Fixing the 401(k)

Generally speaking, the economics of retirement plans is screwed up and has been for years.  Despite the fact that just about every 401(k) provider I now meet claims to have been a long-time proponent of full disclosure, the retirement plan industry has really fallen short of providing clear and easy-to-understand information.  As a result, fees have come under intense scrutiny over the past year and become a major hot-button issue.  This is a good thing because the issue of fees has a major impact on both fiduciaries and participants. 

ERISA section 404(a)(1)(A) is clear that fiduciaries have a duty to ensure that retirement plan fees are reasonable.  In order to make a judgement as to reasonableness, a fiduciary must first identify and understand the fees that are being paid and know who is receiving compensation (and how much) from the plan.  Unfortunately, I haven't seen this happening in most retirement plans, especially at the smaller end of the market (I'd say in plans under $50 million in assets).  Fee disclosure most directly impacts participants who wind up bearing the vast amount of costs associated with a retirement plan.  Participants depend on their fiduciaries to be knowledgeable about fees (and fee arrangements) so as to protect their retirement income.  Without fiduciaries who are vigilant about fee containment, the costs to participants and the impact on their retirement income can easily spiral out of control (see this paper I co-wrote for an illustration). 

As readers of my book know, I include questions that fiduciaries should be asking at the end of each chapter.  In fact, Chapter 6 ("Deciphering Fees & Expenses") is dedicated to this topic.

Solving the problem and getting the answers you and your participants deserve begins with knowing the right questions to ask.  Here's 10 questions to get you started:

1.  Are we comfortable with level of proactive fee disclosure provided by our service providers?
2.  Do we clearly understand all the fees associated with our plan, both direct and indirect, who is receiving compensation from the plan, and the amount of that compensation in percentages and dollars?
3. How do the fees in our plan compare with other plans that are similar in size?
4. When was the last time we had a detailed fee analysis conducted on our plan by an independent, objective third-party?
5. Do any of the funds in our plan include any revenue sharing in the form of Sub-TA fees? How much?
6. Is there any amount of 12b-1 fees included in our funds? How much?
7. What share class are the funds in our plan? Why were these share classes chosen?
8. Do we have retail or institutional share classes in the plan? If retail, can we qualify for institutional classes?
9. Do any funds in the plan provide for higher 12b-1 fees than others and create a conflict for the recommendations by our broker, advisor, or consultant?
10. In light of the previous question, should we consider eliminating all funds that provide for any indirect compensation?