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FEES FOR 401(K) plans cover a wide range of services
such as investment management, financial advice, hiring
and managing plan vendors, telephone or Web-based
customer service for plan participants, custodial or
trustee services for plan assets, participant-level
recordkeeping, compliance testing, and government
reports. Some of these fees are billed to and paid
directly by the employer/plan sponsor, but other fees
are charged against plan assets. The fees that are
charged against plan assets can influence the long-term
performance of an employee savings plan. According to a
November 2006 study published by the U.S. Government
Accountability Office, even a small difference in the
401(k) fees charged against plan assets can
significantly decrease an employee's 401(k) account
balance over the course of a career.
Many
employers and plan participants are not aware of these
“hidden” charges or undisclosed business arrangements
that can negatively affect plan performance. In
addition, fees can mask a potential conflict of interest
— for example, where one service provider to a 401(k)
plan pays a third-party provider for services, such as
record-keeping, but does not disclose this compensation
to the plan sponsor.
To
compound the problem, not all companies review 401(k)
fees as often as they should. Transamerica Retirement
Services reported in a 2005 survey that 17 percent of
companies never evaluate their retirement plans’
investment performance and expenses. Of those that do,
small companies are less likely than large companies to
conduct reviews at least once a year. At the same time,
many employees don't understand there is a cost for
401(k) investment services. In a national survey
conducted by AARP, more than 80 percent of 401(k)
participants reported not knowing how much they pay in
fees.
Managing 401(k) fees
New
federal initiatives that address 401(k) fees should help
manage plan costs and improve understanding of a plan's
expense structure. The U.S. Department of Labor is
proposing changes to the regulations that govern
arrangements between plan sponsors and their service
providers, with a focus on fee transparency. Under this
proposal, plan administrators would be required to
disclose indirect fees, including revenue-sharing
payments, on the plan's annual report (Form 5500). Plan
service providers would also be required to provide a
summary of all fees that plan assets cover or that
participants pay directly.
Employers can manage 401(k) costs and liability concerns
by taking an active role in plan management. Attorney
Gregory Ash, a partner with Spencer Fane Britt & Browne
and a specialist in employee benefits law and litigation
avoidance, explains that class-action lawsuits are
cropping up in response to 401(k) fees. In 10 lawsuits
filed recently, plan participants argued that even small
reductions in the return of their 401(k) investments are
devastating, and that the most certain means of
protecting plan returns — and the factor most within
employer control — is to reduce fees and expenses that
are charged against plan assets.
Ash
recommends these tactics to help your clients maintain a
well-managed 401(k) fee structure:
·
Calculate current plan costs and ask providers to
explain the expense and revenue-sharing arrangements
·
Periodically review investment performance and expenses
of all plan investment options, to determine whether
those funds continue to be appropriate.
·
Negotiate plan fees, conduct formal or informal requests
for proposals with existing or new providers, to ensure
clients are using the 401(k) offering with the greatest
value.
·
Offer
a diverse selection of funds and investment options to
ensure choice and flexibility for plan participants.
·
Inform participants about fees and expenses and
thoroughly document the employee communication process.
Working with a TPA who understands the importance of fee
transparency is critical to helping your clients provide
their employees with valuable retirement plan benefits.
For more information please visit
www.rightfitretirementpartner.com.
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