As I mentioned in my post last week, we (the industry) need to come up with a disclosure that truly (and simply) explains who is getting paid what, for what, how, and by whom, along with a participant-specific dollar figure of costs incurred – then explains how the participant can affect their own plan costs based on their choices. This is no small task.

There is no doubt that fees within 401(k) Plans are confusing at best ... deceptive at worst.

This video just starts the discussion on Fee Disclosure.  http://www.youtube.com/watch?v=qsBeau8FV-Q

I'd like to take some time to talk about what might work when it comes to Fee Disclosure in 401(k) Plans.

STEP ONE: The first step has to be that the Plan Sponsor needs to understand the fees within the plan they are offering their employees ... ALL of the fees. I can't tell you how many times a Plan Sponsor has said to me, "Our plan is free. We don't pay anything for it." Ugh! My heart sinks.

Just like there's no such thing as a free lunch, there's no such thing as a free retirement plan, either. Your company may not be "writing a check" to anyone for administering your plan or its investments ... but someone is paying ... and it's probably your employees/participants through reduced returns.

Truly getting to the bottom of all of the fees in your plan will take time, tenacity and some expertise to ask the right questions and understand the answers you get. It is your fiduciary responsibility to both control the costs in your plan and to retain qualified experts to help you do it.

STEP TWO: So now that you know WHAT the fees are, now you need to assess if they are reasonable. There is no concrete definition of reasonable when it comes to fees.

Merriam-Webster’s dictionary defines “fair market value” as “a price at which buyers and sellers with a reasonable knowledge of pertinent facts and not acting under any compulsion are willing to do business.” That definition applies to fees in a retirement plan, too.

Reasonable fees in a retirement plan are fees for which you are receiving a reasonable level of services in exchange. It doesn’t mean the cheapest … it doesn’t mean the same as the next plan … it means a reasonable price for what you are getting in your plan.

Therefore, just because you have the least expensive investment fund, doesn’t mean it’s the most “reasonable.” Sometimes that adage “you get what you pay for” applies. There are funds that are worth paying a little more for, if they are providing consistently exceptional performance. There are administrators, recordkeepers, and TPAs that are worth paying a little more for because of the quality of service, quantity of service, and quality of technology.

There are many factors to consider when deciding if what you are paying is reasonable. Certainly you should benchmark your fees against the industry as a whole, against your peers/competitors, and against itself in terms of “taking it out to bid” periodically to see what other providers can offer you.

Again, I would recommend getting some expert help to ask the right questions and understand the answers you get. If your fees are reasonable, then GREAT! Take an extra coffee break, pat yourself on the back, and make sure you document your entire process, findings, and conclusions! (This is part of proving your fiduciary responsibility!) If they are not reasonable (i.e. too high – you wouldn’t mind them being too low) you have 3 choices:

1. Negotiate a reduction in fees (may mean changing out some investment funds or renegotiating your Service Provider Agreements with your administrator/recordkeeper/TPA)
2. Negotiate an increase in products/services from your providers for the same fees you’re paying now. This may mean adding employee communication campaigns, online investment guidance products, a brokerage window investment option, compliance services, or a myriad of other possibilities.
3. Change. Change investment funds. Change administrator/recordkeeper/TPA. Change investment advisor. If you can get the same (or better) services/funds/products somewhere else for a more “reasonable” fee, then make the change. Just be sure you understand that change is hard … it’s an arduous process to make changes to a retirement plan in terms of time, legal considerations, communications, costs of implementing the change, etc. I usually suggest that unless you’re really unhappy with your current provider, try to make #1 or #2 work first before making this move.

STEP THREE: Now you know who is getting paid how much and for what services – and you’ve deemed them reasonable. How do you explain it to your employees/participants?

This is the hard part – and it’s what should be the focus of Congress’ efforts to improve participant fee disclosure. Through the first 2 steps, you’ve gotten quite an education on revenue sharing agreements, 12b-1 fees, marketing and distribution fees, investment management costs, basis points, benchmarks, service levels, etc. How do you “translate” that to participants so that they understand not only how much they are paying, but the impact of those costs on their future retirement savings? Oh … and you need to do it before their eyes glaze over and they start run!

Ideally a participant would get a lovely simple “box” on their quarterly statement that shows them something like this …

For this statement period, your account paid $______ in expenses to maintain your account.

This includes: $_______ Costs paid to fund companies to manage your investments
                                                   (investment management fees net of 12b-1, marketing, etc.)
                        $_______ Costs paid to (RK/TPA/Admin) to keep the records of your account
                                                   (RK/TPA/Admin fees typically paid from investment fees)
                        $_______ Costs paid to (investment advisor) for monitoring the plan investments
                                                   (amounts paid to advisors from investment fees)
             (these should add up, too!)

These expenses amount to an annualized expense cost of _____% which has been reduced from your investment earnings rate of return.

Looks so simple, doesn’t it? I can tell you that in reality, there is a significant amount of work (and cost) involved in identifying these figures at a participant level, let alone programming record keeper’s systems to be able to automatically generate them this way. Understand, these costs are calculated and paid on a rolling basis, so someone will have to determine what balance each person had on the days the fees were “collected” and be able to reconcile the individual amounts up to the whole amount paid. Whew! I’m tired just thinking about it! (Remember: If it costs them a lot to do it, you can bet those costs will be passed along.)

So my pretty little box above tells them what they are paying. We still need to help them understand two things:

1. The impact of these costs on their future retirement savings, and
2. How their choices within the Plan can change those costs and outcomes.

My next blog will address these two issues in more detail. I hope you’ll stay tuned for “the rest of the story.” In the meantime ...

Let me know if I can help ... it's what I do!