Employee Benefit Plans: The 411

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

What Fees are being Charged for your 401(k) Investment Offerings?

If you have hired an investment consultant to assist your plan participants in choosing the funds offered in your 401(k) plan, you probably feel comfortable with your investment options, even more so if you periodically replace poor performing funds with funds that have more potential. These are good practices; however, the responsibility of the plan fiduciary does not stop with monitoring fund performance and ensuring a good selection of funds for the plan’s participants to choose from. You must also be concerned with the fees and expenses being charged to the investment options being offered by your plan.

It is common practice for 401(k) service providers to receive payment for the funds offered in the plan. Revenue sharing (12b-1) fees are often embedded in the expenses the funds will charge for investment. Generally, these fees will be charged before earnings are calculated and before plan participants receive a return on their investments. It is important to know that your plan may be able to offer the identical investment funds with lower expenses and fees, which can provide your participants with higher returns on their investments. As such, it is imperative that you have an understanding of these fees and how they are charged in your plan.

A recent court ruling in the case of Tibble v. Edison International found the fiduciaries liable for excess expenses paid for retail classes of mutual funds. It was determined that the same mutual funds also offered institutional classes that had lower expenses. The investment committee for this plan failed to inquire about fees and could not provide a reason why the higher fee retail classes were selected for their plan. The fiduciaries were also found to be liable for the loss of investment opportunity on the excess fees paid by the participants.

As you may have gathered by now, your fiduciary responsibility is not fulfilled by simply relying on the recommendations of your investment consultant. To help avoid fiduciary liability, you should always consider how fees and expenses are being charged for all of your investment options and inquire if there are other share classes with lower fees available to offer in your plan.

Joe Goodmiller