401(k) – Fees & Some changes you should be aware

As of April 1, 2012, Department of Labor regulations will require the disclosure of investment expenses as both a percentage of assets and a dollar amount to 401(k) participants.  Prior to the enactment of:

  • ERISA 408(b)(2) – that governs disclosures that must be made by service providers to plan sponsors, and
  • ERISA 404(a)(5) – that governs disclosures that must be made by plan sponsors to plan participants

these fees were tucked away in the annual Form 5500 filing.  This reporting is long overdue and welcome as the expenses charged against employees retirement account will be far more transparent and includes:

  • Types of fees employees paid in the past quarter
  • Recipients of these fees
  • The dollar amount of fees and other indirect expenses, including:  compensation paid by plan record keepers and investment firms to third-party service providers

You should be aware that plan pricing/fees can vary quite a bit with some charging as much as 4% in my experience.  These fees may become quite an eye-opener to some employees who may previously have been unaware they personally were being charged. My guess is that there’s a pretty fair chance these fees will catch their attention if, for example, their account is down 1-2% or more yet the fees charged to manage this “return” might be 3-4% and all of a sudden those 5500s from prior years will be in considerably greater demand.

Repercussions could range from anger and broken trust to really miffed and rallying other participants in those plans that haven’t been managed well into a class action against the plan’s fiduciaries.  “Fiduciaries” likely includes the CEO and the senior most financial or HR person, perhaps both, for many of you who may be reading this. Your fiduciary duties include: prudently selecting and compensating plan providers, including record keepers and investment providers and to conduct an objective process to assess both the qualifications and quality of services by your provider.

Many plan record keepers have done a good job keeping these negotiable fees reasonable, however inexperienced plan sponsors that try to administer their plan without an adviser’s help are at risk of noncompetitive pricing.

Indicators that you may be at risk:

  • No one in your organization knows what fees are being charged to your plan’s participants.
  • No one has ever negotiated these fees.
  • The investment options in your plan have only gone up over the years.

Risk fixers:

  • Engage a qualified advisor to review fees and negotiate as necessary.
  • Document your actions.
  • Conduct at least annual reviews with your plan participants that include straightforward examples e.g. – for every $1K you invest in option A the annual fees to manage will be $X.XX or Y%.
  • Offer, consider requiring,  individuals an assessment of where they are presently vs. their goal at this time vs. their ultimate retirement goal and maintain those records.

These new rules are a good thing for plan participants … and plan sponsors who have managed their plans well.

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