Starting in July, 401(k) plan participants will start receiving quarterly fee disclosures. These rules apply to plan years beginning after October 31, 2011, and require the disclosures to be distributed no later than 60 days after the beginning of the plan year. So for a calendar year plan, fee disclosures need to be distributed no later than August 31, 2012.
401(k) plans should have lower expenses than retail investment funds. According to a November 2011 Deloitte/Investment Company Institute study, the average expense fee hovers around 0.78%. But plans with a small amount of assets may sometimes only have access to retail funds, while larger companies and plans tend to have access to the lower fees of institutional funds. Since all plans have some level of fixed cost associated with the setup and maintenance, participants in the smaller plans typically pay higher fees per dollar invested than plans with larger account balances.
If you're unsure about the fees charged by your funds, review the prospectus. It will list the expense ratio, any management expenses, short-term trading fees and any sales charges. Prospectuses don't always tell the whole story, and you may need to discuss the fee structure with your service provider. Take the time to really understand whether your funds are retail or institutional funds and gain an understanding of the cost of the funds, fees and all revenue sharing arrangements.
The 401(k) fee disclosures are likely to spark mixed reactions among employees. According to an AARP survey released in March 2011, roughly 71% of 401(k) participants believe they did not pay any fees at all, while another 6% were unsure. The truth is that participants bear the majority of 401(k) fee expenses.
Make sure that you thoroughly understand the fee structure and can explain it to employees in plain language. Even though the Department of Labor tried to make the model fee disclosure notice in an easy-to-read format, employees will still have questions about what it all means. So take the time to really educate yourself and ask questions now.
Research appropriate fee levels for a plan of similar participant size, total asset size and participant account size to determine if your fees are reasonable. If they're not, speak with your service provider and ask them what they're doing to help lower fees. See if they can provide a track record of successful attempts to lower fees for participants.
If your fees are higher than the norm for your plan, and your service provider isn't helping, go to market and seek bids on managing your plan. There may be another service provider that better fits your needs, or your current provider may be able to offer you different investment options, services or platforms.
Most importantly, be prepared to share your action plan with your employees. Take the time to discuss the possible impact of the fee disclosures in your 401(k) committee meeting prior to the due date. Before your employees receive the fee disclosures, proactively communicate a summary of your findings and your action plan.
Contributing Editor Shana Sweeney is a self-proclaimed geek and political junkie with degrees in politics and human resources. She can be reached at email@example.com.
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