Recently, a survey published in PLANSPONSOR magazine indicated that most plan sponsors were satisfied with their fees. Yes, and Kim Jong-Il gets a 99% approval rating from the citizens of his North Korean regime.
OK, I'm not comparing a dictatorship to plans sold by insurance companies. The point is that an informed decision is possible only when all the facts and options are known. Unfortunately, when it comes to most 401(k) plans, those footing the bill only think they know the full tally, and so they say, yes, sure, we're satisfied.
As a financial advisor, you may deal with or be asked to comment upon retirement plans for your clients. Increasingly, it is becoming clear that you have a fiduciary duty-in spirit, if not in fact-to assist your clients in uncovering all the fees involved with their plan. Lawsuits have been filed and more can be expected. It's time for you to understand the facts so both you and your client can be protected.
The much-lauded Pension Protection Act of 2006 provided improvements in the retirement plan landscape. It does not, however, discuss how mutual fund or insurance companies are getting paid for providing 401(k) plans. The PPA provides a sheen of respectability to plans that are in fact tarnished.
Plan providers, including many of the biggest industry names, have mastered the art of hiding fees within their marketing materials and complex plan documents, making it virtually impossible for employers to make sound judgments regarding 401(k) fees. In many cases, the language in the plan documents and other materials borders on illegal, and is certainly unethical. Regulations to clear up this sorry situation are wending their way through Congress and the Department of Labor. Will they pass? Probably. When will they take effect? Who knows?
In the meantime, here's a primer on how many big-name 401(k) providers obfuscate when it comes to fees.
Let's start with a blatant but typical example. A plan provider, under the "Fees" section of the plan proposal, shows in large bold letters, "Fees Waived." How can that be? Does that insurance company provide those services as a pro bono civic duty? Hardly. The answer is that fees are hidden elsewhere, but those fees do not show up anywhere in the proposal.
The insurance industry says the fees are "disclosed" in the plan documents, typically delivered after the plan has been agreed to. Even then, the fees are hidden deep within the many pages of the document. The fees are never shown in one place; instead, they are split up among different categories. This flies in the face of employers' fiduciary responsibility. The Labor Department says an employer must "ensure that fees paid to service providers and other expenses of the plan are reasonable in light of the level and quality of services provided." But how can that judgment be made without transparent fee disclosure?
Another technique for hiding fees involves the use of so-called "no-load" funds. Most employers are familiar with that term, and so they lower their guard when assured that the plan will, in fact, use only no-loads. But here again, deception is at play. Funds may be labeled as no-load because they carry no front-end or back-end sales charge. But typically, some companies use funds with higher-than-average expense ratios. The fund company then "rebates" all or part of the fee back to the insurance company in the form of "revenue sharing" or "expense reimbursements."
The bottom line is that thousands of employers do not know that they and/or their employees are needlessly paying 1% to 2% more each year directly out of their retirement accounts. Excessive fees equaling 1% could, over decades, reduce a final nest egg by hundreds of thousands of dollars.
The solution we are calling for is an unambiguous summary sheet of all fees and charges. This laundry list of fees should be shown to both the employer, when shopping for a plan, and to the participants, with every statement they receive from the record keeper. Without this summary, there can never be a level playing field for competing plan providers. Without fair, vigorous competition among plan providers, millions of plan participants will be saddled with burdensome costs.
And without disclosure, employees cannot pressure employers to seek more cost-effective plans.
Approximately half the work force, 43 million Americans, now rely on 401(k)s as their main retirement plan. Regulations should have been implemented years ago.
Ken Weber, president of Weber Asset Management in Lake Success, N.Y., provides 401(k) plan design, implementation and performance evaluation. He can be reached at email@example.com, or 800-438-3863.