Complex

Are 401k Fees Too Complex? Can Your Employees Understand Them?

NO THEY AREN’T AND YES THEY CAN! 

You and your employees understand the price of many things you purchase.  However many people are truly perplexed about their 401k fees.  Why the big mystery?  Do your employees care about fees?  Do they trust that you understand the fees?  Or do they feel like its pointless to find out because they can’t do anything about their fees anyway?

THE SITUATION

RETIREMENT PLAN FEES ARE A MYSTERY BECAUSE MOST FINANCIAL SERVICES FIRMS WANT THEM TO BE!  They are masters at making fees difficult to assess. The fees are never completely hidden, just hard to get to.  Think about it.  The price of virtually everything you purchase is prominently displayed.  Yet have you tried to read a fee disclosure or prospectus from a financial services firm? These ridiculously lengthy documents can confuse industry veterans.  Novices have virtually no chance.  The fees are in there somewhere.  But you have to find them and then figure out if they apply to your plan.

Things are getting better though.  Now more than ever 401k (and other employer sponsored retirement plans) fees are in focus.  More articles, more research, more lawsuits, more legislation, more comedians riffing on fees, etc.  (Yes, comedians are even making a joke of 401k fees these days).  The DOL required Fee Disclosure in the past several years (even though I think it has largely failed).

This is as it should be.  Most plans, and plan participants, are grossly overcharged.  While plan fees have come down, the fee reductions have been minimal – hardly anything to get excited about.  The current average for small plans is around 1.30% to 1.35%, depending upon the study.  They are down roughly 10 to 15 basis points in the past five to ten years.  Big whoop.  They are still absurd.  Fees will vary from plan to plan, but far more can get closer to .50% per employee.  Not all will, but many can. Even small, micro plans.

Don’t get me wrong – I would never expect the average person to be able to explain, in detail, their 401k plan fees.  Maybe a few can, but most won’t be able to.  But it’s not unreasonable at all to expect the average person to have a general sense of what they pay and how each service provider to the plan is compensated.

THE REASON

This comes down to the attitude of the employer.  If you make a commitment to helping your employees understand plan fees then it will happen.  You should demand that your adviser provide some type of basic education on plan fees.  Not an hour long seminar where they blather on about all their expertise, experience, competence, value, etc.  Something short and concise about each fee and it’s purpose.

Unfortunately, many employers don’t take this on because they aren’t even sure about their plan fees and don’t know if they are competitive.  They might be legitimately concerned that they cannot justify their fees – so why educate staff about them.  And if employees aren’t making a big issue of it, why bring it up?

THE SOLUTION

The employer should present to each employee a one page sheet explaining the important fees. These are the larger fees which represent the main costs of the service providers on the plan.    

The key figure for employees is the percentage of their account which pays for plan services and investments.  This is how much they pay.  Why can’t this be presented on one page?  Seriously – with one line item and cost for each.  That’s it.  Distribute it once a year with the updated percentage per person and new total plan costs.  Nothing fancy – no small type and endless disclosures.  Would this be so hard to produce and understand?

The idea that employees cannot understand their plan fees is ludicrous.  When you make a commitment to educating your staff about fees, and work with an adviser that will help you do this, the majority of your employees will have a better idea of what they pay.  In addition, you will them become better consumers of financial products and services they purchase outside of the workplace.

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