So you thought your retirement plan was free? | submitted by Nate Hedden and Robert Shultz

July 1 has come and gone, and with it the revelation that the work-sponsored retirement plan you have been enjoying has been enjoyed by others as well. The “enjoyment” of others we are talking about are the fees and expenses either directly, or indirectly, charged by the plan providers to the employees participating in plan. For most plans with quarterly reporting, this information will be clearly revealed for the first time on the employee participant’s September quarterly statement.

Much has been written recently regarding these new rules and disclosures. Let’s take a moment to consider the personal impact on you as an employer offering a retirement plan. Generally speaking, you, as the provider of this benefit, are a fiduciary to the plan and held to standards that suggest that you know what is going on in your plan. Surveys of plan sponsors across the country have shown that this often is not the case. A recent survey of 1,000 sponsors revealed that half of them did not know if their participants were being charged anything or, worse yet, believed that such fees were waived by their current provider.

Even if you didn’t know you have been a fiduciary all along, you must now be prepared to wear that hat, or retain an advisor to assist you in that role. Your employees will need someone able to educate and inform them about the fees and expenses that will show up on their next quarterly statement. These charges will most often be expressed as expense ratios associated with the particular investments in the plan. These fees can be quite onerous in smaller plans with balances that don’t meet certain minimums, or any plan containing load-based or high-fee mutual funds.

Come October, for most plans, the participants are going to have questions and concerns about the expenses and fees clearly listed for the first time on their statement. This places you, the employer/sponsor, in a difficult situation inasmuch as employee education will become a much greater component within your plan. A significant part of this education will require you to become a knowledgeable fiduciary, responsible for understanding the true picture of fees and expenses associated with your employees’ investments in the plan, or to find someone qualified to assist you with this task.

Until the release of these new disclosure requirements, there was no real incentive driving a plan sponsor/fiduciary to pay close attention to internal plan expenses. On top of that, there was often true incentive for some mutual fund and plan providers to mask the fees they were charging. Such behavior will no longer be without consequences. As we have stated before, you, as a fiduciary of the plan, will be held accountable for defending the fees that will be revealed, and must be able to explain their purpose. The noise in the hall regarding the plan might no longer be only about the returns, or lack thereof, on their investments. Employees will want, and are justified to demand, an explanation as to what they are getting for these newly disclosed fees and if better options are, or should be, available within the plan.

We are approaching a new era in work-sponsored retirement plan understanding, participant rights, and fiduciary responsibilities as these charges are disclosed to the participants for the first time. The motivation for an employer to be educated about the plan will be just as strong as the clamoring for employee education has been in the recent past. It will no longer be sufficient to say, “Congratulations, you’re in the plan too.” Employers, HR personnel, and people closely associated with the plan will be held to a higher standard by the employee participants as they become more aware of the fees and expenses that are now clearly disclosed to them for the first time.

Some employers will be seeing these fees and charges for the first time as well and will use this information to reassess the benefits and services they are currently receiving from their plan provider. At the same time that you, acting as an employer/fiduciary, are digesting this information, your participants will be receiving a similar listing of fees and expenses clearly shown on their statements as charges per $1,000 invested. At a minimum, this new methodology will probably trigger questions from your participants. More likely, unrest in the halls may ensue as the participants try to determine why they are paying so much for their retirement plan, and whether or not (in their view) the plan is doing something to them as opposed to for them.

Obviously the dust hasn’t settled on this issue and much remains to be discussed, but as an employer/sponsor of a plan, you must first look inward and accept the fiduciary responsibilities you have. Then you, or your trusted advisor, need to understand and be able to satisfactorily explain to your employee participants the fees and charges that will be disclosed to them every quarter.

Nate Hedden and Robert Shultz, directors at Musser Capital Advisors, LLC, collaborated on this article.

Disclaimer: Implied and expressed opinions in this piece are to be considered “General Advice” and subject to change. The information contained in this report was not presented with specific regard to any particular person’s financial or investment objectives, or financial situation. Any person using the advice should consider its appropriateness to their financial situation and perform their own diligence prior to investing.

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