Do you know how much you are paying for your 401(k) or 403(b) plan and investments? Paying too much in fees, even just 1% more, can mean hundreds of thousands of dollars less in your retirement plan.
Some retirement plan advisers pay to access databases of benchmark information that can easily show you how your fees compare. “Live bid” benchmarking is where an adviser shops your plan to compare it with what the market will offer. (Note that in certain instances, advisers – especially if they aren’t retirement plan specialists – are not fully aware of the fees, themselves.)
Under federal law, all qualified retirement plans must identify a plan trustee/fiduciary legally responsible for overseeing the plan; often it is someone in your company’s finance, legal, or human resources department. The U.S. Department of Labor and federal Employee Retirement Income Security Act retirement laws hold these fiduciaries accountable for looking out for your best interest, understanding service provider and investment fees, and ensuring those fees are “reasonable” for the services rendered.
What happens when fees are too high?
Class action lawyers regularly sue fiduciaries for excessive fees and bad investments, including recognizable entities such as Yale University, Verizon Communications Inc., General Electric Co., American Airlines, Intuit Inc., Qualcomm Inc. and Clorox Co. Some lawyers advertise for employees to join a class-action lawsuit against their current or former employer.
Where should you look to find what you are paying and assess reasonableness?
• Check the online or paper retirement plan statement; specifically, look at the sections showing “fees and transactions.”
• Look at the expense ratio of your mutual funds. It may include the cost of managing the money or the fee to pay a broker, recordkeeper, or plan administrator. It may include investment management fees and, sometimes, revenue sharing (a type of rebate that can go to you, your fellow plan participants, or be kept by various service providers).
• Are you in index funds? Those tend to be cheaper. But even index funds sometimes have fees tacked on to pay a broker commission, or for recordkeeping. So look closely.
For context, some of the lowest-cost index funds only charge 0.03%-0.015%. According to Forbes magazine and Investopedia, actively managed funds tend to have higher expense ratios (0.68%) compared with passive index funds (0.06%).
• Beware of fluff if you are selecting index funds for the low cost. A good litmus test would be to see if the fees are costing you more than 0.02%. If the fees are above that threshold, there may be extra – even hidden – fees. In some instances, this may be acceptable, but you and your employer should understand why. And, moreover, if the index funds seem overly high, there’s a good chance your other fees are also overly high.
• Every year, a plan’s service providers, record keepers and advisers have to send your employer a detailed document – a “408(b)2” notice – outlining all fees being charged. Likewise, your employer must regularly provide all employees with its own detailed document – a “404(a)(5)” notice – outlining all investment fees. Ask your employer for these notices to determine what fees are being charged.
Every dollar counts as you save for retirement. Do your homework and ask your employer if you want to learn more. Make sure you are not paying too much.
If you are the one responsible for your own company’s plan, or you are a plan trustee/fiduciary, protect yourself by understanding all fees and making sure they’re reasonable. Verify that your adviser is fully disclosing all fees, explaining them to you, and helping you negotiate for lower fees with your service providers.
Based in Providence, James Worrell is a co-founder and the managing director of the Northeast office of Strategic Retirement Partners, an independent retirement plan advisory firm.