If you don’t understand the fees associated with your company sponsored 401k plan, don’t worry, you’re not alone. In fact, some retirement plan experts say that not knowing and evaluating plan fees is the biggest mistake plan sponsors make. Here is how to request the information you need—and what to do with it.
Responsible To Participants
As fiduciaries plan sponsors are responsible to participants (and their beneficiaries) for ensuring that the fees associated with the retirement plan are reasonable. In the current litigious environment, it is especially urgent for plan sponsors to double down on their efforts to understand and monitor the fee structure for the plan. As Eric Phillips, Senior Director of Financial Partnerships & Strategic Insights at Human Interest observes:“The number one plan mistake would be not evaluating — or knowing to look for — hidden fees in their 401(k) plan.” Not sure how to get started? Ask service providers for a breakdown of fees. Here’s how according to Jacqueline Reeves, Managing Director at Bell Rock Capital:
“Many plan sponsors do not understand fees and are under the impression that their plan is ‘free’…Plan sponsors can request a simple breakdown of the fees because it is appropriate to pay for services. Then, plan sponsors should compare their data to the industry average for plans of their size, in terms of assets and number of plan participants. Finally, document the differences. If higher than average, perhaps the services and or returns support the data, etc. Implementing an investment policy or charter to execute often helps plan sponsors stay on task each year and document the procedures.”
With lots to do—and take ultimately responsibility for, it’s important for plan sponsors to protect themselves. Given the high standards of ERISA law, mistakes, oversights and lawsuits happen—and even allegations can be expensive, even disastrous. Why go it alone? Colonial Surety is here to help with an affordable Fiduciary and Cyber Liability insurance Pack that arms you with:
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Forbes reminds us that when examining the fee structure of a retirement plan, it is especially important to understand the expense ratio:
The ideal expense ratio is 0.20% or less, while anything above 1% is indefensible and usually is representative of “revenue sharing”. Revenue sharing is defined as a deliberate overcharge at the expense ratio level used to pay the vendors of the plan such as a third-party administrator, record keepers, brokers, or financial advisors. These hidden overcharges come in the form of eroded returns and have been at the heart of a great deal of these 401k lawsuits. These fees are difficult to uncover and are typically buried deep within the Service Provider 401k Fee Disclosure Document, form 408(b)2.
A 401(k) plan with a total “all-in” fee, where total costs are expressed as a percentage of assets in the plan, between 0.50% to 1% is typically okay, depending on the size of the plan. The Department of Labor requires employers to monitor these fees and failure to do so is considered a fiduciary breach that can result in stiff fines and penalties. High expense ratios with revenue sharing fees built-in can lead to a significant negative impact on an individual’s bottom line over the lifetime of the investment.
Claims of fiduciary breaches over the fees and performance of investment options in retirement plans continue—with most litigation ending in hefty settlements and paving the way for more cases, impacting more plans and businesses. Lawyers advise plan sponsors to make sure their plans have a clearly articulated investment policy, which includes a solid process for monitoring investment fund options—and investment provider costs.
Keep in mind that as diligently as you go about all of your plan sponsor duties, including putting policies in place, you can mitigate fiduciary liability risks—but never fully eliminate them. Under ERISA law, any individual involved in the management of a retirement plan can be held personally liable. Let Colonial Surety help you manage the inherent risks with our affordable three point protection plan: the DOL required ERISA bond to protect the assets of the retirement plan from theft; Fiduciary Liability Insurance to protect you and your assets from personal liability; and, Cyber Liability Insurance to safeguard your company and plan from covered losses and expenses in the event of a cyber breach. With Colonial, you can easily and quickly secure your affordable coverage package right now:
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