If you ask a 401(k) participant how much they pay for their 401(k) plan they will quite often say nothing. The new 408(b)(2) regulations require service providers to make written disclosures of their services, status, and compensation to plan sponsors by July 1, 2012. This means service providers will have to disclose compensation hidden in the expense ratio of the investment such as:
- 12b-1 fees: Payments from mutual fund companies for marketing and distribution.
- Sub transfer agent fees: Payments from mutual fund companies to record keepers.
- Wrap fees: Charges for bundled services typically through insurance programs.
In one instance we were reviewing the 401(k) options of a client and found an excellent fund; however, when we examined the annual expense ratio it was a whopping 2.81%. The catch is when you remove the insurance company’s “wrapper” we could invest in the same fund for an expense ratio of 0.56% annually. Although the client didn’t think they were paying anything they were losing 2.25% of their investment return each year to expenses above and beyond that of the actual investment.
By making services and fees more transparent the hope is participants will receive a better value. Plan sponsors will be able to easily identify what their plan actually costs for benchmarking, and they will also know whether or not their service providers are fiduciaries (legally obligated to act in the best interest of the plans / participants). At Financial Plan, Inc. we act as fiduciaries for our clients and only accept transparent, fee-only payments.