Understanding 401(k) fees and fiduciary duties

There are nearly half a million 401(k) plans in the United States, and for each plan, one — or more commonly, several – company executives have fiduciary responsibilities for plan oversight.

Most executives and plan trustees know they are fiduciaries. Few fully comprehend the responsibility – and liability – this entails. When you accept fiduciary responsibility, you are exposed to fiduciary liability, which includes personal liability.

Small employers in particular, but even sophisticated, middle market employers, do not have the time, experience or information to fully understand and manage the plan expenses or evaluate true investment costs.

Managing a qualified retirement plan can be a daunting task. For those plan sponsors trying to get answers, it is sometimes nearly impossible to know what questions to ask — or what answers to expect. For this and other reasons, the vast majority of retirement plans outsource these responsibilities to various service providers. This can be a seriously flawed approach.

Many employers rely on name-brand service providers hoping that will discharge their responsibilities about knowing plan and investment expenses. That is a dangerous game. Just open the business section of your local newspaper. It seems that every day a new mutual fund family or bank is being investigated and/or charged by the SEC and attorneys general.

Unfortunately, there is no substitute to taking the time, educating yourself about what you need to know, asking those hard questions and demanding answers to them.

In addition to the late-day trading problems, plan sponsors are now learning of various “pay to play” arrangements between fund families and their distributors, which have created undisclosed “soft dollar” compensation for service providers. In some cases, this compensation is used to offset overall plan costs. However, in other cases it increases a plan’s costs, without being disclosed.

Every company that has a 401(k) plan needs to know whether its vendors are being paid to recommend investments or perform services for mutual fund companies that have never been disclosed. Plan sponsors are beginning to realize the fee they pay their investment professionals, record-keepers or other vendors is being supplemented – sometimes substantially – by mutual fund companies. Many of these fees are taken directly out of the retirement plan’s asset — so if you don’t know how to look for it or ask about it, you’ll never find it.

Lance M. Roberts is executive vice president of Advisors Capital Resources, which is presenting, along with the McLane Law Firm, a Jan. 13 seminar on “Understanding Your 401(k) Fees” at the McLane firm’s offices in Manchester. For more information, call Cindy Motta at 627-7000 or e-mail info@acrinvest.com.