Participant Fee Disclosure - 404(a)(5)
By Justin Pritchard, CFP® and Craig Ciarlelli, ChFC, AIFA
As of 2012, participants in retirement plans such as 401k plans will understand how much they pay to save and invest in the plan. ERISA Section Under 404(a)(5) requires 401k providers to disclose how much employees personally pay each quarter.
Why Disclose Fees?
Most retirement plan participants are not aware that they pay anything to use the plan. They may assume it’s an employer provided benefit, with any and all costs covered by the employer. More often than not, employers pay only a portion (if any) of the costs in a retirement plan.
Employees should understand what they pay and how their choices affect charges within the plan. While they may not have much control over these costs -- because the employer often chooses a set of service providers along with an investment menu -- participant fee disclosure rules allow them to make informed decisions.
What Information is Disclosed?
Participants should receive a quarterly breakdown of fees charged to their account, including:
They’ll understand how their own account was affected by 401k plan fees, and will see the cost expressed in dollars and cents.
Problems with Participant Fee Disclosure
Sharing information is generally a fair and consumer-friendly practice. However, these disclosures can create problems. In particular, participants will suffer sticker shock. After years of assuming the plan was free, they may be upset about how much they pay. This can lead to unintended consequences.
Employees may even decide not to participate in the plan. If they view any and all fees as evil, they may decide to use other savings and investment vehicles that may or may not help them reach their retirement goals. For example, bank savings accounts are often perceived to be “free” and may be more attractive to fee-conscious participants.
Workers may also make investment decisions based solely on cost. Instead of investing according to their risk tolerance, they may choose the cheapest investments available in the plan -- often the most conservative choices available such as money market funds and short term government bond funds. Again, these vehicles, even with lower expenses, may or may not be the most appropriate choice.
When participants compare their costs to the costs of other plans, they may be unhappy to find that they pay more than their friends and neighbors. If plan fees are too high, they should be adjusted. However, retirement plan fees depend on numerous factors, and every retirement plan is different. Plans are generally priced based on:
- Total plan assets
- Average participant account balance
- Services provided to the employer
- Services provided to employees
- Investment philosophy
- Plan design (safe-harbor, cross-tested, etc)
A small company 401k plan most likely costs more than a university plan with thousands of participants and tens of millions in assets.
Ultimately, employees have little control over plan costs. The things they can control (choosing to participate and picking investments) can get them into trouble if avoiding fees is their highest priority.
What about employers? They are responsible for offering a plan with reasonable fees. They should discuss fees with service providers and shop around, but employers get fee disclosure documents as well. As of 2012 they cannot claim to be uninformed.
What to do with Disclosures
If you feel like you pay too much for your retirement plan, bring the issue to your employer’s attention. At the very least, feel free to ask why you pay what you pay, and if your employer believes the cost is reasonable. Employers should periodically shop the retirement plan to ensure they’re not paying too much. They should also benchmark the plan periodically against national averages of similar plans (same asset size, number of participants, and so on).