Many financial planners and investment advisers have helped small companies establish 401(k) retirement plans for their employees.
Many financial planners and investment advisers have helped small companies establish 401(k) retirement plans for their employees. But if those financial planners and investment advisers want to continue earning their fees for advising those plans, they should examine all fees being charged to those plans, including their own.
They should ensure that the fees being charged to the plans and to the participants are reasonable and that there are no conflicts of interest surrounding them.
Fees have become a significant issue for federal regulators, and a possible source of revenue for trial lawyers, since the Pension Protection Act of 2006 went into effect.
Regulators are concerned that participants in some 401(k) plans are paying exorbitant fees to mutual funds and that service providers are sharing those fees.
Members of Congress also suspect that there are hidden fees of which plan sponsors and advisers aren't aware, and legislation de-manding greater disclosure of all fees is in the works.
They think that the hidden fees are undermining employee retirement security and that the current level of fee disclosure doesn't allow easy comparison of investment options.
According to a Government Accountability Office study, a 1% increase in fees reduces the retirement benefit by 17%, given a normal working career.
In addition, trial lawyers are sniffing around for potentially lucrative class actions that might be brought against deep-pocketed service providers such as mutual fund companies. Other service providers could easily get swept up in the suits.
Congress and the regulators turned their attention to 401(k) plan vendors because retirement for most workers will be secured by 401(k) and other defined contribution plans. The quality of that retirement will depend on how much money is in the 401(k) plans at retirement. But that depends in part on the net investment return employees earn on their 401(k) assets.
Some studies have suggested that 401(k) investors are earning far less than market returns on their assets because of fees.
Although it isn't easy to compare the fees charged to 401(k) plans by service providers, advisers must make sure the fees are reasonable.
They should check that a plan has an investment policy statement that is followed in the selection and oversight of investments.
Advisers should also make certain that they have a written service agreement between themselves and the plan, and that all other service providers also have such service agreements. Advisers must ensure that all fees are being paid in accordance with plan documents.
Advisers can save themselves, the plans and other service providers a lot of grief if they are proactive in examining these issues.
