Many employers who sponsor 401(k) retirement plans don’t really have a good handle on the fees they pay to fund managers or other financial service providers or that are passed along to their workers by those service providers.
This was the conclusion of a report by the U.S. General Accounting Office (GAO) to Congress.
Fees, which sometimes can be hidden in the fine print, can diminish the amount of cash that workers have when they retire and seek to tap into their retirement savings in their 401(k) plan. And if the employer is confused, how can an individual employee sort things out?
Some common investment fees include portfolio management fees, marketing distribution fees, sub-TA fees, trading or transaction fees, and wrap fees associated with insurance products.
According to the report, 401(k) Plans: Increased Educational Outreach and Broader Oversight May Help Reduce Plan Fees, about 50 percent of the employers surveyed did not know if they or their employees paid investment management fees (the most common fee assessment) or wrongly believed that these fees were waived.
Some employers were unaware if their providers used complex fee arrangements, such as revenue sharing, or if their plans paid certain fees under a group annuity contract or another form of insurance contracts. Some employers claimed awareness of these arrangements, but did not fully comprehend how these fees were charged. The GAO found that one employer underestimated recordkeeping fees by about $58,000 because the employer failed to include the fees charged to workers’ accounts under its revenue sharing arrangement. According to the New York Times, in a revenue sharing arrangement “the plan provider pays another, outside firm for certain administrative costs.”
The U.S. Department of Labor has several educational initiatives going for more disclosure of 401(k) fees but the GAO reports states that more work needs to be done in this regard.
The reports concludes that …
…plan sponsors may need to be aware of and closely monitor the fees charged by various service providers to help ensure the fees they and their participants pay are not excessive. However, in several instances, sponsors of large and small plans did not know or fully understand the fees charged to their plans, because fee arrangements have become so complex and may be disclosed differently, adding to sponsor confusion about p [lan fee In addition, because sponsors of plans of all sizes may not be aware of certain fees that participants are paying, such as transaction costs and wrap fees, it is difficult to get a clear understanding of the total fees that participants are actually paying.
Except in the public sector, 401(k) plans have replaced traditional guaranteed defined-benefit pension plans.