New regulations help employers with 401k plans reduce liability exposures

When business owners offer their employees a retirement plan benefit they have a personal responsibility to make sure that the fees charged are reasonable. Realizing that many employers are unaware of all the fees they’re paying, the Department of Labor is requiring plan providers to more clearly disclose the fees being charged. Fees vary a great deal, but generally speaking, the smaller the plan, the higher the fees when measured as a percentage of participant assets.

Under the new regulations plan providers are required to provide employers with this information by July 1 of this year, and by August 30, the information needs to be provided to all participants.

A recent study by AARP found that 71% of respondents thought they didn’t pay any fees in their plan. The study suggests that for the millions of Americans who will be receiving information on how much they’re paying for their 401(k) retirement plans, these disclosures may come as a big surprise.

The logic behind the new requirement is twofold.  First, fees can make a big difference in the amount people are able to accumulate in their retirement accounts, and second, if plan sponsors understand how much they’re paying, they’ll be better able to fulfill their personal legal obligations to make sure the fees their employees are paying are reasonable.

In their publication “A look at 401(k) plan fees” the Employee Benefits Security Administration provides an example of how important fees can be.  Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000.  If returns on investments in your account over the next 35 years average 7 percent and fees and plan expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account.  If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000.  The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.

In a study done by Deloitte Consulting in November of 2011, they found that only about one-third of business owners had participated in a competitive review of their current retirement plan in the last two years.  Examples of a competitive review include a review of plan fees by a third party (an investment or benefits consultant) or a complete vendor search with a request for proposal (RFP).  By not actually checking their options, business owners may have a difficult time proving that they’ve fulfilled their responsibility to ensure that the fees charged are reasonable, thus exposing them to a potentially significant personal liability.

The new fee disclosure requirements are already having an impact in the market, creating more competition and driving costs down.  Business owners that check their options now to make sure the fees they are paying are reasonable may avoid problems this fall when their employees find out how much they’re being charged.

The author, Ken Perine, is a Certified Financial Planner TM at Meritage Wealth Advisory.  He provides personal financial planning and retirement plan consulting services to business owners.  For more information, go to www.meritage-wealth.com.