Key findings of government report on 401(k) plans
A government report concludes that many employers don’t know enough about the fees they and their employees pay for 401(k) retirement savings plans.
Some key findings:
Fees at small plans offered by companies with fewer than 50 plan participants are frequently far higher than those paid at larger companies. For example, sponsors at small plans reported paying an average 1.33 percent of plan assets annually to cover record keeping and administrative services. Large plans with at least 500 participants averaged 0.15 percent.
Important fee, little awareness
About 50 percent of plan sponsors did not know if they or their plan participants paid investment management fees, or they mistakenly believed those fees were waived. Investment management fees account for the majority of 401(k) fees overall. They’re paid to managers who select stocks, bonds or other investments in funds that 401(k) assets are invested in. Plan sponsors may be unaware because management fees are typically deducted from a participant’s account, rather than being invoiced to the plan sponsor, the GAO said.
Few questions asked
Many sponsors reported they asked providers little about which fees were charged. For example, 70 percent hadn’t asked about whether the plan charged 12b-1 fees. Those charges can cover everything from compensation for brokers selling funds to advertising and promotions. Eighty-two percent didn’t ask about fees to reimburse plan record keepers for services including maintaining participants’ accounts and distributing disclosures sent to fund investors.
Complex arrangements not understood
Some sponsors did not know if their providers used complex fee arrangements with outside companies that provide various plan services. Those include revenue sharing, or indirect payments made from one service provider to another for services such as record keeping. The GAO reported: “If sponsors do not understand these arrangements, it could result in the plan sponsor and participants paying more for services as assets grow, although the level of service provided tends to remain the same.”
Resources largely ignored
Few sponsors use or are aware of resources the U.S. Department of Labor offers to help companies compare fees charged by providers. Fewer than 6 percent consulted an agency publication on 401(k) fees. The GAO concluded sponsors typically rely on providers for fee information and advice.
Among the GAO’s conclusions: “In several instances, sponsors of large and small plans did not know or fully understand the fees charged to their plans, because fee arrangements have become so complex and may be disclosed differently, adding to sponsor confusion about plan fees. In addition, because sponsors of plans of all sizes may not be aware of certain fees that participants are paying … it is difficult to get a clear understanding of the total fees that participants are actually paying.”
Recommendations included: The Department of Labor should “develop and implement more proactive approaches to sponsor educational outreach” and improve public access to data about the fees that each plan charges.