Managing 401k Plans for your employees is not as clear cut as it should be. Many employers lack a clear picture of the amount they are actually paying in fees to administer their 401k retirement plans.
Recently, a 401k retirement plan account executive was on a sales call to an ice cream wholesaler about 300 employees. When he asked the details about their current retirement savings plan fees, the CFO of the company told him that they spent about $10,000 a year. The account executive did a quick audit of their prior year's 5500 filing, which revealed close to $51,000 in fees, more than five times as much as he thought which was not being invested in the 401k retirement savings plans funds.
Obviously, that CFO did not have all the information he needed. How can something like this happen?
Do Your Homework
As long as a fee is disclosed in the prospectus, the participating employees and employer must pay it. This results in 401k plans for small business (or large, for that matter) being more expensive than plan participants and even employers think.
The most common type of fees collected without most clients realizing is when the 401k retirement plan engages in what is known as "revenue sharing". Revenue sharing generally refers to a compensation practice in which money is paid to plan service providers out of 401k investments or by their managers. There is some debate as to the precise definition of revenue sharing and whether all forms of payments should be labeled in this way.
The bottom line is that “revenue sharing” has come to mean payments that are directly or indirectly sourced in a 401k retirement plan’s investments, and that are paid to other providers without going through the plan.
Buyer beware: Read the fine print to find the fees disclosed in the prospectus, and you will do better with managing 401k plans fees, channeling more money directly to investments.
A number of lawsuits are currently pending concerning 401k fiduciary misconduct (particularly fee levels, revenue sharing and self-dealing). The Department of Labor (which oversees the regulation of 401k's) often refers to these as “indirect payments,” while plaintiffs’ lawyers call them “secret and excessive payments.”
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How do you avoid paying exorbitant fees?
First of all, help is on the way. Recent legislation has forced 401k retirement plans to disclose exactly what they are charging to the employer and all participants up front.
To be sure you understand what you will be paying, look over your prospectus very carefully, then crunch some numbers to come up with a solid figure you are sure about.
Managing 401k plans takes some time, but if you exercise due diligence when evaluating various 401k plans for small business, you will have an accurate picture of your fees.
If the idea of managing 401k plans seems too time consuming, you may want to consider another type of retirement savings plan. See our Retirement Plans tab for more information.Home › Retirement Savings Plans › Managing 401k Plans