Are you spending too much on your 401k plan? With mutual fund and administration fees a hot current topic, a consultant suggests evaluating your plan--starting with a thorough review of the fees associated with the plan.

• Author: Stone, Donald
• Position: Benefits

One of the big stories in 2004 is fees--mutual fund fees, asset-based fees, administrative fees and disclosed and undisclosed fees of 401(k) plans. Yet many CFOs who are responsible for these plans do not fully understand the fees they pay (or have participants pay), and don't always know the questions to ask a service provider.

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Some CFOs assume that because the hard-dollar fee they pay is low or even "zero" that they must be getting a good deal. The Employee Retirement and Income Security Act of 1974 (ERISA) requires that plan sponsors ensure that fees in retirement plans they sponsor are "reasonable." What follows can help you determine if, indeed, your plan is reasonable.

Warning Signs You May Be Paying Too Much:

* Low plan administration fee. Your plan administration fee is low or "zero." Nothing is free, and a zero hard-dollar fee means the plan is paying for administration based on plan assets (either through an asset-based charge or higher fund expense ratios that subsidize the record-keeper, or both). Fees that don't cover the cost of administration obscure the cost of the service and asset-based fees result in substantially higher fees as assets grow.

* Average participant balance over $25,000. Since 80 percent or more of vendor revenue is asset-based, high average balances result in very profitable business for the vendor. The economics of the industry make plans with average balances under $20,000 not very profitable for most vendors, while those over $25,000 become very attractive. If a plan has average balances over $50,000, it is a virtual certainty that you are overpaying the vendor and can negotiate a lower fee or additional services.

* Wrap or asset-based fee. Common in plans with low average balances and/or small total plan balances (roughly under $5 million), these fees result in over-payment by larger plans or plans with high average balances. Because they are asset-based, they result in ever-higher plan administration fees, while the plan services they pay for remain the same.

* Vendor compensation from funds is unknown. Many plan sponsors have never calculated how much the vendor earns in sub-transfer agent fees (sub-TA) or shareholder service fees. Most mutual funds pay compensation to record-keepers because they do accounting work the fund would otherwise have to do. These fees are asset-based and often amount to $175-250 or more on a $50,000 account balance.

* Heavy reliance on proprietary...