Saving for your savings

With new regulations requiring more transparency of 401(k) fees, you may want to rethink your retirement plan

If your company offers a 401(k) retirement savings plan for your employees, you're already ahead of most small-business owners.

Ninety-two percent of companies with 20 or fewer employees have no retirement solution, according to Andrew Meadows, consumer and brand ambassador at The Online 401(k),® which provides Web-based 401(k) plans to small businesses. This year, new Department of Labor (DOL) regulations will require 401(k) plan providers to be more transparent about the fees embedded in employees' 401(k) plans. These new reports, which will be published in November, are expected to make employees and employers reconsider their 401(k) plans. And for those who don't yet have a plan, it may be the perfect time to consider launching one.

According to the American Association of Retired Persons, 80 percent of people don't realize a portion of their 401(k) distributions goes toward fees for record keeping, administration, investment advice, brokerage and management services. Some plans cost employees thousands of dollars each year, according to David B. Loeper, a registered investment adviser and author of Stop the Retirement Rip-off: How to Keep More of Your Money for Retirement. If your company offers a 401(k) plan, chances are employees may experience some sticker shock when the new reports surface this fall.

"Business owners usually are not experts in retirement planning; they're too busy running their businesses," Loeper says. "Many small-business owners have been misled into purchasing 401(k) plans that are unreasonably expensive for themselves and their employees, and the new reports coming out will make this easier to determine."

Deciphering the new reports

The new DOL rules went into effect in August, and 401(k) plan providers will be required to comply with the more robust reporting requirements beginning this fall. The new reports must disclose the total annual percentage cost of each mutual fund to which an employee is invested as a cost per $1,000 figure, says Justin Fisher, financial adviser with Moss Adams Wealth Advisors LLC, Seattle, who works regularly with construction companies and their retirement planning projects.

"It is not uncommon for a mutual fund held within a 401(k) plan to have an internal cost of 1.25 percent," Fisher says. "A plan participant with $100,000 invested in a fund with this fee structure would now see he or she is paying $1,250 each year to maintain that investment."

According to Fisher, when employees see the fees they're paying in annual dollars rather than simply as a percentage of their investment, they may rethink their investment.

"Employees may start to think, ‘Is this investment really worth $1,250 per year, or more than $100 per month?'" Fisher says. "Employers should be aware employees may concentrate on this portion of the statement as this should be the clear indicator of what it's costing employees to be invested in each of the funds they hold within their 401(k) plans."

In addition to reporting the dollar value of fees charged to employees each year, the new reports also must disclose any other fees charged against the individual account. This may include fees for record keeping, administration, investment advice, and brokerage and management services. By adding the annual percentage cost of each investment and the additional fees, an employee will be able to determine what it is costing him or her to be invested in the 401(k) plan.

"As an employer, you may be surprised at the level of detail that proper reporting will show," Fisher says.

Because so many 401(k) plan participants do not believe they are paying anything for the benefit of investing in their company's 401(k) plan, many employees may be shocked by the new fee disclosures.

"This may prompt several questions from employees surrounding the cost of their investments and the value employees are receiving for the fees they're paying," Fisher says. "Employers should heed this warning and work with their advisers to ensure they are prepared to adequately answer these questions."

How to react

Some fees for managing your 401(k) plan are to be expected, but you will have to determine whether the fees are warranted. A reasonable amount to pay in fees varies depending on the plan's size.

"The total cost of any 401(k) plan will be determined by the services the plan receives, and this must be a key ingredient to use in any comparison," Fisher says. "In general, plans in excess of $100 million in assets will have overall costs under the 1 percent range. Plans in the $50 million to $100 million range may have average costs of 1.5 percent though a plan less than this may have costs in excess of 1.5 percent."

One reason for the difference has to do with competition for the higher-size plans because there are fewer efficiencies in the lower-size plans. Loeper says the amount you're paying in fees should be determined by the level of service you're receiving.

"If you're meeting quarterly with an adviser and he or she is making recommendations, that's a lot of service, and I can see paying 0.75 percent to 1 percent," Loeper says. "But if you're not getting this kind of service, you can get a globally diversified portfolio for 0.01 to 0.15 percent."

If your plan is charging 0.5 percent or less in fees, there's probably no reason to consider making changes.

"There are a lot of plans out there charging 2, 3 or even 4 percent," Loeper says. "In that case, you're getting ripped off. A plan like that can cost a teacher or a police officer $1 million during the course of his or her career."

Although 1.5 percent to 2 percent doesn't sound like a lot, people may be surprised when they see the cash value they're paying each year in percentage points.

Paying too much?

If you believe the fees you or your employees are paying are unreasonable, first make sure it's not because of your choices or your employees' choices. For example, an employee may have elected a variable annuity with layers of funds that could be driving up his or her costs. Consider making a plan representative available to educate employees about how their investment choices affect their fee structures.

If you've checked your investment choices and the fees still seem too high, consider talking with your plan provider about improving the quality of your plan or think about offering additional, lower-cost choices. You may want to consider approaching your plan provider about reconfiguring how it charges fees.

"Based on conversations I've had with some providers, I believe some of them will go to lower fees or a flat fee," Meadows says.

If your provider won't lower the percentage rate of its annual fees, there may be other ways to save money without switching to a new plan.

"As a small-business owner, you are unlikely to get large companies to charge less for your employees' 401(k) accounts," Fisher says. "Instead, they may discount administrative fees or offer a special deal for small-business plans."

Still not happy?

"Do the same thing you would do if you believed a materials supplier or a subcontractor was not providing you with appropriate value for the fees being charged: Check the marketplace," Fisher says. "A business owner should look at his or her 401(k) plan, or any other retirement plan, as another important part of business that can be managed to improve employees' well-being."

Start by requesting a proposal from other investment advisers who have the knowledge to properly serve retirement plans.

"For roofing contractors, the request for proposal process is nothing new and should be applied here," Fisher says.

As a part of this proposal process, Fisher recommends comparing your existing and potential advisers in at least three main areas:

  • Is the adviser willing to put his or her own (and the firm's) interests behind your employees by stating it is a fiduciary to your retirement plan?
  • How will the adviser be paid (including all fees)?
  • How will the adviser ensure plan investments are appropriately selected and monitored in alignment with the plan participants' (employees') best interests?

Keep in mind the new reporting requirements for 401(k) plans represent a learning experience for 401(k) plan sponsors (your company) and participants (your employees). The learning process may take some time.

"It's like credit cards," Meadows says. "Several years ago, consumers didn't understand a lot about their credit cards, but now people have become more educated about what their annual percentage rates are and exactly how much it's costing them to use credit cards. But a 401(k) still is a relatively new thing, and people don't understand the fees they're paying."

Now start saving to save

As a business owner, you can use the new reports as an opportunity to educate yourself and your employees about the costs associated with saving for retirement—and start taking advantage of the benefits.

Nancy Mann Jackson is a freelance writer based in Huntsville, Ala.


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