Small business owners who are providing 401(k) plans for employees must, by law, act in their workers’ best interest. But when it comes to deciphering plan provider fees, some experts say both employers and employees are often in the dark – but perhaps not for long.
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Under new regulations, as of July 1, plan providers must disclose any and all fees to fiduciaries, or small businesses, and small business owners must then disclose those fees to their plan participants, or employees. According to the Department of Labor, disclosing these fees can help small companies determine the total cost of the plan, and also compare investment product fees and plan administration expenses charged by different service providers.
Examples of such fees include legal fees for initial plan design, and ongoing amendments due to changes in pension law or plan design, and the cost of a mandatory audit.
According to the Department of Labor, fees can generally be calculated in four ways:
Asset-based fees- these expenses are based on the amount of assets in the plan, and are generally expressed as percentages or basis points.
Per-person fees- these expenses are based on the number of eligible employees or actual participants in the plan.
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Transaction-based fees- these expenses are based on the execution of a particular plan service or transaction.
Flat rate fees- these are fixed charges that do not vary, regardless of plan size.
Andrew Meadows, consumer and brand ambassador for The Online 401(k), said most fees are between .5% and 2% of the total fund on the back end, and that many small business owners are unaware of the costs associated with the plans they have selected for workers.
Post-recession, fund companies are being held more accountable for such charges, Meadows said, because contributors—both sponsors and participants—are concerned about where their money is going. Being told up front about these fees allows business owners to be savvier when choosing plans for their workers.
“Those who lost money in 2008 got the ball rolling on new regulations, which are all about full fee disclosure,” he said. “Small business owners need to be reported to on how much they are actually paying. These regulations are forcing providers to create a reporting system.”
Meadows said he expects companies to comply with the new regulations by disclosing fees on monthly statements and quarterly reviews for either sponsors, participants or both. Which means small business owners will have the opportunity to compare other plan providers’ charges, he said.
Stuart Robertson, head of ShareBuilder 401k, said the new regulations will give small business owners more confidence in understanding the plans they are sponsoring for workers. However, seeing the fees in print may not be enough information for them to make truly educated decisions.
“There is no perspective for them to see if it’s high or low, fair or not fair,” Robertson said. “Your number-one job is to make sure this is working for your employees.”
Doug Fischer, senior vice president of Retirement Policy Development at Fidelity, said it's important for plan sponsors to understand their fiduciary duties, including how to assess fees and expenses in their employee's plans.
"It's good for a business to have a healthy retirement plan community," Fischer said. "When the Department of Labor is [spreading awareness] about service provider fee disclosure, they are also assessing the reasonableness of the fees people are being paid. It takes a village to keep a retirement plan operating and in compliance."
Fischer said Fidelity is in favor of the upcoming rules to increase transparency. Retirement companies like Fidelity are in one of the best positions to collect these service provider fees and report on them to small businesses because they act as record keepers for the plan sponsors, he said.
"We are responsible to disclose the entire fund lineup and make it very clear what the expenses are in these funds," he said.
While fee disclosure is certainly a step in the right direction, Robertson said business owners should compare their investment expenses versus total assets in the plan, and figure out that percentage. If it is higher than 2%, it is a higher- priced plan, Robertson said. For those who feel uncomfortable with making these comparisons, he said to seek out the help of an advisor, who can weigh the pros and cons of plans for your particular business.
Meadows agrees the regulations are a positive step in supporting a more transparent system, however he doesn’t believe many small business owners will switch to new provider plans upon finding out the fees they are currently paying. If they did however, he said, this would likely prompt more low-cost 401k plan providers to enter the marketplace.
“This will create a conversation about how prepared [business owners and employees] are for saving and it will increase awareness,” he said. “The main reason people aren’t saving or putting money into a 401(k) is because it is too costly or complicated or they see it as a ‘big business’ thing. Small businesses know they should provide [plans] but there is that barrier of not having the time or money to do it.”