401(k) Plans' Dirty Little Secret

Among the 50 largest providers of 401(k) plans, approximately one third are insurance companies. These firms, and the salespeople that represent them, have mastered the art of hiding fees within their marketing materials and complex plan documents, making it virtually impossible for employers to make sound judgments regarding 401(k) fees. In many cases, the language in the plan documents and other materials borders on illegal, and is certainly unethical. As a result, a significant portion of American workers are burdened with excessive 401(k) fees, fees that will have a major impact on their long-term ability to achieve a successful retirement.

An example: in a proposal from one of the largest 401(k) plan providers is a tabbed section labeled “Fees.” There, in bold letters, are the words Fees Waived. Is this firm providing those services pro bono? No, the fees are hidden elsewhere, but do not show up anywhere in the proposal–a clear deception.

The firms make the case that all their fees are disclosed in the plan contract, but even there, various fees are both difficult to find and often unclear. As one state regulator stated, “disclosure without comprehension is not disclosure.”

This problem flies in the face of the fiduciary responsibility of the employers. The Deptartment of Labor, in its publication A Look At 401(k) Plan Fees, says an employer must “Ensure that fees paid to service providers and other expenses of the plan are reasonable in light of the level and quality of services provided.” But how can that judgment be made without transparent fee disclosure?

Another technique for hiding fees involves the use of so-called “no-load” funds. Funds may be labeled as no-load because they carry no front-end or back-end sales charge. But typically, insurance companies use funds with higher-than-average expense ratios, another well planned deception. The fund company then “rebates” all or part of the fee back to the insurance company in the form of “revenue sharing” or “expense reimbursements.”

The issue seems to fall in a gap between the DOL and the SEC. The DOL usually doesn’t concern itself with investment issues, and the SEC steers clear of insurance issues. At this point neither has tackled the issue of hidden fees because there are few knowledgeable advocates for the plan participants.

The solution to the problem is simple: an unambiguous summary sheet of all 401(k) fees and charges.