Beware the upsell when comparing recordkeeping costs

July 12, 2019

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What you go through as a plan sponsor to ensure your plan’s administrative and recordkeeping costs are reasonable can often resemble buying a car.

Bundling of recordkeeping and fund fees can make it harder for sponsors to clearly see what they are paying for and how much. It’s a lot like the car dealer who wants to talk about your trade-in, while you’re trying to negotiate the price of the new car.

But it doesn't have to be this way.

At Vanguard, we believe that service providers, such as ourselves, should be fully transparent about the fees we chargenot low-ball fees in one area only to recoup them in another.

Keeping it simple

First, we assess a fixed fee in the form of a flat per-participant (per capita) basis or based on account balance (pro rata). These and other plan fee structures are described in the Vanguard Strategic Retirement Consulting research paper, Slicing and Dicing Plan Fees: Allocation Consideration for Plan Sponsors.

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There is a consistent set of factors that Vanguard considers in determining an appropriate level of plan fees. These factors include the:

  • Number of participants in the plan
  • Number of potentially eligible participants
  • Number and diversity of payroll sources
  • Level of plan administrative activities "outsourced" by the plan sponsor to Vanguard
  • Frequency in which contributions will be transmitted
  • Plan's participant education needs

Making it transparent

Second, we provide two documents that promote fee transparency: the Recordkeeping Fee Agreement and annual All-in Fee Report. This approach provides a holistic, transparent view of the all-in fees of the plan to help plan sponsors fulfill their obligation to understand the fees paid for recordkeeping services.

This recordkeeping fee agreement, provided at the onset of a plan sponsor client relationship and updated if fees change, details the fees charged to support the plan, including those for recordkeeping and certain investment management activities.

The All-in Fee Report, issued annually, lists any asset-based fees and service fees the plan incurred for receiving investment and recordkeeping services during a year.

The All-in Fee Report rolls up all of this information into the plan's total expense ratio, which we calculate by dividing the total fees charged by the total plan assets. With this report, plan sponsors can review the total cost of the retirement plan services received each year from Vanguard. It's a document that provides a level of transparency we believe sponsors should demand of any service provider.

Advocating for sponsors and participants

We believe keeping fees simple and making them transparent go a long way toward ensuring that employees are not unduly burdened by excessive fees for the professional management of their 401(k) accounts. Accordingly, we believe sponsors should be skeptical of service providers with fees that seem complicated, or opaque.

Some of the questions we recommend you always ask your record keeper include:

  • How do your relationship managers and phone associates get compensated?
  • What sources of revenue do you have besides the recordkeeping fee?
  • Do you get compensated for distribution or allowing nonproprietary investments in the lineup?

Assuming they have nothing to hide, any service provider should be willing to answer these simple questions.

Vanguard has long been a leading advocate for fee simplicity and transparency, practicing full and candid disclosure of employer-sponsored retirement plan and investment fees for many years. In fact, Vanguard has testified before Congress and regulators to advocate for fee disclosure in 401(k) plans.�

When it comes to fees, Vanguard will continue to be an advocate for both plan sponsors and participants.


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