Help with 401K admin fees

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rene
Posts: 233
Joined: Wed Mar 19, 2008 9:33 pm

Help with 401K admin fees

Post by rene » Thu Jun 29, 2017 1:01 pm

Bit of a long post but I am trying to figure out if I should make a fuss about admin fees or just accept and move on.

Background : My company has a profit-sharing plan plus 401K. For decades the admin fees were always covered by management using redemption revenues (people quit before fully vested). We have changed plan advisors a few times and currently for past few years it is managed by a big financial firm. A new change was implemented this year without much fanfare and the result is that I will pay 4x$45=$180 in admin fees for my 401K/Plan. The change has been that revenue credits are now charged back to the participant rather than the total plan.

I challenged our investment committee about this change and I was allowed to see the reply from one of the plan advisors who explained the issue to the committee. Some more context... I have pushed hard in the last 10 years for adding Vanguard index funds and ML and management provided these funds over time, much to my delight.

The text is below.

My questions are :

1) Is $180 'fair' even though I invest in only 3 Vanguard index funds (TBM, SP500 and Total World ex USA)

2) I can't wrap my head around 'revenue credits'... are these just smoke and mirrors?

3) Any red flags in this response from the plan operator?

Thanks in advance for reading this far and hopefully reading the long text below as well :)

Rene


>>>>>>>>>>>>>>>>


Subject: Plan Fee Policies

Committee members,
I will follow up with specific communication that can be used for participant purposes however I thought it would be best to provide you at least an overview of how fees are currently being assessed and specifically any modifications that have occurred recently:

1. Fees have not changed, what has changed is that we instituted flat fee pricing for recordkeeping services. Where previously participants were being charged an asset based fee for recordkeeping and therefore those with larger balances were paying more ( and would continue to pay more as balances increased) we implemented a flat fee cost of $180 per participant annually. This was done for two purposes – fairness- for a function that doesn’t increase in complexity, risk or outcome based on asset size ( unlike areas related to investment management or fiduciary services), it doesn’t make sense for someone with a $250,000 balance to pay 5 times more for the same services as a participant with a $50,000 balance; secondly to obviate any potential risk of litigation or audit by the DOL or associated parties which might come into question regarding an asset based fee for recordkeeping; this has become an increasing area of scrutiny and litigation for a number of mega plans. Furthermore as the recordkeeping and administration function is more aligned with a “per participant” pricing model , it doesn’t seem appropriate to assess an asset based cost when the actual number of participants might not increase as dramatically as the asset size of the plan – Your Company (my edit) for example has shown close to a 60% increase in asset value since 2014 while the number of participants has remained relatively flat.

2. The best practice standard for ERISA qualified plans is to adhere to the standard of “reasonableness” and a doctrine of equitable assessment of fees. In adopting the flat fee recordkeeping we also implemented “fee levelization” which translates to ensuring that for those participants that invest in options which provide a "revenue” credit back to the plan, that the amount of the credit would go directly back to the specific participant. Prior to adopting this fairness approach, revenue credits would inure to the aggregate plan. The assortment of individual revenue credits would then be used to offset/pay the recordkeeping expenses of the entire plan. The best example of how this might be construed as unreasonable would be for a participant who invests solely or dominantly in the passive index funds as opposed to a participant who might be utilizing a mixed approach for their diversification through the target date funds (see example below). In essence even though they have equal balances and receive equal recordkeeping services the participant in all index funds is having a component of their fees offset by their fellow employee through the revenue credits generated.

3. Transparency – fees for recordkeeping are now assessed and charged at the participant level and are fully detailed on quarterly statements; these are noted as “recordkeeping fees”. In addition revenue credits are now allocated back to participants monthly and the total credit is incorporated into “interest, dividends/other credits” on the quarterly statement.

