Buckle your seatbelts!
No doubt about it, changes are on the way regarding fee arrangements in 401(k) plans which will impact you.
Investment and Retirement Committee members and other plan fiduciaries need to be aware of the issues
just now beginning to bubble to the surface and consider a prudent course of action to take now in order to protect themselves and, most importantly, to preserve employee confidence in the retirement plan.
The Stimulus for Change
Class action Lawsuits Filed -
As most of you are undoubtedly aware, in September a number of class action lawsuits were filed against 10 major employers by the participants of their 401(k) plans. Word has it that seventeen more cases are in the works.
It is reasonable to assume that, depending upon the outcomes of these cases, “copy-cat” cases may become troublesome for smaller employers and their respective fiduciary committees.
The basic theme in all these cases is that the defendant fiduciaries have caused or allowed their 401(k) plans (and participants) to be charged excessive fees by virtue of revenue sharing arrangements for plan services. (To read a more detailed explanation of the cases, click here
)
New Government Report on 401(k) Fees -
Additionally, the US Government Accountability Office (GAO) has just released a report at the end of November commissioned by Rep. George Miller, D-California. The gist of the report recommends that Congress take action by enacting legislation that among other things would:
1) require employers to provide disclosure of plan related fees to workers,
2) require 401(k) service providers to disclose to employers the compensation they receive from other service providers (mutual fund and insurance companies etc.) and
3) require investment consultants to disclose potential conflict of interest problems relating to the compensation they receive from the investment companies they are recommending to plan sponsors. (To read the full GAO report, click here
)
“It’s critical that workers’ hard-earned savings not be wasted on excessive fees,” Rep. Miller said.
5 Steps You Can Take Now
1) Review specific expense and revenue sharing fee arrangements for every fund in your plan. Ensure that fees are equitable on a fund by fund basis since not all participants invest in the same funds.
2) Plan expenses should be identified and segregated, then benchmarked to determine whether they are reasonable given the size of the plan; by number of participants and total amount of plan assets. Be sure to identify the total expenses being paid both, directly and indirectly, whether by the plan, by the participants, or the employer.
3) Insist on using only the lowest cost mutual fund share class available to minimize or eliminate revenue sharing. Substituting a cheaper share class may not produce immediate cost savings as the service provider may seek an equivalent hard-dollar fee to make up for the lost revenue. (From a fiduciary governance point of view, you would be much better off with an identifiable, fixed, hard-dollar fee arrangement, than with a hidden, variable, soft-dollar fee arrangement. Industry insiders acknowledge that recordkeeping fees charged on a “percentage of assets” basis do not always correlate to the level of work involved for producing such services.)
4) Examine plan communications to be sure that all fees are clearly reported to plan fiduciaries and participants.
5) If the plan uses a third-party advisor to select or advise on plan investments, insist that the advisor provide to you in writing an acknowledgement of his fiduciary status and a full disclosure statement of any conflicts of interest. For example, if his advice in anyway benefits a related or affiliated entity such as a brokerage firm, there may be a problem.
Independent, third-party consultants may be an efficient resource available to you to assist in this process. They bring a knowledge of industry practices and the experiences of other plans.
In addition, the US Department of Labor has several online publications and useful tools: “Understanding Retirement Plan Fees and Expenses
” and “A Model 40(k) Plan Fees Disclosure Form ”.
PrimeTRUST Advisors Can Help
Given the complexities associated with evaluating varying fee and service arrangements, we can simplify the task for you. Since investment expenses comprise more than 80% of the total plan expenses, we can prepare preliminary investment expense diagnostics reports which will benchmark your current fees to institutional standards.
This tool is an efficient way to ascertain whether your plan may be exposed to the risks addressed above before you launch into a more in-depth analysis.
To contact us, click here
, or call, in Greenville 864-627-4015 or in Columbia 803-787-4015.
Ask for Chip.