This witch’s brew of hidden fees, conflicts of interest and complexity in applications is at odds with investors’ best interests.
– SEC Chairman Chris Cox, speaking on retirement plans
When I sit down with employers to talk about their defined contribution retirement plans – 401(k) and 403(b) alike, they often tell me how their decision to go with X or Y Big-Brand recordkeeper was fueled by their wish to avoid toil and trouble – in particular, high fees and legal liability! Most commonly, X or Y Big-Brand recordkeeper has a national media footprint, and the understandable human tendency to believe that “bigger is better” is at play, at least subconsciously.
Since October is the month of Halloween, it may be timely to remember childhood stories of witches ensnaring well-intentioned people, often disguising themselves or their words in their efforts. We may, for example, remember the story of an evil Queen who attempted to poison Snow White with a beautiful apple.
You may have heard the saying that those who cook the meal often desire to pick the groceries. The same is true with many Big-Brand recordkeepers in that they also are fund companies. It’s important to ask about the funds they offer, their method for charging fees and the fees themselves. Just what are they brewing? Is it foul, fair or something in-between that can be improved upon?
Unfortunately, it is not in the interests of recordkeepers to deliver complete transparency to employers and participants. Complicating this, recordkeepers often offer both their own name-brand funds and those of other providers, and there are a variety of fees and methods for fee collection. At the end of the day, however, the law mandates that it is the responsibility of employers to understand the fees and monitor them for reasonableness. A recent report of an ERISA Advisory Council working group cites, for example, the Department of Labor’s “repeated admonitions that it is part of a plan sponsors’ fiduciary responsibility to ensure that they fully appreciate the amount of fees, both direct and indirect, that are being paid to the providers.”
“Revenue sharing,” a common method recordkeepers use to collect fees, makes understanding fees difficult for plan sponsor fiduciaries. Revenue sharing charges fees directly to employees’ investment returns. This means the participants don’t “see” the fees they are paying because they are removed before any investment returns appear in the participants’ accounts. This results in many thousands of dollars in fees, compounding over years and decades. Because these hidden fees aren’t listed on participants’ account statements, participants often assume there are no fees!
When big name-brand recordkeepers offer the “treat” of non-proprietary funds (those of other providers), they often offer a “trick” of which many employers are unaware: because many recordkeepers require a payment from the fund provider to include non-proprietary funds on their platform, the additional fee is passed on to participants. And use of the revenue-sharing method once again obscures these fees because fund investment performance is reported after the fees have been removed. The before fee performance is never reported to the participant.
Then there’s another “trick.” Each fund can have as many as ten different share classes, with the only difference between the share classes being that participants are charged a different fee for investing in them. While two different company plans may offer the same funds, Company A’s employees may pay higher fees than Company B’s employees, simply because their employer chose a higher cost share class. In many cases, the choice was unwitting – the plan sponsor company didn’t realize funds come in a variety of share classes. Regardless, it was the responsibility of the company plan sponsor to understand how their share class compares with others and to ensure that they selected the lowest cost fund share class available to them.
That’s not just a lot of potential toil and trouble – that’s spooky!
As a retirement plan consultant, it is my mission to ensure that employers understand their fees – that they are “treated” to an unbiased review of their fees to help them in determining fee reasonableness – rather than being “tricked” by hidden or hard-to-understand recordkeeping information. By performing some quick detective work, I can sit down with employers and help them understand the fees in their plan. I can also inform them of options that they were previously unaware existed, such as working with recordkeepers whose business does not revolve around selling retirement plan investments.
The concept of retiring can be spooky enough without having to worry about hidden fees brewing in the background. Let’s have a chat at your earliest convenience – and have a Happy Halloween!
This blog is written to help make the lives of plan sponsors easier in the process of meeting legal requirements under ERISA for their defined contribution plans. Please understand that reading this blog should not alone take the place of a one-on-one consultation regarding the needs of your specific plan, and hence cannot be a guarantee against fiduciary breaches.