I thought a few examples might assist in clarifying the above but I also want to respond to the email inquiry you shared from one of your participants, specifically that could there be some form of “waiver” . The smoke and mirror approach of “free recordkeeping” or “no costs to participants” have fortunately become less prevalent for the services required to maintain a defined contribution plan. Admittedly how those fees have been charged has been more opaque and byzantine than it should have been, which has led to some examples of egregious abuse but the basic parameters have always been in place – either some or all of participants pay for services or those costs are shared between the sponsoring company and the participants- there of course has never been the proverbial free lunch when it comes to the cost for these services. The key guidelines are awareness, fairness and full disclosure- all tenets we look to full support in our role as an advisor to your plan. I also think it is worth noting that as a committee you have done significant work since we began our relationship with you to ensure reasonableness when it comes to the cost of services. Your total cost of plan services as an asset based charge was 1.71% for your average participant when we first began working with you, currently the average asset based cost has been reduced to approximately 0.58%.

For the examples I used 3 different scenarios:

Participant A – I used an actual participant with a combination of active and passive funds and an account balance of $450k.
Annual Recordkeeping costs $180
Annual Revenue Credit received $485
Net (Credit) +$385 annually

For next two I have looked at a participant with the plan’s average account balance of $190k but the difference in their fee structure would be impacted by a choice of either utilization of a custom TDF ( I’ve used your most popular option the 2030 TDF) as opposed to an all index option investment choice with equal weighting in each index

Participant B (2030 TDF)
Annual Recordkeeping costs $180
Annual Revenue Credit received $192
Net (Credit) : +$12 annually
Annual Investment Expense of portfolio: 0.36% ( approximately $684 annually)

Participant C ( all index options)
Annual Recordkeeping costs $180
Annual Revenue Credit received $0
Net (Credit) : $180
Annual Investment Expense 0.08% ( approximately $152 annually)

As you see the real cost to a TDF participant is higher due to cost of active management (participant directed choice) , additional diversification , etc. but unlike the previous fee structure the revenue credit Participant A generates through their portfolio structure is now credited back specifically to their account as opposed to where part of this credit would formerly be used to offset cost of Participant B (who has chosen an investment portfolio which does not produce credits). Obviously and intuitively the optics in regards to fair and reasonable fees can be justified by the current fee structure as opposed to the former. Concurrently those participants who may want to select a lower cost investment structure pay their fair amount of fees while benefiting from lower price structure inherent with index options.

Hopefully the above provides a degree of clarity in relation to how and what fees are charged to participants, how they are disclosed quarterly and support for why this structure was advocated for and applied. If you would like me to respond to any additional questions or information please let me know.

Best regards,

livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: Help with 401K admin fees

Post by livesoft » Thu Jun 29, 2017 1:05 pm

$180 a year is excessive in my opinion. My old firm was charged about $30 a participant and the firm simply paid that as one of the costs of the plan, so that the participants didn't pay it. And we had low-expensive ratio index funds in the plan which was run by Fidelity.

So you should continue to lobby for lower fees.
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flamesabers
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Re: Help with 401K admin fees

Post by flamesabers » Thu Jun 29, 2017 1:17 pm

If $180 is the total amount you have to pay every year for recordkeeping and such, I don't think that's a horrendous amount. If you were being charged the AUM fee of 0.58%, you'll be paying more then $180 every year for recordkeeping fees once your 401k grows beyond a balance of about $31k.

Raabe34
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Joined: Tue Apr 14, 2009 9:58 am

Re: Help with 401K admin fees

Post by Raabe34 » Thu Jun 29, 2017 1:21 pm

It appears that you have gotten the plan moved to one that does not charge a % for recordkeeping any longer which is a huge win. I'm guessing that you have a significant balance in the plan and that overall this is not for a megacorp situation. Vanguard has per head costs on the plan even if the plan is at Vanguard and it's really not all that different than what you are quoting so I think you've got a heck of deal. The recordkeeping/tpa entity is possibly losing money servicing you. It has no impact on the amount of funds you hold but the cost for the administration of the plan as a whole.

Those credits that are referred to are revenue sharing for extra expensive funds that the revenue is now credited to the participant instead of service provider.

All the above does not include whether or not your plan has an advisor and if/how they are getting compensated.

rene
Posts: 233
Joined: Wed Mar 19, 2008 9:33 pm

Re: Help with 401K admin fees

Post by rene » Thu Jun 29, 2017 1:28 pm

Raabe34 wrote:It appears that you have gotten the plan moved to one that does not charge a % for recordkeeping any longer which is a huge win. I'm guessing that you have a significant balance in the plan and that overall this is not for a megacorp situation. Vanguard has per head costs on the plan even if the plan is at Vanguard and it's really not all that different than what you are quoting so I think you've got a heck of deal. The recordkeeping/tpa entity is possibly losing money servicing you. It has no impact on the amount of funds you hold but the cost for the administration of the plan as a whole.

