Why People Still Don’t Know Their 401(k) Costs
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On February 3, 2012, the Department of Labor published final regulations on fee disclosure for retirement plans. The final regulations were supposedly going to finalize the process where the DOL began to expand disclosure of compensation paid to service providers of ERISA-subject plans. In short, the idea of this regulation was to offer the consumer better transparency of their 401(k) by having much easier fee disclosure to read and understand. The regulations raised important questions for plan sponsors and service providers to implement new compliance systems within the regulation.
As fiduciaries, plan sponsors are responsible for making the decisions related to selecting an appropriate fee structure. These fees can include asset fees charged by the financial institution, fund expenses within the mutual funds themselves, and broker/financial advisor compensation that may exist within the plan. This doesn’t involve the actual cost to the company of running the plan for recordkeeping, plan participant fees, etc. It’s up to each and every company large and small to determine the overall cost structure.
Three and half years later, what we know is that not much has really changed for lack of fee disclosure. Although one good outcome of the rule is that the benefits and human resources departments of companies have been able to drive fees down because there is more light being shed on this topic, the fact is that participants still don’t have a clue on how much it costs them to do business within their 401(k) plan. Why is that the case?
- Page One. The real way to get people to know exactly what it costs them is to have it disclosed right there on page one. For most fee based financial advisors, the statements show the word FEES right there on page one of the monthly statements sent to clients. 401(k) statements don’t show fees anywhere on the quarterly statements I have seen over the past three years. How will the average person have any idea what it costs them if it isn’t labeled up front on page one?
- Lobby Groups. Like most rules enacted in this industry, everything gets watered down once the lobby groups take hold of the rules. While the fact is that there are fee disclosures by law, they are embedded deep in dark space in legalese and prospectuses that even the most astute people wouldn’t be able to find. Line up ten people and ask them to find the fees on their 401(k) within five minutes. Do you think they could do it?
- Understanding Expenses. Since there may be several types of expenses, even if a participant found the expense page then the question would be do they understand what the various costs are in the 401(k). What is the difference between an asset fee and a fund expense? What does a financial advisor provide for the cash they are getting paid in the plan? Is there a basis point kickback to a third party administrator?
If you don’t understand your 401(k) or the costs you are paying, it would be a good time to let me have a look at your plan. Just shoot the details to me at email@example.com.