From the July 2010 issue of Boomer Market Advisor • Subscribe!

How high plan fees foil your clients' retirement plans

As 401(k) plans become an increasingly important source of retirement income for boomers, the fees charged to such plans are becoming the subject of growing scrutiny. Excessive plan fees can hamper efforts to save for retirement, and litigation, legislation and regulation concerning plan fees are all on the rise. It's therefore more important than ever for you, as a financial advisor, to review your clients' retirement plans carefully and understand their fees.

As with any investment-related product, 401(k) plans generally incur a certain level of fees and expenses. However, excessive fees can prove to be a real impediment to saving for boomers, as well as a legal and regulatory concern for your plan sponsor clients.

Several recent lawsuits regarding 401(k) plan fees center around allegations of breach of fiduciary duty. Some of these lawsuits allege that the applicable plan fiduciaries failed to:

  1. Monitor the fees and expenses paid by plans
  2. Understand the different ways vendors, including advisors, are paid for performing services to plans
  3. Establish, implement and follow procedures to properly determine whether plan fees and expenses are reasonable

Client concerns over fees paid for retirement plans are relevant to the advisor community, particularly in such volatile market environments. As such, it's important for advisors to be very clear when speaking with clients about their retirement plan and to walk them through the fees and costs that they're paying. Plan sponsor clients may want to focus on investments, which are certainly important, but retirement plans go way beyond investments, so be sure your clients are aware of the entire process.

The Employee Retirement Income Security Act of 1974 (ERISA), is a federal law that sets legal standards for many employer-sponsored retirement savings plans. ERISA's fiduciary requirements include, but are not limited to, the duty to:

  • Act prudently and solely in the interest of the plan's participants and beneficiaries; and
  • Obtain sufficient information on services, costs and service providers in order to make prudent, informed decisions

You can help your clients manage their fiduciary responsibilities by helping them to understand and evaluate the fees and expenses paid for their 401(k) plan. These fees and expenses generally fall into four categories:

  • Investment-related Expenses
  • Plan Administration and Servicing Fees
  • Start-up/Conversion Fees
  • Termination Fees

Determining "reasonableness"
When reviewing costs with your clients, you may want to review the fees and expenses of your client's plan against those of other plans with similar characteristics and features. This exercise will help your plan sponsor clients satisfy applicable ERISA standards. Remember, your clients don't need to use the lowest cost provider so long as they are able to document that they have compared the cost of services with the value provided, and able to conclude that the fees are "reasonable" by that measure. In addition, note that upcoming changes to ERISA standards are expected, which promise to make this exercise more involved.

Helping your plan sponsor clients implement and maintain a prudent retirement plan is critical in today's environment. And a sound retirement plan goes a long way in helping boomers (and participants in general) save for their retirement income needs.

Rina Aligaen is an associate product manager of retirement solutions at OppenheimerFunds, Inc. in New York. She can be reached at raligaen@oppenheimerfunds.com

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