Those credits that are referred to are revenue sharing for extra expensive funds that the revenue is now credited to the participant instead of service provider.

All the above does not include whether or not your plan has an advisor and if/how they are getting compensated.
Account balance for me is roughly $900K and yes we are not a megacorp by any means.

dbr
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Re: Help with 401K admin fees

Post by dbr » Thu Jun 29, 2017 1:41 pm

I think their response is perfectly reasonable and quite transparent. I think you should feel you are better off. For you personally I can't imagine someone with $900k at stake would be spending time on a $180 fee. That is 0.02%. I can see employees as a whole having some concern if the average rate is high, but the question would be why the average account is so low as to cause that.

It probably would not be taken well, but I see the issue as why the corporation does not subsidize the fee as part of overall compensation and benefits. Most large companies do absorb the fee, I suspect. It is really just part of administering the totality of the payroll and benefits package.

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Earl Lemongrab
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Re: Help with 401K admin fees

Post by Earl Lemongrab » Thu Jun 29, 2017 2:57 pm

Flat fees work well for people with large accounts, like you. Percentages for those with small accounts. At Megacorp, those fees are expressed as about .04% additional ER. Sounds low, but for me that's over $300 per year.
This week's fortune cookie: "You will do well to expand your horizons." Ow. Passive-aggressive and vaguely ominous.

rene
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Re: Help with 401K admin fees

Post by rene » Thu Jun 29, 2017 4:01 pm

thank you all for the feedback

Magic7
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Re: Help with 401K admin fees

Post by Magic7 » Wed Dec 06, 2017 4:31 pm

( I used this thread since it is under the same topic)
This is somewhat of a good problem to have but still very upsetting .
I’m looking to propose back a fairer administrative funding scheme that they will have to take seriously.

Bottom line is I am paying $5000 dollars per year to have the company administer the 401K because the plan is using an asset based fee structure. I think this is excessive considering the services are the same for every employee. Ironically, this will nearly negate the company matching since I don’t make zillions and they don’t match that well.

Work at a small company with 370 plan participants and $40 million is the entire 401K plan.
With 30 years of dedicated savings, I have 2.1 million in the company plan. (Mix of Traditional and Roth) The company has general never contributed much as 93% of the monies invested was contributed by me.
The current provider is the Principal who just revamped and condensed a number of share classes lowering fees across the board. Dropping about .19% the investment expense cost so now the aggregate investment cost to their funds is .2%. However, now the company I work for has added a new additional 0.24% administration fee
Stating the Plan administrative fees typically include items such as recordkeeping, participation website, participation statements, plan compliance services and profession services.

For reference: The company has no special employee link to the Principal website and statements are minimal.
Bottom line to me is a 5% increase.
Before I was paying $8700 per year in fees now it will be $9100.

The company appears to be collecting $96,000 annually and the Form 5500 show expenses of about $41,000.
I feel unfairly burdened for funding the company plan.

KSActuary
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Re: Help with 401K admin fees

Post by KSActuary » Wed Dec 06, 2017 7:14 pm

An asset-based fee structure is not fair for plan participants, especially those who have large account balances since you are not receiving any real benefit for those high fees. Its merely a math problem since the fees are prorated by balance.

Looked at another way, how much is that $9,100 as a percentage of your salary each year? When examined in that light, asset-based fees are terrible - fees should be fixed for advisory and recordkeeping.

Magic7
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Re: Help with 401K admin fees

Post by Magic7 » Thu Dec 07, 2017 8:49 am

Yes, because of the 30 year balance when you compare it to current pay the numbers are absurd.

I will be paying more than $5,000 dollars per year for the company recordkeeping, participation website, participation statements, plan compliance services and profession services.
The same services as every one of the other 370 employees.
I would like to go back and propose a cap on how much an employee should have to pay for these services. Or propose and alternate methodology.

