It isn’t unusual to find 401(k) plans with total costs paid by the participant exceeding 3 percent of account total annually, with investment choices limited to subpar proprietary funds, and with payments to the various providers not related to services rendered.
It is our view that sponsors/employers should consult an independent adviser to help them understand what they are paying. Registered investment advisers are more likely to act in co fiduciary role along side the plan sponsors. Other entities tend to “sell” rather than advise retirement plans.
A fiduciary must act in the best interests of the employees. If an plan adviser is truly a fiduciary, they should be researching ways to provide plans with the best performing and lowest fee mutual funds. Often, the biggest expense to a retirement plan is the mutual fund fees. This is because 401 (k) providers offer employers “free services” by passing along costs to plan participants via higher mutual fund expenses. Plan sponsors should note that by adopting a plan with fees bundled into mutual funds may expose them to legal risks. The Washington Post notes:
The new rule is in response to numerous lawsuits filed by employees who learned after the fact that they were paying large hidden fees to investment firms managing their accounts. Under the new requirement, insurance companies, payroll services and to some extent mutual fund companies will no longer be able to hide their unconscionable fees to people participating in their retirement plans.
“Minding your fees” is not only a way to make it to retirement goals efficiently but it also a way for employers to avoid costly litigation by employees.
401 (k) plan sponsors must ask themselves this question: “Is your retirement plan represented by a fiduciary or salesman?”