Now that retirement plans are required to disclose their fees, it’s up to participants and their financial advisors to wade through the information to find out what the costs of their plans really are.
Philip Rousseaux, founder and president of Everest Wealth Management Inc., points out that companies have had to be more transparent since fee disclosure regulations went into effect in July 2012, but that hasn’t really been the case.
Many companies dump a lot of documents on their participants and expect them to find out what fees they are paying, in general, if they have the stamina to dig through everything provided.
“For many ‘average Joes’ with 401(k) and 403(b) savings plans, disclosure hasn’t helped at all,” he said. “The paperwork supplied can be so dense and full of jargon they can’t make heads or tails of it.”
Rousseaux said he has even spoken to financial advisors who couldn’t make sense of the information provided.
He offered the following tips to understand plan fees.
- Trading fees apply to mutual funds which typically comprise at least half of 401(k) plans. These previously undisclosed fees are brokerage commissions that are charged to the plan holder every time a fund is traded. The charge is a percentage of the fund’s value, somewhere between less than 1 percent to less than 2 percent. In many cases, fees can double the cost of the transaction, Rousseaux said.
- Revenue sharing occurs when mutual funds and other plan providers pay a third party for administrative services such as recordkeeping, which the fund is expected to perform. These will be labeled sub-transfer, agents/sub-TA or shareholder servicing and they are built into the plan’s expense ratio so it is not a double charge.
- 12 b-1 fees: This term – named for the section in the regulation that allows for it – applies to marketing and distribution costs. They’re generally paid as commissions to brokers who service retirement plans and they also may be paid to noninvestment professionals such as recordkeepers or insurance companies. Most mutual funds have share classes that provide for varying revenue amounts from 12b1 fees. Brokers and recordkeepers have an incentive to use funds with 12b1 fees and to share classes with higher 12b1 fees because they make more money.
He recommends that participants and advisors look closely at the expense ratio of a plan, which should be stated in dollars under terms of the new DOL regulations.
“Generally, the lower the ratio, the bigger the fund will grow,” he said.