Plan_Expenses

401(k) Plan Expenses Attract Attention

from Lawmakers

Expenses associated with the operation of 401(k) retirement plans were the focus of a US House Education and Labor Committee hearing on March 9, 2007.

Various representatives of the 401(k) plan industry provided testimony regarding the detrimental effect 401(k) plan expenses have on a participant’s ability to accumulate sufficient assets for retirement. An increasing number of employers have eliminated pension benefits for their employees. As a result the 401(k) Plan is the primary vehicle for retirement savings accounts for many employees.

Testimony Focused on Two Key Areas of Concern

Today it is very common for companies to require their employees to bear the burden of 401(k) plan administration costs. Even a small increase in annual expenses will have a direct impact on the participants’ growth in their accounts. For example an increase in plan expenses of 1%, or 100 basis points, for a participant contributing $2,500 annually to a 401(k) Plan would reduce the total account balance at the end of 20 years by nearly $13,000 (assuming an 8% overall annual return).

401(k) participants often do not understand the fees they are paying in their 401(k) Plan. A majority of the fees charged to participants are netted against the investment return of the plan assets. This creates “hidden fees” that give participants the false impression that there are no fees associated with their participation in the plan. In fact, as noted above, these fees have a significant impact on participants’ account balances.

Where Are My Fees Hidden?

In his testimony before Congress on March 9th, Matthew Hutcheson, a nationally recognized authority on qualified plans and fiduciary responsibility, identified five different types of fees that may not be fully disclosed to 401(k) plan participants.

1. Undisclosed Trading Costs

2. “Soft Dollar” Revenue Sharing

3. Sub-Transfer Agent Revenue Sharing

4. 12b-1 Commissions

5. Variable Annuity Wrap Fees

401(k) plan participants and the companies sponsoring the plan should fully expect to be charged for the myriad of services that are required to properly operate a 401(k) Plan. Mr. Hutcheson’s criticism is that many of the expenses noted above have not been properly monitored by those responsible for the plan’s operation: the plan fiduciaries and their advisors.

How Can RSA Help?

One of the challenges faced by the 401(k) industry is the large number of advisors and company sponsors who are compensated under the “hidden fee” arrangements noted above. This arrangement creates an inherent conflict in the advice-giving capacity of any of these parties.

Retirement Solutions Advisors is an independent retirement plan consulting firm and is not in a position to benefit from any of the fees noted above.

We can assist your company in determining exactly what your participants are being charged for the operation of the plan. We can also assist in advising you on whether the expenses charged are reasonable for the services provided and competitive in the current market.

Please contact Steve Johnson at: (312) 923-8700 or e-mail: steve.johnson@rsadvisorsllc.com if you would like more information on how RSA can help you assess your current 401(k) vendors.