June 20, 2012 (Powerhomebiz.com) This July, 401k participants will receive more disclosures about the fees they are paying inside their 401k plans.
The Department of Labor wants more transparency and more disclosure on what kind of fees employees are paying inside their 401ks. Why? Because many employees have no idea how much they are paying in mutual fund fees. A recent survey by AARP said that 71% of people saving for retirement thought they didn’t pay any investment fees whatsoever.
The fees inside a 401k are either paid by the plan sponsor (you – the employer) or by the participants, which are the employees. Over the last few years more of the fees have been paid by the employees. According to a report issued by the Investment Company Institute and Deloitte, employers are moving more of the plan charges onto their employees. For instance, employees are now paying for 91% of plan expenses, which is a substantial increase from 2009 when they paid 78% of such charges.
How does this happen? Here is an example. An employer wants to start a 401k and calls a bunch of mutual fund families to get some pricing to see how much it will cost to set up and administer. Most of the bids come back at $5000 a year. But one comes back at $1000 a year. Why is this one so much cheaper? Because the fund is making the money on the back end – higher mutual fund fees. So the employer goes with the cheaper option, and the little guy ends up paying more in fees.
A report issued last month by the U.S. Government Accountability Office highlighted that many employers aren’t really aware about the fees charged by retirement plan providers (the mutual funds). The most obvious fee is the expense ratio inside the mutual funds offered inside the 401k plans. Many 401ks do not offer enough low cost mutual funds such as index funds. That’s because they are usually not as profitable (to the fund company) as an actively managed fund is. For an explanation of index funds vs. actively managed funds, go to this link. http://bit.ly/KpLtcn
Some Perspective
In the 1990s, when the average stock mutual fund was making 10% year after year, no one was complaining about mutual fund expenses inside 401k plans. Everyone was making money. But today, stock market returns have averaged 3.77% for the past 10 years. Mutual fund fees inside 401ks have decreased over the past 10 years. According to the Investment Company Institute, the average expense ratio for a stock fund in 1997 was 1.04%. In 2011, the average fee was 0.93%.
Higher fees mean lower returns for 401k participants.
If the average investor made 3.77% net of fees and the average fee paid by the investor was 0.94%, the average investor paid nearly 20% of his/her profits in fees.
Things to Consider If You Are an Employer and You Offer a 401k
1. Offer index funds inside your 401k plan.
2. Be proactive. Tell your employees about the upcoming information they will receive about the fees they are paying.
3. Calculate the average expense ratios of the funds in your 401k. Shop your pan and see how competitive your current 401k is.
4. Remember that if you are most likely a plan fiduciary, which means you are personally liable if you breach your duty as a fiduciary to the plan participants and beneficiaries.
5. Consult with 3rd party professionals like plan administrators and ERISA attorneys to make sure your 401k plan is compliant.
The trend is for more transparency in 401k fees that people will pay. Get in front of this and be proactive.
Remember what Wayne Gretsky said. “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.”
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Justin Krane is a certified financial planner who has helped countless entrepreneurs create a bigger vision for their businesses by showing them how to identify and meet goals for increasing revenue. Go now to http://kranefinancialsolutions.com to get your free financial financial toolkit and you’ll also receive a free audio CD on increasing your business revenue.