Top 5 401K Service Provider Hidden Tricks
Running a 401K plan at times may feel like being a parent watching five 2-year-old children while attempting to cook a meal. Unfortunately since we’re not gifted to be able to focus on several high priority things at once, something ultimately has to give.
As a plan sponsor, that something may be a vigorous plan review. While it may be relief to hire a big provider like Principal or Fidelity that’ll plug into your benefits program as easily as microwaving a TV dinner, your job as a fiduciary includes taking a hard look at the ingredients and determining if monosodium glutamate and high fructose corn syrup are truly in the best interests of the ones you’re responsible to protect.
Given that the Department of Labor fee disclosure regulations are taking effect in 2012, plan sponsors are checking the label on their plans and finding that there are consistent themes — or hidden tricks — that are ultimately putting their firms at risk of lawsuit by employees.
The top 5 hidden tricks are below:
1. 12b-1 Marketing Fees: 12b-1 fees range between .25-1% of the amount invested in an actively managed mutual fund, are deducted from a participant’s mutual fund investment as an operational expense, and paid back to the mutual fund provider (and in some instances the broker of record as well). It’s like a slow, hidden leak over time.
2. Asset-Based Administration Fees: As plan assets grow from $5M to $15M, the work of a third party administrator (TPA) may stay the same. Therefore, unless they provide a compelling argument otherwise, TPA’s should not charge your plan a fee for assets under management.
3. Bait and Switch Formulas: A provider may offer low-fee investments in the plan, but have a clause that enables them to sell a much higher fee product to participants to recoup their costs on the back end. For example, a low fee plan from a popular insurance provider is offered contingent on that provider having the right to sell high cost annuities to plan retirees.
4. Betting on Inertia: While a plan may offer low cost funds, they may default new participants or newly transferred participant assets into higher cost funds. A popular low-fee plan provider has been caught by plan sponsors doing this, and has as their “aw shucks” explanation research showing that a certain percentage of employees would never reallocate their savings out of the funds they were initially place into. As a result, this enables the provider to provide low-fee funds and recoup fees from the accounts of their low inertia participants.
5. Single Provider Plans: It’s a key fiduciary responsibility to provide quality investment selections in a plan that represent the different categories that an employee will need for the long term (e.g., growth and income, growth, etc.). As a result, it’s a fiduciary misstep to offer employees a plan from a provider that only sells that provider’s funds since no one provider ranks at the top in all investment categories. In other words, if the funds in your 401K all have the same name as your service provider, you may be doing your employees a disservice by not diversifying.
My firm will help you overcome these hidden tricks while providing the financial education and managed portfolios that many providers neglect to provide. Price Capital is also regulated as a fiduciary unlike many of the plan providers today (who are sales brokers regulated under FINRA). We have the same responsibilities as plan sponsors to do what is best for our clients.
With our help, perhaps you can become the ultimate fiduciary able to handle all of your responsibilities without breaking a glass nor dropping a plate.
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