I recently covered what I thought was the biggest problem in 401(k)s today – advisors who don’t specialize in qualified retirement plans. This is the first of several parts addressing other problems in 401(k) plans.
High fees are a risk to both employer and employees – employees because they reduce the growth of their investments and harm their retirement readiness, assuming fees are deducted from participant accounts, which is the norm.
High fees are a risk to the employer because they invite lawsuits and Dept. of Labor (DOL) civil actions. In both cases, the company will have to pay tens of thousands in attorney fees. If found liable, which is usually the case, it will have to pay back 5 years of what was deemed to be the excess fees, plus interest, and if it is the DOL, probably excise taxes as well. There is also the tax on employee morale as they see management forced to pay back money to the retirement plan from mismanagement or _____ you fill in the blank with what employees are likely to think. Hint: it’s not good.
That would never happen in your plan, right? First, let’s see if you have a good handle on what your fees actually are. Big problem if you don’t think you’re paying any fees. You are. Always.
Have you had a consultant like me look to find both disclosed and hidden fees? By “consultant,” I don’t mean the hordes of junior smile-and-dial “advisors” that harass your HR Dept. with endless calls. I mean an experienced retirement plan specialist.
Do you have a copy of your required annual fee disclosure document (408(b)(2) from your plan provider(s)? Have you compared it to the ones from the last two years? If you do, and your plan is under $25 million in assets, your are probably in the 90% whose fees went up 5% – 10% each year. That’s because 90% of plans are charged an asset-based fee, and as the plan grows with investment growth, contributions and matches, the fee grows just as fast – exactly as fast. A dollar to a doughnut says you don’t let your other expenses grow at that rate in these low inflation times. Plus, it’s only partly your money. Fees typically come out of participant accounts based on what percentage of plan assets their account makes up. So, if you are a CEO, CFO or HR director and you have 10% of plan assets, 10% of the plan fees come out of your account and 90% from your coworkers.
The DOL says plan fees must be reasonable in light of services performed. How can service stay the same and fees grow 5%-10%/year and still be reasonable? The only way is if the service you are getting is at such a high level that you were underpaying before. If you have typical 401(k) service, which amounts to a meeting or two each year and not much else, and you are paying, say 0.5% in costs not related to the fund choices, you are paying $5,000/year per million in plan size. For what?
Do you know exactly what you’re paying? Not if you don’t know all the fees and whether the fund expenses are as low as possible. Many times I’ve seen fund options that are not in the lowest cost share class. WalMart paid many millions because their funds weren’t and quite a few other household names have too.
Are your fund expenses as low as they should be? Probably not. But you won’t know for sure unless I look at it carefully with you.
This is something you really need to be on top of. It doesn’t cost anything for me to look at your plan costs. You owe it to your employees and to protect yourself. The average award in a DOL civil action last year was well over $200,000, not counting attorney fees and the hit to employee morale. Protect yourself and your retirement as well as your employees’.