As more employers shift away from offering defined benefit plans to defined contribution plans (such as 401(k) and 403(b) plans), employers are trying to provide employees with a wide menu of products to choose from. In part, this is to ensure that employees with various personal financial situations have the ability to select investments that best fits their particular needs. While this flexibility is generally a good thing, it does come with a price. In addition to understanding the fees associated with the administration of the overall plan, employees must also understand the fees and expenses for the individual investment products. To further complicate matters, each plan administrator and investment product may have different fees and different ways of charging those fees.
Under the current Employee Retirement Income Security Act (ERISA), employers are required to follow certain rules about the administration of 401(k) plans including the plan’s fees and expenses. However, the rules do not specifically dictate what the fees are and how they are charged. The responsibility for determining the fees paid are left to the employer and the employee (through the investments he/she chooses).
According to the US Department of Labor (DOL), fees and expenses associated with a 401(k) plan can generally be grouped into the following three categories:
1) Plan administration fees: These are fees paid for the daily management of the plan including record keeping, accounting, legal, educational seminars, etc.;
2) Investment fees: These are fees associated with the specific investment. For mutual funds this may include transaction costs, loads, sales charges, 12b-1 fees, management fees and commissions. For annuities this may include wrap fees, surrender or transfer charges, insurance-related charges, etc.; and
3) Individual service fees: These are fees for optional services that a plan participant chooses. For example, a participant may be charged an administration fee associated with taking a loan from his/her 401(k) account.
As the responsibility for building a retirement nest egg continues to shift from employers to employees, understanding the impact of fees and expenses on your 401(k) account is critical.
In October 2010, the DOL issued new rules that should make it easier for employers and employees to understand the fees that are associated with their 401(k) plan. Starting on January 2012 employers will need to provide more transparent information about the fees associated with their 401(k) plans and the investments offered by their plan.
The new rules require employers and plan administrators to provide more detailed, user-friendly information about two main areas including:
* Plan-related information such as administrative expenses and the fees and expenses deducted from individual plan participant’s account, and
* Investment-related information for each investment such as performance data, benchmark information, and expense and fee information.
Regardless of these new rules the DOL recommends that you review your fees though your account statements, investment documents (e.g., prospectuses), and the various plan documents (such as the summary plan description and the Form 5500) available from your employer or plan administrator.
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