Companies Are Ignorant About 401(k) Plans

With all the hoopla about how smart business folks are, a recent GAO report is quite surprising. To paraphrase the report, many employers are completely unaware how much companies and their employees pay for the operation of their 401(k) plans.

This is a big deal because understanding the impact of 401(k) fees is important, as the fees have a huge bearing on the amount employees ultimately have accrued for them for retirement.

The Federal Department of Labor has issued new rules mandating the mutual funds and other administrators of the plans to disclose more information about their administration fees.

The rule could not have come at a better time. The GAO report disclosed that there is extensive bewilderment by employers about the many fees that outside plan administrators charge, especially fees paid to other companies. The report was prepared for the House Committee on Education and the Workforce. It surveyed 365 administrators of 401(k) plans. The margin of error for this study was calculated at plus or minus eight percent.

Examples of how poorly companies understand what is happening with 401(k) plan fees include:

One half of employers indicated that they simply were unaware if they or their employees paid investment management fees; many incorrectly believed that these fees had been waived. According to the GAO these fees comprise most of the total fees paid for 401(k) plans.

One large employer in the study had a 401(k) plan with over 15,000 participants and $100 million in assets stated they never paid trading or transaction fees. Further investigation showed they paid more than $310,000 in such fees.

The GAO report also said that nearly 50 percent of employers had no idea if their retirement plan provider had what is known as a “revenue sharing” arrangement. These arrangements have plan provider pay another outside firm for certain administrative costs.

The report discusses a company that reported its plan only paid, in total by employer and employees, $3,800 in record keeping fees. But, if revenue sharing agreements were counted, that number soared to $62,000. Excess costs that the company was totally unaware about.

The GAO concerns about “revenue sharing” arrangements are appropriate. Under these arrangements, record keeping fees can grow in based on the amount of assets under plan management. Thus, the fees can grow as assets grow if the company is not aware of them – even though the level of service is unchanged.

The GAO prepared a video for 401(k) information challenged companies that explains revenue sharing.

It is a good idea for employees to discuss with their employers how 401(k) plan fees can affect their retirement accounts. Before you ask, find out if they have seen the video!