Financial Opinion and Insights

401(k) Fee Disclosures On The Way

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

If you’re participating in a 401(k) plan, it won’t be long before you’ll be seeing brand new fee disclosures on your statements; and, if you’re one of those who thought your plan was ‘free’, be prepared for a big surprise.  As you may have guessed, there isn’t now, and has never been, a free lunch.

Employers will be obtaining new disclosures from all covered service providers (CSPs) and will be required under ERISA 404(a)(5) to make clear and useful disclosures to participants.

Whether your plan’s fees and expenses are too high is a relative question. The requirement for determining `reasonableness’ is mandated under ERISA (the Employee Retirement Income and Security Act).  Employers are required to periodically compare their current plans with what else is available in the marketplace, given the size of the plan, number of participants, and the number and level of services the plan is receiving.  There are two ways of doing that.

One way is to conduct a provider search request-for-proposal (RFP) process.  The only problem, of course, is that the process can take about 4-8 weeks and can be a little costly.  Despite this, it’s a process that probably should be conducted at least every three years.  If your plan hasn’t conducted at RFP in the last three years, it’s more than likely your plan can, and should be, made better.

Another way is to conduct a fee and expense benchmarking process.  This is less expensive and something all plans should probably do annually.  It’s simply a process of comparing your plans to others of like size, etc.   Two things to keep in mind about benchmarking:  (1) it’s best if the study can reveal what comparable plans – roughly same size, number of participants, etc. – are actually paying, not a bidding process, and (2) what’s `customary’ may or may not be `reasonable.’

What You May Not Know

If your plan is comprised of funds from a few fund families, you might want to take a look in your funds’ prospectuses.  Look to see if there are 12b-1, shareholder servicing, and sub-transfer agent fees (Sub-TA fees).  If so, it’s possible these fees are there to pay plan expenses that otherwise would be billed directly to the plan under `revenue sharing’ arrangements between service providers. 

These may not be unreasonable; but, I’ve always felt that transparency leads to greater competition and, therefore, lower prices.  I’ve never understood how hidden fees can be good; nevertheless, they do exist.  But, one has to wonder what the incentive would be to replace a high-fee fund that pays revenue sharing to the plan vendor with one that has no such fees and pays no revenue sharing.  How much would service providers charge then, if they had to use fully-disclosed billing?  Oh, well, that’s just me.

If your plan is one using an `open architecture’ platform – you can select from hundreds of funds and families, including no-load and index funds that don’t pay revenue sharing – consider yourself one of the lucky ones.  Just be sure you’re getting the education you need to make prudent decisions.  Remember, the best investment process isn’t exciting, entertaining, or even worth discussing with your friends.  The best process is often boring, but effective.

You don’t have to be brilliant.  All you have to do is be smart – and that’s the same thing as not being dumb.



Jim Lorenzen is a Certified Financial Planner® and an Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Written by Jim Lorenzen, CFP®, AIF®

April 3, 2012 at 8:00 am

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