BenefitsAll

Flip the Script on 401(k) Fee Disclosure Notices

Audio Version

July 11, 2012

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Over the next few months employers will engage individual retirement account plan participants (e.g., 401(k), 403(b) and profit sharing plans) in a discussion about retirement plan fees and expenses. But this will not be a discussion about new plan fees and expenses. Employees have been paying these fees and expenses since 401(k)-style plans were first adopted by corporate America over 30 years ago. However, recently the Department of Labor (DOL) passed the 401(k) Fair Disclosure and Pension Security Act of 2009 requiring employers and their administrators to make fee information more noticeable and understandable.

This is how the fee disclosure conversation between employers and employees will go down at the average company.

Employees will receive a two-page letter from their employer that was drafted by the retirement plan administrator (e.g., BMO, CitiStreet, Fidelity, NFC, Putnam, TIAA-CREF). The letter will provide an explanation of the contents of an attached 12-page DOL fee disclosure form. The letter will state that fee information is already provided in the plan documentation. The enclosed information just puts this information in an “easy-to-understand” and comparative format.

The letter “from the employer” will emphasize how low or on par the fees are in comparison to similar size employers. The fees match or are lower than industry averages. There will be an illustration of how plan fees and expenses affect a hypothetical employee's retirement benefits. This will be based on what the employee contributes, for how long, and a projected return, which may not be the actual return. This hypothetical employee will not be the employee receiving the notice.

The human resources department staff will be equipped with a script provided by their retirement plan administrators. The script will state that the fees pay for services needed to keep the plan operating and in compliance with government regulations.
The employer will welcome any questions about the fee disclosure information and direct employees to contact the HR benefits staff (so that they can read the script). The employer will sum up the notice by reminding the employee to review the retirement plan web site and/or call a retirement plan representative for more information. Also, they will remind employees that each investment fund has a prospectus that includes all fee and expense information (and always has), and can be viewed online or mailed to them upon request.

The information provided will be extremely confusing. The DOL fee disclosure form will show every plan investment option and the operating fees and expenses. Some fee information will be combined, some presented as a percentage and some as a flat dollar amount. The employer knows that only about 1% of employees will read, understand, and ask questions about the fee disclosure notice. Their third party administrators have informed them of us this statistic and have armed them with a script to address this 1%. But you can prove them wrong.

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It Is Up To You

Did your human resources department representative mention the words "retirement plan fees and expenses" during your new hire benefits orientation?

Was fee or expense information included or referenced in any benefits documentation you received as something to consider when making a fund selection?

Has your employer, retirement plan representative, or company-appointed investment advisor ever hosted an educational session just about the impact of plan fees and expenses on your retirement benefits?

The answer to all of the above questions for most defined contribution retirement plan account holders is "no."

Did you ever wonder, why not?

There are several reasons why an employer sponsoring a 401(k)-style retirement plan speaks ad nauseum about investment risks and asset allocation, but not plan fees or expenses.

They did not think it was an important or worthwhile subject to warn employees about
They assumed employees knew how to read a fund prospectus
They did not know how to explain the fee and expense structure because they did not understand it themselves
They had no idea that employees were paying fees
They did not care because they were not paying the fees

Who knows what they were thinking. But you now know that:

You are paying fees and other expenses for your retirement account
These fees and expenses reduce your retirement benefits in two ways:
- The actual fees and expenses deducted from your account
- The earnings on the fees and expenses that you forego
Over time, these fees and expenses can eat away your retirement plan benefits to the tune of tens of thousands of dollars, not the $120 per year in the hypothetical fee examples you will receive from your employer

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Take Control

Take the time to review the fee disclosure information you receive in the next few weeks from your employer or retirement plan administrator. It is okay if you do not understand the information at first
Read articles and listen to television reports about 401(k) fees and expenses from the mainstream press and financial news media. It is likely that mainstream media projections of the impact of these fees on retirement benefits will be much higher than the financial industry’s projections
Review web sites like BrightScope.com and freeerisa.com. These sites use plan fee data provided by the employer on the annual Form 5500, and mutual fund prospectus and other data to create a numerical calculation (algorithm) to rate 401(k) plans. You can find out if your plan’s fees are at, above or below average in comparison to other employer’s plans
Use a free mutual fund cost calculator like personalfund.com to calculate the fees and expenses for the funds your 401(k) plan offers. This calculator allows you to compare funds with similar objectives so that you can maximize your retirement benefits and minimize fees. It may mean that using your employer’s chosen investment funds, exclusively, is not your best option

You will need to register for the personalfund.com
site. Registration is free and simple and so is using the calculator. Once registered, input:
- five-character ticker symbol
- amount invested
- type of account (e.g., tax sheltered)
- how long you plan to hold the fund
- expected annual return (e.g., 5%)
Discuss what you have learned about 401(k) fees and expenses with friends, family and co-workers. If you are concerned about the level of fees and expenses in your plan, bring this to the attention of your human resources department. Share with them the data you obtained from brightscope.com and personalfund.com. Encourage your co-workers to do the same
Ask your employer to eliminate costly plan services that you do not use. Only the plan participants who use higher-cost services (e.g., investment advice) should have to pay for them

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Employers have a legal obligation to consider fees and expenses when deciding which funds to offer employees. Investment fund services are not free. It cost money to perform the required plan recordkeeping, accounting, trustee and legal services. There are also costs to create and maintain web sites, phone services, education and investment advice, and the management of investments. The question is not should there be costs, but what are the costs (plain and simple).

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