Know your 401(k) plan fees, expenses, and responsibilities
In the coming months, you’ll surely hear more about the battle raging over reform of America’s 401(k)s as Congress,
regulators, and industry providers spar over plan fees,
investment alternatives, and disclosures to participants.
With the few remaining defined benefit pension plans
quickly disappearing and the uncertainty surrounding the
long-term solvency of the social security system, 401(k)s
are quickly becoming the primary retirement savings vehicle
for many Americans.
The Wall Street Journal reports (March 14, 2007, page D1)
that “at the end of 2005, about 61 million individuals participated in 401(k) plans, with assets totaling $2.44 trillion.” To put this in perspective, that asset total roughly equaled the fiscal year 2005 budget of the U.S. government!
Recent lawsuits against employers increase the concern
The dependency of millions of Americans on their 401(k)
accounts for retirement income has led to increasing tension
regarding disclosure of plan fees and expenses, and the
investment alternatives offered to participants. The Wall Street
Journal reports (in the WSJ.com edition for January 28, 2007)
that, since September, more than a dozen lawsuits involving
401(k) plan fees and investments have been filed on behalf
of investors against some of the nation’s biggest employers.
This tension prompted a congressional hearing to analyze
the issues and determine if additional requirements are
necessary to protect the millions of Americans depending
on the plans for retirement.
What are the employer’s responsibilities?
As the sponsor of a retirement plan, you are helping your
employees achieve a secure financial future. It is your
responsibility, as a fiduciary, to act in the interest of the
plan’s participants and beneficiaries and to ensure that the
services provided in the plan are necessary and the costs of
the services are reasonable.
Under the Employee Retirement Income Security Act
(ERISA), you have an obligation to select and monitor plan
investments, investment options made available to participants, and the persons providing services to your plan.
Understanding plan fees and the expenses associated with
plan investments is an important part of this responsibility.
How much difference do fees and expenses make?
Understanding the impact of plan fees and expenses is the
first step. A recent report by the Government Accountability
Office (GAO) illustrates the impact of 401(k) fees on
participant savings. Assume you are an employee with
35 years until retirement and a current account balance
of $25,000. If returns over the next 35 years average 7%,
and fees and expenses reduce your average returns by 0.5%,
your account balance will grow to $227,000 at retirement,
even if you make no future contributions to your account.
If fees and expenses are 1.5%, however, your account
balance will grow to only $163,000. The 1% difference
in fees and expenses would reduce your account balance
at retirement by a whopping 28%.
What questions should employers be asking?
The U.S. Department of Labor, Employee Benefits Security
Administration, provides a number of questions employers
should be asking about their 401(k) plans. These include
some of the following:
- What investment options does your 401(k) plan offer?
- Do you have all available documentation about the plan’s
investment choices and fees?
- What types of investment education are available and
is there a cost associated with this service?
- If administrative services are paid separately from
investment management fees, are they paid for by the
plan or by employees, or are they shared?
- Do any of the investment options under your plan
include sales charges (such as loads, commissions,
12b-1 fees, insurance charges, or surrender fees)?
Where can you find more information?
For additional guidance from the U.S. Department of Labor
on evaluating your current 401(k) plan, visit the website www.dol.gov/ebsa. There you’ll find a 401(k) fees checklist,
information about your responsibilities as a plan sponsor,
and a guide to help you evaluate different 401(k) providers.
For more information about our retirement plan administration and investment management services, please contact
Jesse Nelson of Schenck
Investment Solutions LLC at 800-236-2246 or 920-731-8111.
Jesse L. Nelson, MBA, is an investment manager with Schenck Investment
Solutions LLC. In addition to constructing
and managing portfolios for individual clients and 401(k) plan participants, Jesse also researches and analyzes stocks
and mutual funds.
June 2007
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