Historically, the retirement industry hasn’t been required to publish all fees and expenses associated with 401(k) products.
That’s about to change.
The Department of Labor (DOL) noticed that the majority of 401(k) plan sponsors are in the dark regarding the fees they’re paying. To add insult to injury, most are under the impression that their plan is free.
The DOL has issued a new regulation that will take effect in April and the end of May 2012 for plan sponsors and their employees, respectively, requiring the disclosure of fees and expenses associated with 401(k) plans. The regulation will impact not only plan sponsors, but the whole of the retirement industry.
401(k) plan administrators, brokerage houses, investment firms, etc. will now have to create disclosures following user-friendly, uniform guidelines. When pooled collectively by the account holder, these disclosures will tell a clear story of both direct and indirect fees and expenses.
This is a monumental decision. In fact, some might say it’s a long time coming.
The disclosure requirement has sent 401(k) vendors scrambling to comply. Some vendors are opposed to this regulation as it will expose the high, even unreasonable, fees associated with their products and services.
Plan sponsors, in turn, should be concerned because starting in 2012 they’ll have to share those expenses with employees and justify their plan choices. Plan sponsors who don’t plan ahead and secure reasonable-fee solutions may be facing some awkward, difficult conversations.
Plan sponsors can avoid these types of conversations by requesting a written explanation of their fees from their current provider. They should be prepared to ask some hard questions. Here are a few questions to get you started:
- What are the total all in fees and expenses applicable to my companies’ 401(k) plan?
- What have you accomplished in our plan for the compensation you were paid?
- Does this total expense include any indirect compensation received by your firm for selling/administering my plan? If not, why aren’t they included?
- How much is the indirect compensation and what is the frequency?
- Why wasn’t I made aware of this fee?
- How much has this cost our employees over the life of our relationship?
It’s important they hold their ground and ask for clear explanations of what each fee is for and to whom it is paid.