If you don’t know what you’re paying for — and getting from — your 401(k) plan, you could be facing a potential employee lawsuit. While plan sponsors aren’t required to choose the lowest cost plans, they are expected to know what they are paying and select ones with reasonable fees, says Mike Rogers, director of pension services at Burr Pilger Mayer.
“It’s not about the lowest fees, it’s about the reasonableness of the fees for the services being provided,” Rogers says. “If you have one payroll, no special enrollment needs, everyone works in the same building and you have a tech-savvy work force, a vendor should charge you X. But if you have six offices, run four different payrolls, have English and Spanish enrollment needs and need someone to be at each of your offices once a quarter, that should cost X-plus. But if both companies are paying identical fees, a case could be made that the first plan is overpaying and you could be open to a lawsuit from participants.”
Smart Business spoke with Rogers about fee transparency, benchmarking, and how a 401(k) specialist can lower your fees and help keep you out of legal trouble.
How important is fee transparency?
Fee transparency is the No. 1 issue. As a plan sponsor, when you select a vendor and your fund lineup, you need to know how much you’re paying each of the parties. The vendor should fully disclose upfront every component of the fees so that you don’t get hit with a lawsuit down the road on something that you didn’t know anything about.
The 401(k) plan lawsuits today aren’t like those against Enron, where someone bought stock at $90 a share and it fell to $2. These lawsuits are about whether you, as the plan sponsor, picked a fund or a vendor that costs too much. It doesn’t matter that the mutual fund was up 40 percent last year; it’s that there are less expensive versions of that fund available. As a plan sponsor, you need to be able to justify why you’re using a fund with a more expensive fee class.
The Bush administration said, ‘We are going to mandate how fees are disclosed both to the plan sponsors and to the participants so they know where their money is going.’ The proposed regulations got tabled but are expected to be finalized this year. What participants and plan sponsors really want to know is how much they’re paying for their plan and the funds. As a fiduciary, the plan sponsor is responsible for monitoring fees, but getting fee transparency is akin to sighting the Loch Ness monster.