Does Your 401k Plan Have Hidden Fees?

Does Your 401k Plan Have Hidden Fees

I have shocking news for you: your 401(k) plan is not free.

You should be getting a quarterly account statement soon, if you haven’t already. Many people don’t bother looking at it, but I am going to ask you to open it up. Do you see any fees or deductions on your transaction history?

If the answer is no, that means one of two things:

  1. You are lucky enough to work for a company that pays your retirement plan fees on your behalf, or
  2. Like many workers, you are paying provider fees in the form of revenue sharing and other hidden payments.

Unfortunately, it is nearly impossible to know how much is paid to providers without asking for additional information.

It is difficult to determine the cost of your retirement plan thanks to a practice called revenue sharing. Revenue sharing refers to service provider compensation paid from your investment balances to a plan recordkeeper, third party administrator, or advisor. Because these fees are embedded into the cost of your investments, these transactions aren’t shown in your transaction history.

Many people believe the total investment cost is paid to the investment manager (the firm managing the fund). However, a portion of those fees is typically paid to one or more providers as compensation. While the practice of revenue sharing is legal, it makes it very difficult to properly evaluate the true cost of your 401(k) plan.

Revenue sharing is negotiated at the provider level, so it varies across each investment option and vendor. The lack of transparency surrounding these hidden payments makes it nearly impossible to know if you are receiving an unbiased recommendation to use a fund. Will the advisor or recordkeeper earn more compensation based on which investment options you select? If that’s the case, how can they possibly be objective?

A change to address the potential conflicts of interest associated with revenue sharing practices is currently being finalized by the Department of Labor. Given all the attention surrounding hidden fees, Fiduciary News recently published a piece in which retirement industry professionals weigh in on how they think employers and plan participants will react to increased fee transparency.

Many feel that the increased transparency will not only expose potential conflicts of interests, but it will also help employers evaluate if their provider fees are reasonable for the services offered to the plan. Knowing the total amount of compensation paid without having to dig through pages of disclosures will go a long way towards comparing providers in an apples-to-apples fashion.

Allowing participants to see fees paid on their statements will also drive employers to review plan fees. This will be especially true with plans that have a large number of highly compensated employees subsiding the cost of the plan for other participants.

Only time will tell if the new conflicts-of-interest rule proposed by the Department of Labor will change the retirement plan fee landscape. Until then, it is a best practice for employers to identify the total cost of their retirement plan and determine whether it is reasonable in light of the services provided. Employees concerned about fees charged to their accounts should ask employers when they last conducted a fee review for the retirement plan.

Need help understanding your 401k plan fees?

For more information on finding a retirement service provider who operates under the fiduciary standard, download our ebook, “The Value of a Retirement Plan Advisor.”

 


McLean Asset Management Corporation (MAMC) is a SEC registered investment adviser. The content of this publication reflects the views of McLean Asset Management Corporation (MAMC) and sources deemed by MAMC to be reliable. There are many different interpretations of investment statistics and many different ideas about how to best use them. Past performance is not indicative of future performance. The information provided is for educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy or sell securities. There are no warranties, expressed or implied, as to accuracy, completeness, or results obtained from any information on this presentation. Indexes are not available for direct investment. All investments involve risk.

The information throughout this presentation, whether stock quotes, charts, articles, or any other statements regarding market or other financial information, is obtained from sources which we, and our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Neither our information providers nor we shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in the transmission there of to the user. MAMC only transacts business in states where it is properly registered, or excluded or exempted from registration requirements. It does not provide tax, legal, or accounting advice. The information contained in this presentation does not take into account your particular investment objectives, financial situation, or needs, and you should, in considering this material, discuss your individual circumstances with professionals in those areas before making any decisions.

 

McLean Asset Management Corporation (MAMC) is a SEC registered investment adviser. The content of this publication reflects the views of McLean Asset Management Corporation (MAMC) and sources deemed by MAMC to be reliable. There are many different interpretations of investment statistics and many different ideas about how to best use them. Past performance is not indicative of future performance. The information provided is for educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy or sell securities. There are no warranties, expressed or implied, as to accuracy, completeness, or results obtained from any information on this presentation. Indexes are not available for direct investment. All investments involve risk.

The information throughout this presentation, whether stock quotes, charts, articles, or any other statements regarding market or other financial information, is obtained from sources which we, and our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Neither our information providers nor we shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in the transmission there of to the user. MAMC only transacts business in states where it is properly registered, or excluded or exempted from registration requirements. It does not provide tax, legal, or accounting advice. The information contained in this presentation does not take into account your particular investment objectives, financial situation, or needs, and you should, in considering this material, discuss your individual circumstances with professionals in those areas before making any decisions.