Even if you were great at finding Waldo as a kid, you may have a tough time finding your 401(k) hidden fees today – even with some serious help from the Department of Labor (DoL).
The DoL’s regulation 408 (b)(2) requires providers to give plan fiduciaries enough information to determine if their fees are reasonable. So while information on fees is theoretically now available, too often 401(k) fees remain hidden.
The DoL’s 2012 rule spells out the required fee disclosures in nine bullet points. Among the requirements, the rule requires providers to disclose all direct and indirect compensation.
It’s then up to the plan sponsor to decide if 401(k) fees are reasonable.
This important disclosure rule applies to “covered service providers” (CSPs). CSPs include fiduciary service providers, recordkeepers, brokers, and investment advisors who expect to earn more than $1,000 from your 401(k).
The rule also covers CSPs expecting indirect payments for services like accounting, custody, administration, and recordkeeping.
Even though 408(b)(2) has been in place a few years now, finding fees can still mean lots of digging.
So why is finding fees so hard?
Yes, CSPs must disclose their fees, including indirect fees.
But the rule doesn’t say how CSPs must present the information. That means you might find the fees buried in a footnote, or hiding in plain sight inside a massive multipage document.
Many CSPs will go out of their way to make their 401(k) fees as hard to find or understand as possible.
The disclosures cover both direct and indirect fees.
Direct fees are, well, direct. The plan pays the provider directly. Think of this like writing a check to your plumber. These direct payments might be for recordkeeping, custody, or third party administration.
Direct fees can be paid by the employer or by the participants. But even though those fees are straightforward, they can still be hard to find.
Indirect fees are always paid by participants. That’s because these fees are part of a fund’s expenses. And since the participants are the ones who own the funds, they are the one’s paying these indirect fees.
One way to think of indirect fees is to consider fund expenses in two buckets. Each bucket is filled by siphoning off part of the investment returns.
One bucket belongs to the fund management company. The other bucket belongs to other providers.
The second bucket might include a commission for a broker or a payment to the recordkeeper. These expenses might be called 12b-1 fees or sub-transfer agency fees. Like the investment management fee, they are part of the fund’s expense ratio.
And they take a bite out of returns.
It’s certainly possible to pay for services like custody and recordkeeping directly or indirectly. But there are reasons to be wary of indirect payments.
For one thing, indirect fees are less transparent. For another, indirect fees increase as the assets invested in those funds grow – even if the number of plan participants remains the same. Since it’s your job to determine if fees are reasonable, a higher fee for the same service should be a red flag.
And there’s more. If your investment advisor is compensated by indirect fees, there may be an incentive for the advisor to include high fee funds in your 401(k).
Finally, if different funds have different indirect fees, then the cost of the 401(k) may not be equally shared among participants. Participants owning higher cost funds can wind up paying more of the plan’s expenses.
If you want to learn more about 12b-1 fees, take a look at this more in-depth blog post on the topic.
When you begin your search for 401(k) fees, the first step is to find your 408(b)(2). Even that may be harder than you think.
While CSPs must provide these disclosures, they are not always easy to locate. That’s why we at ForUsAll have provided step-by-step instructions to finding your 408(b)(2) online.
Once you have found the 408(b)(2) we can help you compare fees against those of competitors.
After visiting our 408(b)(2) page mentioned above, simply upload your disclosure to us. We’ll put our crack team on the case and benchmark your costs for you. Benchmarking is the key to locating unnecessary fees and reducing plan costs.
As you review the fees charged by your providers, you may wonder if a few basis points makes a difference. But it’s important to remember that some 401(k) participants will be investing over decades. So even slightly smaller returns due to higher fees can be a significant drag on account balance growth.
This Department of Labor video explains how a 1% difference in fees can reduce an account balance by 28% by retirement.
At ForUsAll we believe that transparency is the best policy. We can help you identify your fees and benchmark them against competitors. And when it comes to indirect fees, ask yourself this: if there are simpler ways to pay each vendor and clearly disclose those payments, why put up with less transparent 12b-1 payments and revenue sharing?
If you are looking for a more direct approach to running your 401(k), talk with us to see if an online 401(k) by ForUsAll makes sense for your small business.
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