If anything is ever remembered for 401(k) plans, it is that any decision ever made must be for the benefit of the participant. This is very important because this is what drives the success of the plan, as well as reduces the risk for the plan sponsor.
A company 401(k) plan is great! It’s a vehicle for employees to save for their retirement, and a way for the business to have a tax deduction while providing a benefit, if done correctly.
Over the years, the 401(k) plans have morphed into something monstrous – a “free” plan for the business and employees. The “free” plan, it’s nothing more than a smokescreen to get the business. There is no such thing as a “free” 401(k). There is cost involved because it’s better to hire a service provider to perform recordkeeping, and another to custody the money because they are the experts, and will do a better job than an office assistant with no formal knowledge. What has happened is bigger insurance companies have hidden these fees through revenue sharing. The participant pays all the cost without realizing it, which makes the plan a monster.
Here’s a breakdown of who and what is involved in a typical 401(k) plan:
- Third Party Administer
- Investment Menu
- Investment Manager
There’s a cost for each, but the fees are layered into the investment menu. It’s a dirty trick to use the investment menu as the fee collection service. The mutual funds in the menu have an expense to maintain the fund, which is standard and fair. However, additional fees are layered in and those are used to offset the other fees listed above, which is not fair.
This creates the illusion of the plan being “free”. Reading a fee statement can be puzzling and participants tend to pay more than necessary with revenue sharing. Since participants won’t see a fee debit on their account, it appears to be a free plan. Because of this, it’s harder to gauge if a fee is reasonable which puts the plan sponsor at risk for breach of fiduciary duty.
So why are the fees “hidden”? A valid question and there are multiple reasons. The common reason is that it’s been done this way for so long. However, all this does is increase the liability of a fiduciary breach for the plan sponsor, and create a fiduciary liability for the advisor involved.
What can be done? Hire FiduciaryShield as the Administrative Fiduciary. It’s time to fix the 401(k) model. Transparency is very important. Our services are designed to provide a 360-degree compliance review in addition to doing the day to day operations. Reducing work, reducing fees and reducing liability is what we do best. Contact us today!