Based on the numbers they are want about $250 per employee but that would look horrible to charge that straight out when they contribution match with $400 to $800.

ERISA Stone
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Re: Help with 401K admin fees

Post by ERISA Stone » Thu Dec 07, 2017 3:46 pm

KSActuary wrote:
Wed Dec 06, 2017 7:14 pm
An asset-based fee structure is not fair for plan participants, especially those who have large account balances since you are not receiving any real benefit for those high fees. Its merely a math problem since the fees are prorated by balance.

Looked at another way, how much is that $9,100 as a percentage of your salary each year? When examined in that light, asset-based fees are terrible - fees should be fixed for advisory and recordkeeping.
It's also not fair to the plan participant who has $1k in his account, and would otherwise pay $250 for administrative services. This goes both ways and I don't see a "fair" solution other than the employer pays.

Magic7
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Re: Help with 401K admin fees

Post by Magic7 » Thu Dec 07, 2017 5:04 pm

As an alternate how does this sound?
If the company wants the employees to pay for the administration of the plan a more even handed approach would be to reduce the matching potentially by ½ percent or whatever is needed across the board. Use that money not given directly to the employees to pay the plan administration.

sport
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Re: Help with 401K admin fees

Post by sport » Thu Dec 07, 2017 5:41 pm

If you are 59.5 years old, you should be able to roll over some of your 401k to an IRA account. This would allow you to escape those high fees, if you do the rollover to a low cost provider such as Vanguard.

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Earl Lemongrab
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Re: Help with 401K admin fees

Post by Earl Lemongrab » Thu Dec 07, 2017 5:57 pm

sport wrote:
Thu Dec 07, 2017 5:41 pm
If you are 59.5 years old, you should be able to roll over some of your 401k to an IRA account.
Might be able to. It's up to the plan as to whether it's allowed.
This week's fortune cookie: "You will do well to expand your horizons." Ow. Passive-aggressive and vaguely ominous.

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Wildebeest
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Re: Help with 401K admin fees

Post by Wildebeest » Thu Dec 07, 2017 7:41 pm

This subject is close to my heart. I paid for all the admin fees for the employees, because I wanted a low cost plan with great participation( it helped I would benefit as well). And may be the employees would appreciate the great deal of a no cost plan and low cost offerings.

However: Do I think I have retained an employee by offering a superior 401 K or a superior health care plan? I did not do a survey, but I do not think so. On the other hand I think they feel I care and we are all happier.

I like the https://www.brightscope.com/ratings/ as well as https://americasbest401k.com as to how the cost your 401 K stack up.
The Golden Rule: One should treat others as one would like others to treat oneself.

tesuzuki2002
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Re: Help with 401K admin fees

Post by tesuzuki2002 » Thu Dec 07, 2017 8:01 pm

rene wrote:
Thu Jun 29, 2017 1:01 pm
Bit of a long post but I am trying to figure out if I should make a fuss about admin fees or just accept and move on.

Background : My company has a profit-sharing plan plus 401K. For decades the admin fees were always covered by management using redemption revenues (people quit before fully vested). We have changed plan advisors a few times and currently for past few years it is managed by a big financial firm. A new change was implemented this year without much fanfare and the result is that I will pay 4x$45=$180 in admin fees for my 401K/Plan. The change has been that revenue credits are now charged back to the participant rather than the total plan.

I challenged our investment committee about this change and I was allowed to see the reply from one of the plan advisors who explained the issue to the committee. Some more context... I have pushed hard in the last 10 years for adding Vanguard index funds and ML and management provided these funds over time, much to my delight.

The text is below.

My questions are :

1) Is $180 'fair' even though I invest in only 3 Vanguard index funds (TBM, SP500 and Total World ex USA)

2) I can't wrap my head around 'revenue credits'... are these just smoke and mirrors?

3) Any red flags in this response from the plan operator?

