“If it’s too good to be true, it usually is.” How many times have you heard this phrase? It applies to most things in life, and investing is no different. A recent AARP survey shows that 71 percent of those questioned thought their 401(k) retirement plans were free. Unfortunately, that couldn’t be further from the truth. Fees vary wildly among retirement plans - anywhere from well below one percentage point to a whopping five percent. Administrative and internal investment costs impact the performance of your retirement plan. Soon, however, you will no longer have to guess how much those fees actually are. On April 1st, 2012, a Department of Labor disclosure fee regulation (Rule 408(b)(2))designed to improve transparency will go into effect, shedding light onto a subject that has kept sponsors and participants in the dark for so long!  

One reason fees are hard to disclose is that many plans have “bundled fees,” which are a combination of direct and indirect compensation to plan service providers. Such revenues reduce net returns of your investments when layered through investment expenses. Among those compensated are Third Party Administrators (TPA), record keepers, investment advisors, and educators. Over the course of your working life, these fees can reduce your retirement plan balance by as much as 30 percent or more! Ary Rosenbaum, Esq. discussed this in his recent blog entitled What Retirement Plan Sponsors Need To Do About The New Fee Disclosure Regulations (www.therosenblumlawfirm.com), pointing out that “It is one of the few industries where professional service providers weren’t legally required to inform their clients of how much they were receiving in fees. The problem is that while retirement plan providers weren’t legally required to tell plan sponsors how much money they were reaping in fees, it was the plan sponsor’s fiduciary duty to make sure that they were only paying reasonable plan expenses, which is impossible if they couldn’t determine how much they were paying, especially when some providers were perpetuating the myth of free plan administration.”
For the plan sponsors, service providers must provide and disclose what services they provide to the plan and how the compensation will be received beginning April 1st of this year.  For example, will the plan sponsor itself be billed, or will their fees be pulled directly from the participants’ accounts? The participants, according to the regulation, must receive from the plan sponsor a statement that is required to disclose not only what fees the participant is paying from their account, but also information on all of the plan’s investment options. The information is to be designed in a chart format that will allow for direct comparisons for each investment available under the plan. Many investment managers and providers of investment options are surprised that they will have to provide significant new information in order for the plan sponsor to comply with the new disclosure requirements.

“I think the public will be shocked when they see the dollar amounts they are paying,” said David Loeper, author of Stop the Retirement Rip-off: How to Avoid Hidden Fees and Keep More of Your Money. “If I have $100,000 in my plan and I'm being charged two or three percentage points, it’s going to dawn on me that I'm paying $2,500 a year in fees that I didn't know about.”  It has been shown that high investment costs substantially impact wealth accumulation.  For example, given 40 years of compound growth, annual contributions of $3,000 and an 8 percent gross return every year, there would be a $177,821 difference in your account balance between a mutual fund that carries an expense ratio of 0.30 percent and one that charges 1.40 percent!
If you are a plan sponsor, verify that your providers will be assisting you in this disclosure. Then make sure you complete your fiduciary due diligence by researching various other providers. Hold an investment committee meeting. Write and file with your plan documents your findings and conclusions. The intent is not to encourage changing of providers - unless it becomes evident you need to do so.  Plan sponsors must document their reasons for the decisions they are making, and I would highly encourage including your retirement plan lawyer in these discussions too.  

A final note - if your practice retirement plan is covered by the Employee Retirement Income Security Act of 1974, as amended, including 401(k) plans and many 403(b) plans, this regulation applies. If your retirement plan is a SEP or a SIMPLE plan, these rules do not apply to you.

Audrey Jones is a Certified Financial Planner professional with over 16 years of experience in the Orlando area. She is a registered investment adviser representative of Financeware, Inc. d/b/a Weatlhcare Capital Management. Her specialties include estate, tax, retirement planning and qualified plans for small businesses. She can be reached at awjones@FinancialLifeDesigns.net.
Her website is www.FinancialDesigns.net.

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