Many plan sponsors assume that well known brand financial companies must stand behind their plan. For extra comfort, they pick the biggest and most well-know companies. Remember the phrase “nobody got fired for hiring IBM?”
Some big name companies have a 401k fiduciary warranty in an effort to help plan sponsors feel safe. It sounds like the manufacturer’s warranty for your car. If it breaks inside of 5 years and 50,000 miles, they fix it on their dime (unless you void the warranty).
Not so with the 401(k). The Employee Retirement Income Security Act (The Act) says that your company and those you put in charge of the 401(k) are both responsible and personally liable. Have you asked your providers what parts they will fix if you’re hit with a lawsuit or DOL investigation? Are they taking on fiduciary liability or simply responsible for carrying out your instructions? In most cases they are carrying out your instructions (directed) or giving you guidance and not advice.
Does the 401k fiduciary warranty cover you for the tricky business of 401k investment fees?
Let’s drill in on 401k fees. Does your 401k fiduciary warranty protect you from claims that you set your employees up to over pay for their investments? Do you know what investment fees you’ve subjected your employees to paying? Is there revenue sharing involved? If so, is the recordkeeper reducing their fees and passing on the savings to your employees? If you’re not aware, investment companies sometimes share fees with recordkeepers. This arrangement is known as revenue sharing.
In a bundled arrangement, it may appear that one company is handling everything when there are actually several. Functions include recordkeeping, custodial, mutual funds and plan advisor. One company’s mutual fund division might share revenue with their recordkeeping division.
Do 401(k) fees cut 17% or 30% from retirement savings? We can agree that it cuts.
Why the fuss on fees? First, the Act says that the company and its officials have a fiduciary duty to watch over the reasonableness of fees. Second, the General Accounting Office estimates that it may cost a participant 17% of their final account balance. Earlier this year, Demos reported 401(k) fees may cut 30% from retirement balance. Let’s assume that a participant read that to generate $40,000 of sustainable income in retirement they need to save $1,000,000. They spend the next 30 years cutting coupons, buying smaller cars and paying cash, in order to frugally save $1,000,000. Now at retirement, they only have $830,000 or $700,000.
What if this was your balance? Are you paying too much? We can help you find out.