Fee Transparency Protects 401(K) Investors Against Conflicts of Interest

You may be asking yourself as a retirement plan sponsor or investor, "What's so special about this fee disclosure regulation besides that I will now know exactly how much I am paying for this plan?" Educate yourself so that the changes in transparency regulations made in July 2012 can help your 401(k) plan and retirement future.

The implementation of 408(b)(2) and 404(a)(5) fee disclosure regulations gives investors additional protection against conflicts of interest in their retirement plans. The sponsors of 401(k) plans face conflicts of interest from service providers assisting in investment option selections because of third-party payments from investment fund companies and other business arrangements.These payments, called revenue sharing, create a conflict of interest because the provider may receive greater compensation from certain funds.

Firms administering 401(k) programs receive fees from fund managers, record keepers, custodians and others, who pay to be included in the plans. The United States Government Accountability Office (GAO) says some program providers use generalized "investment education" sessions to promote their own funds. Such conflicts could lead to higher costs for the plan, which are typically borne by participants.

"If left unchecked, conflicts of interest could lead plan sponsors or participants to select investment options with higher fees or mediocre performance, which, while beneficial to the service provider, could amount to a significant reduction in retirement savings over a worker's career," the GAO said.

The most common forms of revenue sharing can include 12b-1 fees, shareholder servicing fees, and sub-transfer agent fees. In some instances, a portion of the investment management fee for proprietary funds may include some revenue sharing. The diagram below illustrates potential fund expenses. Right click on the graph to open it in a new window.

Historically such allowances may or may not be known to a plan sponsor; nonetheless, it is imperative that plan sponsors with fiduciary oversight of their organization's retirement plan understand the distribution systems that most investment management organizations use and how they share revenue.

Fee disclosure that allow participants to be aware of such conflicts of interest should empower plan providers and participants to get a second opinion and make sure that they are truly paying for the best option for their company and themselves. Although some experts note that mere disclosures do not often prompt second opinions, it is highly recommended to read new fee disclosures concerning potential conflicts of interest. By doing so, you may avoid paying more fees than necessary for 401(k) plans.

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