Thanks in advance for reading this far and hopefully reading the long text below as well :)

Rene




>>>>>>>>>>>>>>>>


Subject: Plan Fee Policies

Committee members,
I will follow up with specific communication that can be used for participant purposes however I thought it would be best to provide you at least an overview of how fees are currently being assessed and specifically any modifications that have occurred recently:

1. Fees have not changed, what has changed is that we instituted flat fee pricing for recordkeeping services. Where previously participants were being charged an asset based fee for recordkeeping and therefore those with larger balances were paying more ( and would continue to pay more as balances increased) we implemented a flat fee cost of $180 per participant annually. This was done for two purposes – fairness- for a function that doesn’t increase in complexity, risk or outcome based on asset size ( unlike areas related to investment management or fiduciary services), it doesn’t make sense for someone with a $250,000 balance to pay 5 times more for the same services as a participant with a $50,000 balance; secondly to obviate any potential risk of litigation or audit by the DOL or associated parties which might come into question regarding an asset based fee for recordkeeping; this has become an increasing area of scrutiny and litigation for a number of mega plans. Furthermore as the recordkeeping and administration function is more aligned with a “per participant” pricing model , it doesn’t seem appropriate to assess an asset based cost when the actual number of participants might not increase as dramatically as the asset size of the plan – Your Company (my edit) for example has shown close to a 60% increase in asset value since 2014 while the number of participants has remained relatively flat.

2. The best practice standard for ERISA qualified plans is to adhere to the standard of “reasonableness” and a doctrine of equitable assessment of fees. In adopting the flat fee recordkeeping we also implemented “fee levelization” which translates to ensuring that for those participants that invest in options which provide a "revenue” credit back to the plan, that the amount of the credit would go directly back to the specific participant. Prior to adopting this fairness approach, revenue credits would inure to the aggregate plan. The assortment of individual revenue credits would then be used to offset/pay the recordkeeping expenses of the entire plan. The best example of how this might be construed as unreasonable would be for a participant who invests solely or dominantly in the passive index funds as opposed to a participant who might be utilizing a mixed approach for their diversification through the target date funds (see example below). In essence even though they have equal balances and receive equal recordkeeping services the participant in all index funds is having a component of their fees offset by their fellow employee through the revenue credits generated.

3. Transparency – fees for recordkeeping are now assessed and charged at the participant level and are fully detailed on quarterly statements; these are noted as “recordkeeping fees”. In addition revenue credits are now allocated back to participants monthly and the total credit is incorporated into “interest, dividends/other credits” on the quarterly statement.

I thought a few examples might assist in clarifying the above but I also want to respond to the email inquiry you shared from one of your participants, specifically that could there be some form of “waiver” . The smoke and mirror approach of “free recordkeeping” or “no costs to participants” have fortunately become less prevalent for the services required to maintain a defined contribution plan. Admittedly how those fees have been charged has been more opaque and byzantine than it should have been, which has led to some examples of egregious abuse but the basic parameters have always been in place – either some or all of participants pay for services or those costs are shared between the sponsoring company and the participants- there of course has never been the proverbial free lunch when it comes to the cost for these services. The key guidelines are awareness, fairness and full disclosure- all tenets we look to full support in our role as an advisor to your plan. I also think it is worth noting that as a committee you have done significant work since we began our relationship with you to ensure reasonableness when it comes to the cost of services. Your total cost of plan services as an asset based charge was 1.71% for your average participant when we first began working with you, currently the average asset based cost has been reduced to approximately 0.58%.

For the examples I used 3 different scenarios:

Participant A – I used an actual participant with a combination of active and passive funds and an account balance of $450k.
Annual Recordkeeping costs $180
Annual Revenue Credit received $485
Net (Credit) +$385 annually

For next two I have looked at a participant with the plan’s average account balance of $190k but the difference in their fee structure would be impacted by a choice of either utilization of a custom TDF ( I’ve used your most popular option the 2030 TDF) as opposed to an all index option investment choice with equal weighting in each index

Participant B (2030 TDF)
Annual Recordkeeping costs $180
Annual Revenue Credit received $192
Net (Credit) : +$12 annually
Annual Investment Expense of portfolio: 0.36% ( approximately $684 annually)

Participant C ( all index options)
Annual Recordkeeping costs $180
Annual Revenue Credit received $0
Net (Credit) : $180
Annual Investment Expense 0.08% ( approximately $152 annually)

As you see the real cost to a TDF participant is higher due to cost of active management (participant directed choice) , additional diversification , etc. but unlike the previous fee structure the revenue credit Participant A generates through their portfolio structure is now credited back specifically to their account as opposed to where part of this credit would formerly be used to offset cost of Participant B (who has chosen an investment portfolio which does not produce credits). Obviously and intuitively the optics in regards to fair and reasonable fees can be justified by the current fee structure as opposed to the former. Concurrently those participants who may want to select a lower cost investment structure pay their fair amount of fees while benefiting from lower price structure inherent with index options.

