Below is a series of questions and suggested talking points to help participants understand that 401(k) plans are not “free.”
What are the 401(k) fees I’m hearing about?
Talking Point #1: There are no new fees for participating in a 401(k) plan. There are, however, enhanced rules ensuring that you receive more complete and easier-to-understand explanations about all of the fees that you may be paying.
Talking Point #2: The purpose of these rules is to provide a clear list of the plan administration fees and the potential investment-related fees that may be charged to your 401(k) account. Just like other major purchases in your life, you will be able to weigh the benefits of various investment options and services against the related costs.
Isn’t my 401(k) plan free?
Talking Point #1: No. 401(k) plans have never been free. Most investments, such as mutual funds, managed accounts, and annuity contracts, contain fees, whether purchased through a retirement plan or another type of investment account. In addition, most 401(k) plans engage service providers to ensure the plan operates properly and qualifies for the federal tax benefits you receive, such as making pre-tax salary deferrals and deferring tax on your plan earnings until you take a distribution. These services are not free and, in most plans, the participants pay a portion of these fees.
Talking Point #2: Some 401(k) plan services may have appeared to be free because of the way the services were packaged and marketed. For example, some 401(k) vendors “bundle” together a variety of services, such as investments, plan administration services, and trust and custodial services. These vendors charge one consolidated fee for the entire suite of services. Because fees may not have been separately identified for each service in a bundled product or are paid for by another service component, the recordkeeping services or other plan-related services could appear to be free. Under the rules, fees have to be disclosed separately.
What types of fees are typical for a 401(k) plan?
Fees can be separated into two main categories
• Fees related to the set up and ongoing operations of the plan
• Fees related to investments
Talking Point #1: Plan administration expenses are assessed for the day-to-day operational support needed to run the plan efficiently and in compliance with the rules and regulations applicable to retirement plans. This operational support includes making certain the dollars you contribute to the plan are allocated to your individual account and are used to purchase the investments you have selected, and providing a plan website or call center for you to access information about your plan account. Portions of the administrative fees, which are typically assessed as a quarterly per-participant fee, are often paid from each participant’s account. Some services result in additional fees charged to you only if you use the services, like the fee for taking a plan loan.
Talking Point #2: Investment fees make up the largest component of plan fees. There are fees related to the purchase of investments, investment management fees, and other fees that may be involved in offering an investment. Investment fees are typically assessed as a percentage of the total investments and are listed in a prospectus for a mutual fund investment or in an annuity contract. The amount of these fees varies with the type of investment and among investments within the same class of investments.
How do I know what I’m paying as a plan participant?
Talking Point: The fee disclosures enable you to compare the costs of the various investments offered under your plan. You will receive an annual update listing all potential costs for plan participation. You will also receive a quarterly statement that will list the specific amount debited from your account during the previous quarter.
Wouldn’t I be better off in a different type of account without all the fees, like a brokerage account or an IRA?
Talking Point #1: Not necessarily. No investment accounts are free. The investment fees described above apply to all investments, not just those offered in 401(k) plans. In fact, investment fees can be higher in individual “retail” accounts, such as IRAs, as compared to a 401(k) plan that has group buying power.
Talking Point #2: When deciding whether to participate in a 401(k) plan, remember the other unique benefits that don’t exist in a retail investment account or IRA, including the ability to make pre-tax contributions and take loans from your plan account.
Talking Point #3: In a 401(k) plan, your employer has a legal obligation under ERISA to ensure the fees charged for plan investments and services are “reasonable.” You have the added protection as a participant in a 401(k) plan of knowing that you are not alone in your effort to monitor plan fees.