Unexpected 401(k) fees raise costs, confusion for employers

• Key Insight: Learn how hidden retirement-plan fees are eroding SMB benefit strategies.
• What's at Stake: Unexpected fees can force plan terminations, reduced matches, and benefit cuts.
• Forward Look: Prepare for increased scrutiny on fee disclosure and PEP administration costs.
  Source: Bullets generated by AI with editorial review

Small and mid-sized businesses are struggling with unexpected retirement plan fees, according to a new survey, and some are canceling their benefit plans as a result.

Two-thirds of small and midsized employers paid fees they didn't anticipate when selecting their current retirement plan provider, the report by Human Interest found. These include charges for third-party services such as auditors and ERISA counsel, value-add services, and routine plan events such as participant searches, compliance updates and IRS filings. 

"Small and medium-size businesses are being nickel-and-dimed for every retirement plan transaction, distribution, and plan event," said Rakesh Mahajan, chief revenue officer for Human Interest, a financial technology company offering 401(k) plans. 

"Transaction fees add up — in administration time, in cost, and in confusion for employees. These employers are the key to better retirement security for American workers, and should not be treated like a revenue stream. Transparent, predictable pricing is the standard the industry should be held to."

The findings of the Retirement Industry Disruptor report are based on surveys with 500 U.S.-based benefits decision-makers at small businesses offering a 401(k) or pooled employer plan between March 3 and 12.

Transaction fee impact

Nearly three-fourths of employers reported that additional services and plan event fees drove up the overall cost of their benefits program. As a result, 13% terminated their plan because they couldn't afford the additional costs, while 26% lowered their matching contribution to save money.

Additionally, 31% cut other benefits to compensate, and 27% switched to a provider with more transparent pricing due to unexpected fees. 

"The unexpected nature of some fees can really impact the ability of employers to meet the goals they initially set up in offering a retirement plan," said Marc Fowler, director of retirement education for Human Interest. "The majority of employers go into thinking about a retirement plan with the best intentions, either to help the business or the employees. And what we see is that the reported experience of folks who are offering retirement plans often doesn't match the expectation going in." 

Workers are feeling the impact too, especially lower-balance participants who tend to be hit hardest by transaction fees. According to the survey, 81% of respondents said providers charge employees fees for hardship withdrawals and loan originations. Sixty-three percent reported participants have withdrawn from the plan because they've found transaction fees unaffordable, unexpected or confusing. 

Forty-nine percent said complaints and support tickets increased because employees are frustrated, confused or surprised by these fees. 

PEPs also hit by fees

The study also examined the impact of fees on pooled employer plans (PEP), which allow multiple small businesses and nonprofits to participate in a single, jointly administered system. These plans are often marketed to small businesses as a simpler and more cost-effective alternative to a standalone 401(k), but the study found that PEP sponsors were far more likely than 401(k) sponsors to have unexpected fees (89% versus 53%).

A quarter of survey respondents hired ERISA counsel despite PEPs being designed to offload fiduciary liability from the employer. PEP sponsors also spend 81% more time each week managing the plan than 401(k) sponsors. 

Read more: Employees can invest alternative assets into their 401(k)s. Here's what to know

"The PEP market was founded on the promise of simplicity and cost efficiency, but that's not what's happening," Mahajan said. "Our data suggests that [small and midsized businesses] in PEPs are reporting higher total costs and more administrative burden than many may expect, including ERISA counsel costs that PEPs are designed to reduce."

Fowler encourages benefit leaders to think about the long-term cost of ownership when shopping for a retirement plan, rather than just focusing on upfront price or service costs. 

"That is the thing that will allow you to insert a retirement plan into a comprehensive benefit package," he said.