Understanding Retirement Plan Costs

Consider a couple of important dates, which will be longed remembered in the retirement plan industry. 

• August 17, 2006 saw the passage of the Pension Protection Act of 2006. This act has already and will continue to significantly change all types of retirement plans and savings vehicles and will be the subject of many future articles.
• September 11, 2006 marked an important date for attorneys across the country. On this date, nearly a dozen class action lawsuits were launched targeting 401(k) plan fees and expenses. These lawsuits were filed against several large companies as well as their officers and members of their investment committees. The companies names are unimportant in contrast to the impact the results might have across the nation. A veritable “storm” of ERISA litigation is on the horizon, according to some attorneys closest to the issue.

At the heart of the matter, the fiduciaries to the plan are alleged to have: 

1. entered into agreements with third parties that allowed the plans (thus plan participants) to pay unreasonable, excessive fees,
2. failed to inform themselves of, and understand the various methods service providers and vendors in the retirement industry collect payments and other revenue from the 401(k) plans they service, and
3. failed to monitor the fees and expenses of their plans. 

In addition, complaints against the fiduciaries of these plans allege that they allowed their service providers to receive excessive revenue through direct payment of “hard dollar” expenses by the plan and/or through “revenue sharing arrangements” with other service providers involved with the plan.  Referring to revenue sharing as the “big secret of the retirement industry” these complaints identify the practice of “sharing” portions of asset-based fees with other service providers as adding unreasonable cost for the services received.  

This is not to suggest that every plan is at risk but a suggestion to plan fiduciaries that they need to: 

• understand all fees being charged,
• who is receiving any and all portions of them, and
• exactly what value they are providing for the fees they are collecting. 

At a minimum, employers should consider offering only institutional shares of mutual funds rather than retail shares in an effort to reduce investment cost and insure that share classes they offer to their employees are appropriate for their plan size. In light of these actions, we believe that the best action an employer can take today is to assess the current plan in an effort to understand its performance and expenses. 

From this assessment, the employer can take prudent action to either improve the plan with the current provider or move it to a provider that can provide the needed service and support.  The worst thing would be to ignore the signs and trust blindly in what you have today. 

We Can Help! 

Freedom One pioneered the 401(k) Fiduciary Review, an expert third party analysis of your 401(k).  After successfully completing over 150 reviews we are so confident that this analysis will lower your costs, benchmark your company’s current plan, and immediately add value, that we guarantee its results.  To get your plan on course for success, click here