What You Need to Know About 401(k) Plan Fees
If you offer a 401(k) retirement plan to your employees, chances are one or more of your workers are going to ask you questions about the fees associated with their plan. Are you prepared to answer those questions when they come up?
According to a 2007 AARP study on 401(k) Participants’ Awareness and Understanding of Fees, 83 percent of plan participants admit they do not know how much they pay in 401(k) in fees and more than half say they do not know what effect fees can have on their retirement. Further, 61 percent of survey respondents believe the employer should bear the responsibility of ensuring that plan participants have a clear understanding of the fees charged by their plans. This is the mindset that is driving proposed legislation and continued litigation relating to retirement plan fee disclosure – and it is something that employers cannot afford to take lightly.
Currently, a bill is making its way through Congress that would require 401(k) plan providers to disclose all fees so that workers saving for retirement can make a fully informed decision about which plan is best for them. It is just the beginning of a movement to ensure employer communication regarding the plan fees of which employees never knew but are starting to ask questions.
As a plan sponsor, you have a responsibility to know, understand and monitor the fees associated with your retirement plan – regardless of the laws that may come to fruition. More plan participants are requiring their employers to account for and monitor their plan’s investment expenses; have knowledge of all the parties that had been and are currently being compensated from plan assets; and monitor the legitimacy of the compensation received by each party in light of the services provided.
Employers will need to understand the four basic categories of 401(k) plan fees and how they affect retirement savings:
- Administration Fees – Costs associated with the day-to-day operations of the plan, i.e. recordkeeping, plan testing, customer service, etc.
- Communication/Education Fees – Costs associated with helping employees understand their plan, including enrollment meetings, websites and newsletters
- Investment Fees – Expenses associated with managing plan investments (investment management expense ratios, broker commissions and consulting fees)
- Individual Service Fees – Costs associated with optional features offered under a 401(k) plan (loans, managed accounts, brokerage accounts, etc.)
Understanding more about where these fees originate and how they are charged is something that could eventually impact plan participation. As a plan sponsor, the last thing you want is for an employee to use fee disclosure as an excuse not to participate in your plan. As long as you know the fees associated with your plan and use the correct context in explaining them to participants, you can avoid the headaches associated with compliance and litigation, and keep your employees content at the same time.
If you would like to discuss more about the fees associated with your plans, please contact our Retirement and Financial Services division at 919-913-0235. For further information, please visit the following links:
With 401(k) Fees, Employers Better Get Ahead or Fall Behind
Understanding Retirement Plan Fees and Expenses (from DOL website)
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October 10, 2008
Hill, Chesson & Woody strives to keep our clients' group decision makers abreast of trends influencing the employee benefits market. Look for Eyes on Benefits to bring you news and information affecting you and your employees.
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Phone: 919.403.1986
Fax: 919.913.0237
www.hcwbenefits.com