Academic journal article Journal of Accountancy

Dirty Little Secrets of 401(k) Plan Fees

Academic journal article Journal of Accountancy

Dirty Little Secrets of 401(k) Plan Fees

Article excerpt

In September 2006, eight Fortune 500 companies were named in class action lawsuits alleging they failed to monitor and disclose 401(k) fees under so-called revenue-sharing arrangements. To protect your company or client, watch for these red flags when reviewing a 401(k) plan offering:

* Determine haw expenses in group annuities compare to publicly traded funds. Group annuity plan participants don't own mutual funds--they own a share of a pool of assets. As a result, account statements show prices of "unit shares," not fund shares. Unit shares do not correlate with any publicly traded mutual fund. This hides the underlying expense ratios of the annuities.

* Find out what "fees waived" means. In many cases, the broker's sales proposal says administrative fees are "waived" or "included." The point of such language is that the employer has no out-of-pocket expenses, but such statements ignore that participants pay for the services out of their investments. The Department of Labor (DOL) says that an employer must "ensure that the fees paid to service providers and other expenses of the plan are reasonable in light of the level and quality of services provided." See www.dol.gov/ebsa/publications/401k_employee.html.

* Don't confuse the proposal or the adoption agreement with the actual contract. The proposal is a sales document, meant to show the provider in the best light. The adoption agreement helps fit desired plan provisions into a "prototype document." But the contract is typically delivered after a verbal agreement has been made, or even after a letter of intent has been signed. The contract should be signed only after it has been thoroughly reviewed. …

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