Dirty little secrets of 401(k) plan fees.In September 2006, eight Fortune 500 companies were named in class action lawsuits class action lawsuit A lawsuit in which one party or a limited number of parties sue on behalf of a larger group to which the parties belong. For example, investors may bring a class action lawsuit against a brokerage firm that has actively promoted a tax 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 publicly traded fund See closed-end investment company. . Group annuity plan participants Plan participants Employees or other beneficiaries who are eligible to receive benefits from a company's employee benefit plan. 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 out-of-pocket expenses n. moneys paid directly for necessary items by a contractor, trustee, executor, administrator or any person responsible to cover expenses not detailed by agreement. , but such statements ignore that participants pay for the services out of their investments. The Department of Labor (DOL DOL - Display Oriented Language. Subsystem of DOCUS. Sammet 1969, p.678. ) 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. * Don't allow a provider to begin the installation process prior to delivery of the full contract. Frequently, enrollment meetings are held before the contract is delivered and signed. This benefits the provider by making it awkward for the employer to back out. * Examine unspecified "recurring re·cur intr.v. re·curred, re·cur·ring, re·curs 1. To happen, come up, or show up again or repeatedly. 2. To return to one's attention or memory. 3. To return in thought or discourse. charges." Often, marketing materials or fund information pages will say, "the reported past performance does not reflect the annuity's mortality and expense risk charge Mortality And Expense Risk Charge A variable annuity fee included in certain annuity or insurance products which serves to compensate the insurance company for various risks it assumes under the annuity contract. and other recurring charges." Employers should determine what the recurring charges are and what the impact of such charges is on the plan and participant holdings over time. * Watch out for onerous surrender charges Surrender Charge A fee levied on a life insurance policyholder upon cancellation of his or her life insurance policy. The fee is used to cover the costs of keeping the insurance policy on the insurance provider's books. . Surrender charges lock a plan sponsor into a plan, regardless of plan performance or poor service. Surrender charges often start at 5% and decrease by 1% each year, finally disappearing after five years. The charges can make it extremely costly for a company to change plan providers down the road. * Get a written explanation of fund expense ratios. Funds may be labeled "no-load" when they carry no front-end or back-end sales charge Sales Charge A commission or fee paid by an investor at the time of purchasing mutual fund shares. The charge is paid to a mutual fund salesperson or financial advisor and is intended to provide compensation for the financial salesperson's efforts in assisting their client select , but some plan providers use "no-load" funds that have higher-than-average expense ratios. A fund's expense ratio in your proposal may be, for instance, 1.06%. But when you check that fund's expense ratio on the fund company's Web site, you may find the same fund has a maximum expense ratio of 2.35%. Ken Weber is the president of Weber Asset Management, Inc., Lake Success, N.Y., www.weberasset.com. |
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