Hopefully the above provides a degree of clarity in relation to how and what fees are charged to participants, how they are disclosed quarterly and support for why this structure was advocated for and applied. If you would like me to respond to any additional questions or information please let me know.

Best regards,

I Pay A LOT More as the fees are a %. It sucks. I'm paying around $180 a quarter.

KSActuary
Posts: 175
Joined: Fri Jan 13, 2012 10:53 pm

Re: Help with 401K admin fees

Post by KSActuary » Fri Dec 08, 2017 12:28 am

ERISA Stone wrote:
Thu Dec 07, 2017 3:46 pm
KSActuary wrote:
Wed Dec 06, 2017 7:14 pm
An asset-based fee structure is not fair for plan participants, especially those who have large account balances since you are not receiving any real benefit for those high fees. Its merely a math problem since the fees are prorated by balance.

Looked at another way, how much is that $9,100 as a percentage of your salary each year? When examined in that light, asset-based fees are terrible - fees should be fixed for advisory and recordkeeping.
It's also not fair to the plan participant who has $1k in his account, and would otherwise pay $250 for administrative services. This goes both ways and I don't see a "fair" solution other than the employer pays.
A logical solution would be for a tiered admin fee where those participants with account balances under a certain amount would be charged $0 and that missing fees would be either paid by the employer or other plan participants. Current software platforms do not allow for this type of tinkering yet.

Magic7
Posts: 4
Joined: Wed Nov 29, 2017 3:36 pm

Re: Help with 401K admin fees

Post by Magic7 » Fri Dec 08, 2017 2:32 pm

Thanks all,

This is the draft of I am thinking of sending to the plan administrator
Dear 401 Administer,
401k Plan changes
I request you do not implement the 2018 XXXX Plan administration plan funding 0.24% withdrawals. It is implied by the change that XXXX does not want to directly all or part fund the 401K plan administration, however the new administration plan fee which is employee asset based on account balances does not pass any sense of reasonableness and does not correlate with the per participant cost of services provide. I have suggestions to fund the administration of the plan with no greater costs to the company and be at least partially in alignment with reasonableness and transparency.
For the 2018 plan, I will be personally paying in excess of $5,000 per year for the same services the average employee will be paying less than $100-200. Even though there is a 47% reduction in gross expense fees from the Principal. The actual 2018 impact on my 401K account has a net 5% increase in overall total fee cost. The difference is the .24% XXXX Administration Plan Fee. The new funding formula unfairly accesses my Traditional and Roth accounts of which are 93% my comprised of my elective savings. Generally, this burdens long term employees with an unfair share of the actual current costs. By any measure the administrative fee assessment on my account by XXXX lacks fairness and reasonableness. It penalizes existing account balances which bare no relationship to current plan administration costs which is headcount based.
I understand XXXX may not want to fund all the administrative expenses. However, this basis for having employees pay based on assets completely misrepresent what XXXX actually contributes to an employee’s retirement. In my case, although I have 30 years of service, the real XXXX contribution to my retirement is significantly less than most employees. Of the approximate 370 active participants my share of the entire XXXX administrative funding is 5% which is wholly not reasonably for the services provided. In actuality the cost and benefit is equally the same each participants. With the change, the individual contribution to the funding plan has no relationship to services provided.
If the company does not want to charge a straight fee for each employee in this case about $25 per month an alternate would be reduce the matching contribution. For example, reduce the matching potentially by ½ percent across the board or whatever is deemed necessary. Use that money not given directly to the employees to pay the plan administration. This would bring into alignment the entity choosing how the administrative expenses are allocated and the value of them. Then it would present an accurate and transparent amount of what XXXX is contributing to the employee retirement.

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