In second quarter 2012 a new regulation under ERISA Section 404 is scheduled to take effect and you and millions of other 401(k) participants are going to start seeing their retirement plan statements in a “whole new light”.” This regulation will require plan sponsors to provide more information about the fees you are charged in your retirement plan accounts. For the first time (for most of you), specific expenses and fees associated with your plan will be on full display on your Quarterly Statement. The question is, are you ready to see them?
Recently there has been increased attention given to the fees and expenses retirement plan participants must pay and the potential impact of excessive fees on participants’ ultimate success in planning for retirement. The goal of this new regulation, an admirable goal indeed, is to provide participants with more information about the fees they pay, helping them to manage their retirement savings better. Certainly a worthwhile endeavor and much needed, this new transparency will likely create some confusion amongst you and cause many questions to be asked by participants who are simply not accustomed to seeing such a forthcoming accounting of the fees they pay. I predict many of you who might be your company’s HR Manager, CFO, or Owner may arrive at your office one morning to find an employee or two clutching their 401(k) statements and asking “for a moment of your time……”
Types of Fees Being Disclosed
There are a number of different types of fees associated with retirement plans that will be readily identifiable and that will be more fully disclosed under this new regulation.
Administrative Fees: Included in the category are expenses of the plan related to the “administration” of the plan. Fees for Record-keeping and Third Party Administration are the most common, but there can also be fees related to accounting, legal, or payroll as well. Often times the plan sponsor (employer) pays some of these fees directly, but only about 13% of the total plan cost, while you (plan participants) end up paying about 83% of the total plan fees(1). To the extent these expenses are charged to the plan, you would see your share of them itemized on your quarterly statement.
Revenue Sharing: It is quite common for the providers of the investments in the plan (product sponsors) to pay the record-keepers or third party administrators revenue sharing based on how much of the plan’s assets are in their products. This might reduce the actual amount that is directly “charged” to the plan or the plan sponsor for administrative services, and give the illusion that “not as much” or “nothing” is actually being “billed”, but remember… “there is no free lunch”. More than likely the participant is paying for these services through higher investment costs. Under the new regulation, revenue sharing arrangements and amounts will be fully disclosed to the plan sponsor.
Participant Specific Expenses: Any expenses related to a specific participant’s account or activity (loan or withdrawal processing fees, investment advice fees, brokerage fees, sales charges etc.) must also be disclosed on that participant’s statement.
Investment Related Expenses: Fees related to the investments themselves must also be fully disclosed at least annually and include the following:
a. The total annual expense for an investment option expressed as a percentage(ratio)and a “breakdown” of specific expenses that make up that ratio.
b. Any fees such as commissions, contingent sales charges, exchange fees, redemption fees, surrender fees…. ANY fee not otherwise expressed as a portion of the total annual expense ratio.
c. The total operating expense of an investment option for one year expressed as a “dollar” amount for a “$1,000 investment”.
Will Anything Really Change?
Whatever you think the first time you see these expenses in “all their glory” on your retirement plan statement…. Remember this…. IT’S A GOOD THING! You should know and understand the expenses you pay. Your first reaction may be that you are paying more or paying for something you didn’t have to pay for last year. Resist this reaction and accept that these expenses have probably always been there, perhaps hidden, but nonetheless fully present – having had an impact on your total return all along.
There is a great likelihood, perhaps it’s even probable, that the expenses of your plan are “competitive” and that your plan sponsor (your employer) has been serving you well in this regard…. So fight the initial urge to assume that costs are too high. However, it at least allows us to perhaps question or ask for explanation. It may even prompt your plan sponsor (your employer) to take the initiative to perform some due diligence on your plan and confirm that they do offer you a competitive plan – not just in terms of cost, but also in terms of the quality of options you have to choose from.