When considering picking people to provide administration services to your 401(k) plan you have choices not only between individual providers but also types of providers. Generally there are two types, which further break down further into smaller categories. The two main types are bundled and stand alone. Bundled providers provide administration services to your plan but they also provide investment services to your plan. Generally speaking this group breaks down to mutual fund companies and Registered Investment Advisors that also provide administration services. Stand alone providers are just as they sound they only provide administration services to your plan. This group is also separated into smaller groups. Those that align themselves with mutual fund companies and those that don't. When a provider aligns itself with a mutual fund company you must ask yourself why. Usually it is because they get compensation from that fund company. Many will use this compensation to offset the fees you pay but usually because they result in higher fees at the mutual fund level that are hidden.

Bundled providers tend to have a more incestuous relationship. If the provider is a mutual fund company (i.e. Fidelity, etc.) they recommend their own mutual funds as the "best options" for your plan. This is dangerous because any advice that is given or service that is rendered is done so through the prism of how it impacts their funds. When there is a compliance problem with your plan there is generally more than one action that can be taken to correct the problem. The only suggestion that you'll get from your administration contact will be the one that is most beneficial to the fund company rather than what is best for your company.

A Registered Investment Advisor that also provides administration services can have the same problems but also even though you pay a premium for "unbiased" investment advice and their advisor arm (usually) doesn't take compensation from mutual funds their TPA arm can and often does. For example if you have a plan with a Registered Investment Advisor company and they suggest new funds to you and one (or more) of them is an R1 or R2 share class by American funds, their advisor arm gets commission which they usually credit to the plan because by law they cannot keep these. However they also get what's called "Sub-TA" fees for their administration arm and they are allowed to keep these. This relationship raises the question of whether they recommended the funds they did because they are best for your plan or because they are getting compensation from the company that sells those investments.

It's always a good idea to review your plan and providers to determine if those providing services to your plan are looking out for your best interests

The retirement plan industry has for years been operated with no standard way that fees are charged, collected, or even reported. Because of this, it has become very difficult to evaluate an arrangement and the fees that are being paid for it.

In order to get as close as possible to an "apples to apples" comparison of fees we have to first look at the different types of fees that can be charged.

1. Plan Administration Fees - These are fees for providing plan administration services for the plan. This covers compliance and reporting issues as well as statements and participant services.
2. Individual Service Fees - These are fees for things like loans, or distributions. They are charge to the participant using specific services that are offered for a fee.
3. Investment Fees - These are fees that go to the investment management companies and financial advisors. These pay for the management of the investments in the plan and the advisor that helps you and your participants decide where to invest. The fees to the investment management company are usually in the form of expense ratios in the mutual fund companies/insurance companies. The fees to the financial advisor can come directly from the plan, the business, or the mutual fund company in exchange for selling their funds.

All three of these fees have to be paid in some fashion. The Individual Service Fees are generally pretty straightforward. They are generally spelled out in terms of "$75 per distribution" so they do not warrant much discussion here.

The Plan Administration Fees and Investment Fees tend to intermingle more often for the purposes of marketing. By saying, "Your Plan Administration is free," it makes a plan sponsor see a good deal. The problem is these arrangement generally hid much higher fees for investment management than is necessary. Generally one would pay much more in this situation than they would pay in a situation in which each fee is spelled out.

The question is, "Does any of this really make a difference?" Just recently General Dynamics realized it does matter when their free plan cause d fees o their participants that were unfair. They recently settled a class-action lawsuit filed by their participants for $15.15 million dollars. This says nothing about what it also cost them in terms of employee satisfaction. When a group of employees are suing their company I can't imagine they have great employee longevity.

So what should you do about it? Review your plan to find out how much your plan is paying for all these services. If your plan is paying an unreasonable amount (usually more than 1.5-2%) you should check into if you can get a more appropriate deal. If you don't know how to review the fees in total you should consult a professional. When choosing a professional you should be careful that it is one that is entirely independent and has no vested interest in the fees you plan pays and from where. You must find an outside consultant that is not currently related to your plan.