The Department of Labor’s 408b2 regulations were intended to finally bring to the surface the true costs to your retirement plan. What, you say, hidden fees. I often hear “we pay for the fees”. There are many categories of fees and retirement plans. The fees some companies pay for are just part of the picture. An exposé by the general accounting office, a nonpartisan group, highlighted that there may be up to 17 different fees being paid by your employees in the retirement plan.
408b2 and answering the question of fair and reasonable
If you’re like most executives, you really don’t have much time to comb through all of the elements in your retirement plan. You might even feel it is a voluntary program and if employees don’t want to participate, no skin off my nose. Unfortunately, the law says you are responsible to see that the fees being paid are fair and reasonable.
When one buys stocks for their own accounts you typically see that there was a fee paid to the bank that holds the money, a fee to the advisor who made the recommendation and the fee to execute the trade on the exchange. The overarching majority of investments in a retirement plan are some type of packaged investment product that holds stocks, bonds or a mixture. Where does one see the costs for those same three activities? The investment product is packaged in units that add these costs into the unit price similar to when you buy a consumer packaged goods. The problem is that there is no standard for the costs trading, research, investment manager, investment advisor, etc. That simply means that only a portion your savings is actually being invested. Let’s say that could be 99% or 95%. While some of these numbers may seem inconsequential, when one compounds them one can see a large bowl in the balance that one person realizes over another. The General Accounting Office estimates an additional 1% fee over 20 years would reduce an account balance at retirement by about 17%.1
408b2 and benchmarking plan fees
One of the duties of an investment fiduciary is to check to see that the fees are fair and reasonable. 408b2 was just the first step in helping you make that assessment. The first step is to know your fees. The next step is to know what plans like yours are paying. The most expedient way to compare is to use an independent benchmarking report that provides you with a reasonable comparison. A retirement plan consultant that is a fiduciary should have access to a third party reports. Make sure that the third party is reputable. A reputable third-party source should address the consultant’s potential conflict regarding their own fees.
If you would like to get yourself out of the responsibility for all of this you should look into an independent fiduciary or discretionary trustee that actually takes on responsibility for these functions. Before you jump on to the very first one you find, know that that is an investment fiduciary decision that you’re making. You are responsible for making a good one and understanding your options. I maintain that using an independent, unbiased impartial retirement plan consultant that will accept investment fiduciary responsibilities and that shares in your risk is your first step in evaluating all of this. You may become comfortable with their process and not feel the need for paying for an independent fiduciary. We look forward to helping you work through the process.
(1) PRIVATE PENSIONS, 401(k) Plan Participants and Sponsors Need Better Information on Fees, 2007
(2) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
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