The High Cost of Not Knowing Retirement Plan Fees

Revenue sharing arrangements are legal under current law and are common in the retirement market-place. The determination of whether these fees are reasonable in light of services received by the retirement plan is left to the discretion of the plan sponsor. What the GAO is concerned with is the hidden nature and lack of transparency of the revenue sharing arrangements, as they happen many times without the knowledge of plan sponsors and participants. Plan sponsors all too often lack the information and disclosures necessary to prudently monitor fees and change plan providers if needed to keep costs in check.

Another potentially serious problem in the 401(k) marketplace, that the GAO attempts to address, is the lack of objectivity on the part of many service providers. Potential conflicts of interest occur as retirement plan consultants, in many cases, are paid incentives to push certain funds at the expense of lower-cost options. Plan sponsors are not made aware of these compensation arrangements and could potentially choose funds that place a higher burden on participants. What is significant about the GAO findings is that retirement plans studied from 2000-2004 suffered a loss of as much as 1.2% to 1.3% in returns where consultants were not disclosing incentive arrangements.

What Difference Does it Make?

How much money does a participant lose to extra fees created by revenue sharing arrangements? According to the GAO’s study, even a slight increase in fees can drastically affect retirement savings. The GAO compared the difference a 1% fee increase would make on a $20,000 balance calculated over a 20-year period with a reasonable rate of return. At the end of the period, even a 1% increase reduced the final amount by over $10,000. Now imagine what that number would be if you were talking about a 401(k) participant with $800,000 in retirement savings and the number becomes startling. When the extra fees are coupled with the loss in returns from undisclosed compensation arrangements, the losses for a participant could be catastrophic over the course of their work history.

So how can plan providers avoid conflicts of interest and undisclosed revenue sharing arrangements?Plan sponsors must demand transparency from all vendors associated with the retirement plan and obtain costs in writing. Any vendor that is unwilling to provide compensation arrangements is placing undue liability on the company. ERISA law already requires that the plan sponsor have a prudent process in place where all aspects of the plan are being considered. As a part of that process, retirement plan sponsors must have an understanding of what plans of similar size and participants are charged in the marketplace.

Every plan should be independently priced every one to three years by an outside vendor to ensure that fees for services are in line with industry standards. Having your plan independently priced is even more important in scenarios where the retirement plan has been in place for more than 5-10 years, as fees in most cases should come down as account balances increase over time. Plan sponsors should consider consulting with fee-only advisors to avoid revenue sharing arrangements and to ensure that advice is as objective as possible.