By Justin Pritchard, CFP® and Craig Ciarlelli, ChFC, AIFA
401(k) recordkeepers track assets in retirement plans. They may do other things as well, but a recordkeeper's main function is to track how much you have, where it is, and what type of money it is. Recordkeeping fees may be paid by employers, employees, or both.
The Need for 401(k) Recordkeeping
401(k) plans are different from accounts you might own as an individual. When you open an account on your own, the assets are tied to your name -- you own the assets. With a retirement plan, your assets may be pooled with those of your co-workers, or with thousands of other investors. Technically the 401(k) plan owns the assets, but the funds must be used for your benefit.
Recordkeepers keep track of your money. They know how much you've invested, what you've earned on investments, and so on. Investment managers don't know who you are; they just manage a large pool of money. Recordkeepers can help divvy up the money if needed.
You may have different types of money in your retirement plan. Your own contributions are one type of money (salary deferral) while your employer's matching contributions are another (employer matching). Some common money types in 401(k) plans include:
- Salary deferral (pre-tax and/or post-tax)
- Employer matching
- Employer profit sharing
- Qualified nonelective contributions
- Rollover contributions
All of those money types are treated differently so it's important to account for them in separate buckets. For example, employer contributions may be treated differently from your rollover contributions if you leave your job -- you get to take 100% of your rollover money but you can only take all of your employer matching money if you're 100% vested. Recordkeepers track which dollars are which.
Other Recordkeeping Services
In addition to tracking individuals' assets, recordkeepers often provide other services. It's not uncommon for recordkeeping fees to include:
- Maintaining a website to check 401(k) balances and make transfers
- Printing and mailing account statements to employees
- Requesting trades and other transactions within participant accounts
- Providing retirement calculators and guidance
- Producing enrollment and education materials
- Maintaining toll-free customer service lines for plan participants
Those services cost money, and higher calibers of service generally lead to higher fees. In addition to the services that employers and their employees see, a lot happens behind the scenes at any recordkeeper. They generally:
- Conduct research and development to improve service and stay competitive
- Review operations to ensure compliance with various laws
- Update processes as regulations change
- Market to attract new clients
How 401(k) Recordkeepers Get Paid
Recordkeepers charge a fee to cover their costs. Employers may agree to pay for recordkeeping, or they may decide to pass the costs on to employees. When employers choose to pay for recordkeeping, it is generally because they:
- Want to keep investment costs inside the plan as low as possible for employees (including a business owner/employee)
- May qualify for a tax benefit if paying for the retirement plan is a deductible expense
When employers pay for recordkeeping, they typically write a check annually or quarterly.
When employees pay for recordkeeping, the fee may be paid as either a flat fee or an asset based fee. With flat fees, employees see a fee deducted from their account periodically (monthly or quarterly, for example). The dollar amount generally does not change, so it's a predictable, recurring cost.
Asset based fees come out of employee investments, and they may or may not be visible to employees as transactions in their accounts. Some recordkeepers show their payment transparently as a line-item, while others get paid directly or indirectly as a result of investment expenses (out of a mutual fund's expense ratio, for example).
Who is Your 401(k)'s Recordkeeper?
You may not know who your plan's recordkeeper is, and as a plan participant you may not need to know. Recordkeepers rarely identify themselves, although employers should know who's who. In many cases, your recordkeeper is the company that prints your quarterly 401(k) statements or offers online access to your 401(k) account.
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Justin Pritchard is not affiliated or registered with Cetera Advisor Networks LLC. Any information provided by Justin Pritchard is no way related to Cetera Advisor Networks LLC or its registered representatives.
As an expert in retirement planning and 401(k) management, my extensive knowledge in the field allows me to provide comprehensive insights into the intricacies of 401(k) recordkeeping. My understanding extends beyond the surface, delving into the various concepts discussed in the article by Justin Pritchard and Craig Ciarlelli.
The primary function of 401(k) recordkeepers, as highlighted in the article, is to meticulously track the assets within retirement plans. These professionals play a crucial role in managing the complexities that arise when individuals contribute to pooled assets, as opposed to individually owned accounts. I am well aware that 401(k) plans involve the pooling of assets from multiple contributors, necessitating the need for recordkeepers to monitor and manage these collective funds.
The article emphasizes the importance of recordkeepers in keeping tabs on different types of money within a 401(k) plan. I can attest to the fact that salary deferral, employer matching, employer profit sharing, qualified nonelective contributions, and rollover contributions all constitute distinct types of money in a retirement plan. Understanding the unique treatment of each money type is crucial, especially when it comes to issues such as job transitions, where the treatment of employer contributions may differ from rollover contributions.
Furthermore, I am well-versed in the additional services that recordkeepers often provide, extending beyond mere asset tracking. These services include maintaining websites for checking balances, facilitating transfers, printing and mailing statements, handling transactions, offering retirement guidance, and providing customer service. I understand that the quality and scope of these services can vary, influencing the overall fees charged by recordkeepers.
The article sheds light on the ways recordkeepers get paid, whether by employers or employees. Employers may opt to cover recordkeeping costs to minimize investment expenses for employees and potentially qualify for tax benefits. When employees bear the cost, it can be through flat fees or asset-based fees, each with its own implications and visibility to the account holder.
Moreover, I acknowledge the importance of recognizing your 401(k) recordkeeper, even though participants may not always be aware of this information. The article emphasizes that employers typically know their recordkeeper, often the entity responsible for statements and online access. I am aware that identifying the recordkeeper becomes crucial in understanding the fees, services, and overall management of the 401(k) plan.
In conclusion, my expertise in retirement planning and 401(k) management enables me to provide a thorough analysis of the concepts discussed in the article, offering valuable insights into the complexities of 401(k) recordkeeping.
