The 401(k) plan is generally the primary vehicle when saving for retirement within the dental profession. Despite the popularity of these plans, plan fees have only recently become a popular topic among plan participants. Sadly, however, most still do not understand what they're paying and why.
Although most large employer plan providers have found ways to lower their overall fees below 1% annually, the average dental practice is still paying in excess of 2%. Without a doubt, high fees can have a dramatic impact on long-term investment performance and success in reaching retirement goals. As business owners and plan trustees, it's important for doctors to understand the different types of fees and the various ways they're charged. This is outlined below.
Plan administration fees
Many doctors have the mistaken impression that there are no fees associated with the administration of their 401(k) plans. However, all 401(k) plans require some level of administration, including recordkeeping, accounting, and legal and compliance services, which are usually provided by a third-party administrator (TPA). These services are typically charged as a flat fee for administration, and a percentage of assets under management (AUM) for recordkeeping, which typically includes the platform to direct investments and make plan changes. These charges can be paid for by participants' out-of-the-plan assets, directly by the practice, or by revenue-sharing arrangements (12b-1 fees) that result in higher mutual fund expenses.
Investment advisory fees
The largest fee for most plans is the investment advisory fee, which typically ranges from 0.5% to above 1% on plan AUM under a fee-based model. The advisory fee can also be a combination of commission-based and AUM percentages for plans working with a securities broker or insurance agent. The advisory fee typically varies depending on the size of the plan assets and is generally paid through the mutual fund fees or charged directly to plan participants. We typically recommend that doctors pay these advisory fees through their practices as a tax deductible professional fee rather than reducing the value of the investments. This also benefits the staff through lower plan fees. The services provided for the advisory fees also vary with each provider, with some charging a lower fee strictly for picking the plan's investment options, while others charge a higher fee to provide more comprehensive services.
Investment management fees
Most 401(k) plans today offer a mix of passively and actively managed mutual funds as options for participants to direct their investments. One common misconception is that a single mutual fund has only one expense ratio; rather, many of these funds have various share classes, and each has a different expense ratio and revenue-sharing arrangement (12b-1 fee) with the TPA or investment advisor. Some share classes even provide an up-front or back-end sales commission to the advising broker that can be as high as 5%! These fees lower the overall performance of the fund, which makes it very difficult to analyze the plan's true expense for the various service providers. In general, the lowest expense ratio for any fund is found within its "institutional" share class, which carries no revenue-sharing arrangements (12b-1 fees) or commissions.
In summary, understanding your 401(k) fees can be a complex assignment, but one that is very important to your long-term success in saving for retirement. It is absolutely paramount to fulfill your obligations as a fiduciary and plan trustee. While the 401(k) industry is shifting from complex fee arrangements toward greater transparency, all providers are not created equal. New regulations require plan sponsors to provide a fee disclosure that outlines the items above and how they're charged to your practice's plan. In light of this new provision, we highly recommend you review the overall fee structure of your 401(k) plan to make sure plan participants are receiving adequate value for the fees being paid.
John K. McGill, JD, MBA, CPA, provides tax and business planning for the dental profession and publishes the McGill Advisory newsletter through John K. McGill & Company Inc., a member of the McGill & Hill Group LLC. Eric A. Harbert, CPA, CFP, provides investment advice through McGill Advisors Inc. (RIA). Both are members of the McGill & Hill Group LLC, the one-stop resource for tax and business planning, practice transition, legal, retirement plan administration, CPA, and investment advisory services. Visit mcgillhillgroup.com.
