Consider the perspectives of the 3 judges of 401k fees, costs and commissions:
- The employer sees the plan from what is it going to cost the company. Say 3% per year.
- The Department of Labor (DOL) sees the plan from what it costs the employee. Say 3% in annual fees.
- The employee usually thinks it costs nothing.
Are there no 401k fees?
Here’s a 401k fee primer. First, let’s say you make an IRA contribution of $5000. Does it all go to your retirement account? If it’s your first contribution, you are going to pay an upfront commission of say about 6%. That upfront commission goes to a broker for guiding the transaction. There are custodial fees, etc. that further subtract from the true investment.
Instead you make that $5000 contribution to your 401k. Let’s say that 199 other employees, make $5000 contributions, totaling $1,000,000. One would hope your 401k commissions (broker) or 401k fees (if working with an investment advisor) would be discounted by buying in bulk.
Who is watching the 401k fees?
Shopping for the best 401k fees is a fiduciary responsibility. With all fiduciary responsibilities come the liability of not fulfilling the responsibility. Enter the problem of the complexity of the modern 401(k) and time-pressed fiduciaries. Recently, I have talked with several plan sponsors and Retirement Committees. None of them knew how much their plan costs their employees. They should have received a disclosure statement from their providers telling them about the 401k fees. That was part of a long fought battle by the Department of Labor to overcome the damage that high 401k fees do to an employee’s 401k balance.
It is not in the interest of the providers to disclose 401k fees. This forces them to justify them. It is the natural inclination to get paid as much as possible for doing as little as possible. Complicating matters the law allows plan sponsors to let certain 401k fees be paid by the employees. Most providers assume that the company wants it that way. Not all of providers ask company fiducaries if they want to pay the fees or pass them on to their employees. 401k fees paid for by the company present an opportunity for a tax deduction.
A comparison of 401ks with similar assets and participants showed a range in 401k fees of a low of $10,000 to a high of $50,000. Did the low underpay as none of their employees are on track to retire? Did the employees of the high plan get services that justified the extra $40,000?
Who is watching the 401k costs?
ABB was fined $35 million dollars for breach of their fiduciary duty. One of their breaches was having the provider charge their employees a higher investment fee in order to cover some of the company’s administrative expenses. One would believe that the Retirement Committee consisted of at least a few highly compensated employees that had some of the larger plan balances. This decision led to higher fees. The GAO has estimated plan fees of 1% reduce balances by 17%. One would like to believe that they were unaware of the GAO’s work. Otherwise they were self-inflicting wounds to their retirement.
Who is auditing the 401k fees?
The Department of Labor has said that it is auditing the company’s compliance with making sure that the fees are fair and reasonable. Based on my recent experience, they will see no firms complying with the 401k fee comparisons they expected. If you haven’t audited your plan, you can either choose to do go through an RFP process or use an independent fee benchmarking tool like this one from LPL Financial. Why take on risks that you don’t get paid to take?
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