Retirement plans such as 401(k)s, 403(b)s, and cash balance plans are essential pillars of long-term financial security for physicians and professionals. However, as highlighted by Dr. Jimmy Turner and forensic 401(k) consultant Paul Sipple in a recent episode of the “Money Meets Medicine” podcast, these plans are often plagued by hidden, layered, and unnecessary fees. These fees can quietly erode your savings over time, often without your knowledge. This guide distills what you need to know into actionable insights, empowering you to uncover, understand, and hopefully negotiate to reduce these fees for you and your colleagues at work.
Understanding the Landscape: Why Fees Matter
Hidden fees in retirement plans have the potential to cost you hundreds of thousands of dollars over the course of your career. Just like a high-expense ratio when investing in high-cost mutual funds, these costs are often buried deep within complex plan documents, embedded in mutual fund expense ratios, or siphoned off as commissions to advisors and record keepers. The unfortunate reality is that many employers remain unaware of the true cost of their retirement plans. This lack of transparency can lead to significant and unnecessary wealth loss.
We know that when it comes to investing, even seemingly small percentage fees, such as 1%, can compound into massive losses over decades. This is why I am such a huge proponent of low-cost, diversified index funds. Unfortunately, when it comes to 401K fees, the problem is exacerbated by the fact that these fees are rarely transparent, and many employers are unaware. For example, one of these costs involves advisor fees. Yet, the majority of plan participants never interact with the plan’s advisor, but they still pay for those services. This disconnect between cost and value is at the heart of the retirement plan fee problem.
Fortunately, you don’t have to remain unaware. These fees are actually public information that you can look up. It is called the Form 5500. You can look up your group’s own Form 5500 here.
The Power of Form 5500: Your Window into Plan Fees
Form 5500 is a crucial annual report that all employer-sponsored retirement plans must file with the IRS. This document provides a wealth of information, including plan assets and contributions, the types of funds offered, the number of participants, and the fees paid to service providers. By reviewing your plan’s Form 5500, you can gain valuable insight into the true cost of your retirement plan.
This form is really insightful, not only because it outlines the fees paid by your group to administer, advise, and custody your 401K or 403B. It is also insightful because you can see all of the investment options and how many people participate in each. So, if you have variable or whole life insurance policies in that plan, you can see how many of your colleagues are taking part.
To access this information, use the free IRS lookup tool linked above to search for your employer’s plan by name or EIN. Pay close attention to key sections, such as administrative fees, advisor compensation, and participant counts. Specifically, check out “Schedule H” and find the “Expenses” section to see the costs your group is currently paying. An example is shown below.
However, keep in mind that employer-paid fees and mutual fund expense ratios are often not fully disclosed on Form 5500. For a complete picture, always add employer-paid fees to participant fees.
Download a free copy!
The Anatomy of a Retirement Plan: Who Gets Paid and How
This naturally begs the question. Who exactly is getting paid to run your 401K?
Retirement plans are complex structures involving multiple parties, each with its own compensation models. Custodians are responsible for holding plan assets, and their fees are typically low and transparent. Record keepers, on the other hand, maintain participant records and provide customer service, but their fees can be substantial and are often less clear. Third-party administrators (TPAs) handle compliance and prepare the all-important Form 5500, with fees that vary depending on the complexity of the plan. Yet, one of the fees that is often tacked onto these plans (yet rarely used) is advisor fees.
If people in your group are not using the advisor services, you shouldn’t be paying for them. And, if they are, you need to make sure that the fee is reasonable for the amount of services being provided.
Actionable Steps to Uncover and Reduce Fees
Step 1) Download Your Group’s Form 5500
The first step in taking control of your retirement plan fees is to investigate what you’re actually paying. Download your plan’s Form 5500 using the IRS lookup tool, then calculate the total administrative and advisory fees. Divide these fees by the number of participants to determine the per-person cost.
Step 2) Understand Fee Benchmarks: What’s Reasonable?
Understanding what constitutes a reasonable fee is essential for effective benchmarking. For example, there are flat fee models that exist in this space. A flat fee model might cost around $4,250 for up to 20 participants, with an additional $70 per participant beyond that. Specialized plan designs, such as those with cross-tested profit sharing, may add $800 to $1,000 to the total cost. As plans grow larger, per-participant fees can drop to around $50 due to economies of scale.
So, if you have a plan that has 10 participants, a reasonable cost might be somewhere in the neighborhood of $5,000 to $10,000. If you have 1000 participants, $50,000 may be the right size.
Another way to consider the fees and, in particular the advisor fees, is to calculate what the advisor fees are based on the amount of assets in the account. If your plan is charging 1% on $5 million in assets (amounting to $50,000 per year) when a flat fee provider would charge only $5,000, you’re likely overpaying. Watch out for upfront commissions or ongoing fees for advisors who provide little or no service, as well as fees paid to deceased advisors or for “advice” that is actually just generic education.
Step 3) Negotiate to Reduce 401K Fees
Don’t be afraid to negotiate with your 401K providers (or to encourage your group to do so). Contact your record keeper and advisor directly to request a fee reduction, especially if your plan has grown in assets over time. Ask for a detailed breakdown of all fees and services provided. For small practices, consider having the employer pay plan fees directly, as these are tax-deductible, whereas participant-paid fees are not. Always ensure that any advisory or recordkeeping fees are justified by actual, valuable services.
Transparency is key. Request detailed invoices for all plan-related fees, and insist on open architecture platforms that allow access to low-cost, non-proprietary funds. The more information you have, the better equipped you’ll be to make informed decisions about your retirement plan.
As your plan grows, per-participant fees should decrease, so don’t hesitate to ask for reductions. Shop around and solicit bids from multiple providers, especially those offering flat-fee, open architecture platforms. Make it a habit to audit your plan’s fees and services annually. Don’t let inertia or personal relationships prevent you from making necessary changes.
Special Considerations for Small Practices
Small practices are particularly vulnerable to excessive fees. Flat-fee providers often offer the best value for these plans. Remember that employer-paid fees are tax-deductible, while participant-paid fees are not. What this means is that it is makes more sense for the employer to pay for these expenses as they are “pre-tax” in nature, particularly if you work for a private practice group where you are a profit-sharing partner and it is coming out of your paycheck either way. Avoid paying for “Cadillac” features you don’t need—customize your plan to match your practice’s actual requirements.
If you discover that your plan is charging exorbitant fees (for example, $80,000 for 50 participants), immediately request a detailed breakdown and negotiate with your provider. If necessary, don’t hesitate to switch to a more transparent, cost-effective provider.
Final Thoughts: Vigilance and Transparency Are Your Best Defenses
Navigating the world of retirement plan fees can be complex and opaque, but you have the power to negotiate for lower fees. By understanding the true cost of your plan, demanding transparency, and negotiating assertively, you can ensure that your retirement dollars are working for you—not for hidden intermediaries.
Make it a habit to regularly review your plan’s fees and services. Don’t allow personal relationships to cloud your judgment, and always use available tools and expert resources to stay informed. Your financial future is too important to leave to chance—or to hidden fees lurking in the fine print.
Recent Comments