In the months ahead, when employees across the country open the quarterly statements from their retirement savings plan, the executives overseeing those plans may face some tough questions.
Specifically, the officers of a company responsible for their 401(k) program will need to be prepared to explain to their employees that nothing has actually changed — despite the fact that their employees will be looking at statements which appear to be showing new fees.
Starting later this year, the Department of Labor will require plan sponsors to disclose specific fees and investment information to plan participants via two related regulations. The first regulation requires 401(k) providers to supply employers with full disclosure on fees by July 1. The second regulation requires that calendar year plans must provide participants with their first set of investment fee disclosures by August 30. In addition, other fees and expenses paid by participants must appear on their September 30 quarterly statement.
To be clear, these fees are not new — providers have not been managing 401(k) plans for free all these years. But for the first time, the fees will have to be made explicit to employees. In years past, an employee could open a quarterly statement and the fees were not visible since they were included in their net investment results.
This fall, when employees open those envelopes, what they see may be different. Where explicit fees are being paid by the plan, employees will see the dollar amount charged to their account.
Employees may experience confusion and become upset if the fees come as a surprise and there’s no explanation.
The individuals responsible for the plan will 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: This is what the provider charges to keep track of participant accounts and process their transactions. These fees also typically include services to keep the retirement plan in compliance.
●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: This will usually be the largest component of plan fees. 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. But built in to those fees can be other fees paid to third parties, arrangements loosely known as revenue sharing.
For the executives concerned about employees’ reaction to the new fees, the best defense is proof that the company did real due diligence in analyzing its plan fees and determined they are reasonable.
What’s reasonable? It’s challenging because no two plans are alike. For example, two companies may be similar in size based on the number of participants and assets; however, one plan may be paying significantly more because more services are being provided such as employee communication services and investment advisory services.
It would be helpful if we could point to a fee benchmark as a percentage of plan assets (say 1.5 percent) and consider it a reasonable fee for all plan costs. However, the size of the plan in terms of participants and assets will dramatically impact the total costs to a plan. A sponsor of a large plan may determine a fee of 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 plan fees with plans similar to their own. Here are a few options in comparing your plan:
●You could put your plan out for a request for proposal (RFP) and receive estimates from multiple service providers. This approach provides good pricing information; however, it may be expensive and require a significant time commitment from your organization.
●You could engage an organization that offers independent benchmarking of your fees compared with similar type retirement plans.
●Finally, you may choose to do your own benchmarking based on publicly available materials. This method and the previous one are only as good as the data compared to your plan. Both methods are not as detailed or specific as an RFP, but they provide you with some justification in your decision if employees express concerns. For many plan sponsors this may be the most reasonable option.
Generally speaking, employers do not have to find the lowest cost provider. However, they need to conclude that their fees are reasonable. Employers who do the appropriate due diligence and communicate to employees before statements arrive this fall will be in a much better position.Tom Reese is a partner with Conrad Siegel Actuaries in Harrisburg, Pa., and has been with the firm since 1997. He is a specialist in retirement plan consulting, administration and employee communications.