There have always been fees charged to 401(k) plans. However, many employees don’t know these fees exist, or exactly how much they affect retirement savings. A new federal rule requires plan providers to report these fees on employees’ 401(k) statements, which employers must distribute.

The rule went into effect July 1, 2012, so fee disclosures must be included on third-quarter statements in 2012. After that, full disclosures are required annually, and “expense ratio fees”—401k fees as a percentage of an employee’s invested dollars—will be seen on quarterly statements along with any major changes.

Annual statements will include a list of available investments in employer-sponsored plan, as well as the fund management fees associated with each investment choice. These “fund management fees” make up the majority of fees charged for 401(k)s. It is the employer’s job, to distribute the reports made by the plan providers.

Historically, small and mid-sized businesses have higher-cost plans, and even small differences have big affects. The DOL says a 1-percentage-point difference in fees and expenses would reduce account balances by 28 percent at retirement.

In addition to the management fees, other fees that should be disclosed are:
Administration fees—Expenses for basic, daily administrative functions like recordkeeping, accounting and trustee services. Generally, the more services employees use, the higher the rate.

Marketing fees (also known as “12b-1 fees”)—Fees used to pay commissions to brokers and other salespersons, for advertising and other costs of promoting the fund to investors and to pay various service providers.

Individual service fees—Associated with 401(k) plans that offer optional features like taking a loan.
According to the U.S. Department of Labor, employers should also adhere to certain rules in managing 401(k) plans for their employees, such as:

  •  Ensuring fees are reasonable for the service provided.
  • Monitoring investment alternatives and service providers to ensure they are the best choice for employees.
 Written by Anya Skrypka, LinkedIn Profile 
 
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