Do you know how much your 401(k) plan is costing you and your fellow employees? Probably not. Even your employer may not know.
Fees charged by the financial institutions that administer these employee tax-deferred savings accounts are often a mystery. If you don't believe this, go to the drawer where you keep your quarterly 401(k) statements and see if you can find the word "fee."
These statements give the dollar value of shares in different investments, such as mutual funds. Yet the performance of these investments is actually better because instead of stating fees, these statements give investment-return figures after fees have been taken out.
This omission is highly convenient for the large brokerages and insurance companies that provide 401(k) plans because it allows them to charge high fees, paid by investors who have no inkling of the hit their retirement accounts are taking. While these institutions must disclose all fees when asked, federal rules haven't required them to voluntarily disclose these fees — until now.
Sweeping new rules from the U.S. Department of Labor are designed to shine a bright light on 401(k) fees. One of the requirements is a new format for quarterly statements that will show fees. The statement you receive in the fall will look nothing like the ones piled up in your drawer. It will include an eye-opening table showing fees and actual returns for each investment before fees are taken out.
Fees from plan providers often run more than 1 percent annually. (This comes on top of the fees you're paying to the investment companies whose products you've selected for your plan.) One percent may not sound like much, but like the water bill you get from a leaky faucet, this is serious damage over time. An independent study found that the total fees paid on 401(k) plans reduce the total retirement accounts of the average American couple by a whopping 30 percent.
The government is trying to shed light on fees to keep them in check. But despite numerous notices from the DOL, many employers remain clueless about the new rules and looming deadlines for compliance. The first of these comes July 1, when providers are required to have disclosed, and employers to know, all plan fees and the services they cover.
Employers are then required to determine whether these fees are reasonable in relation to the national market — whether lower fees are available for the same services. For example, some arrangements cover employee education (training on selecting investments from among those offered by the plan) as part of the deal, but many don't. When education is provided, it sometimes involves conflicts of interest that the new rules seek to eliminate.
Though the rules call for heavy fines for employers who fail to comply, many companies are literally doing nothing because they haven't read notices from the DOL, don't understand them or don't take them seriously.
If your employer falls into this category, they could end up in serious trouble with regulators. And if your plan is being charged excessive fees, this could continue to drain your 401(k) account. So it's in your interest to make sure your employer is on top of this situation. To ensure this, you could:
• Take a printout of this column or send a link to your company's human resources department. At small companies, these people are responsible for dozens of other matters, so the new rules may be news to them.
• Tell them that there are various sources they can check to confirm the requirements and rigors of the new rules. The DOL is a good place to start.
• Ask your HR people if they've determined what fees are being charged. In all likelihood, their plan provider has already provided required fee information. If not, HR should write the company a letter documenting this failure. This will cover them with federal regulators and put the onus on the plan provider.
• If the plan provider has supplied the fee information, ask HR if they understand it. At smaller companies, they may not, because many providers are burying it in a document the size of a phone book. Does your company have an independent advisor to interpret these fees and determine whether they are reasonable by pinpointing where they land in the national spectrum?
Doing all this might not make you the most popular employee with HR, at least in the short run. But in the long run, you will be protecting your company from a world of regulatory hurt, including heavy fines. More importantly, making HR aware could protect the retirement resources of all employees in the plan, including your bosses.
Anthony Kippins is president of Retirement Plan Advisors, Ltd. a Registered Investment Advisory firm that addresses the needs of retirement plans and the employees who invest in them. An Accredited Investment Fiduciary Analyst (AIFA®) with more than 30 years of experience domestically and abroad, Kippins specializes in providing fiduciary advice to retirement plans on governance, investments and educational services. He also advises individual clients on retirement planning and investment management after retirement. Kippins serves as managing director of Institutional Fiduciary Assurance LLC, an organization that provides fiduciary advice to trustees of endowments, foundations, non-profit organizations and charitable trusts. He can be reached at firstname.lastname@example.org.