Providers have not been managing 401(k) plans for free but due to the new 408(b)(2) and 404(a)(5) regulations, fees are required to be disclosed and will appear on quarterly statements beginning November 15, 2012. In the past, fees were included in the net investment results but were not as visible. This fall when employees open their quarterly statements, they will see the fees being paid by the plan charged to their account shown as a percentage of their total account balance and as a dollar amount.
Company officers responsible for their 401(k) program need to be prepared to explain the 408(b)(2) and 404(a)(5) fee disclosure regulations to their employees and that nothing has actually changed. In order to do this, the individuals responsible for the plan need to first understand the fees.
Here are some of the main types of fees that 401(k) providers commonly charge:
– Recordkeeping and administrative fees: These fees typically include services to keep the retirement plan in compliance, keep track of participant accounts and process their transactions.
– Investment adviser fees: Some plans have an independent adviser select and monitor the plan’s investment options. These fees cover the adviser’s services.
– Expense ratio: Most plans utilize mutual funds that will have expenses associated with them. Investment companies charge a fee to run the funds and they generally take a certain percentage off the top. Built in to those fees can be third party fees, arrangements known as revenue sharing. This will usually be the largest component of plan fees.
For the executives concerned about employees’ reaction to the new fees, the best defense is a good offense. Prove to employees that the company did due diligence in analyzing its plan fees and determined they are reasonable.
What is reasonable? It’s challenging because no two plans are alike. The size of the plan in terms of participants and assets will dramatically impact the total costs of a plan. A sponsor of a large plan may determine a fee under 0.5 percent is reasonable; on the other hand, a very small plan may conclude that fees around 2 percent are reasonable.
It’s important for sponsors to compare their fees with plans and companies similar to their own. Consider these options when comparing your plan:
– Put your plan out for a request for proposal (RFP) and receive estimates from multiple service providers. This approach will provide good pricing information but it will require a significant time commitment and may be expensive.
– You could engage a plan consultant that offers independent benchmarking of your fees compared with similar type retirement plans.
– Perform your own benchmarking based on publicly available materials. This method and hiring a plan consultant are only as good as the data compared to your plan. These methods are not as specific as an RFP, but will provide some justification for your decision. This may be the least expensive option but labor intensive for your staff — which is a cost that must be realized as well.
Employers who do the appropriate due diligence and communicate to employees before statements arrive this fall will be in a much better position to answer tough fee questions.