How to spot hidden fees in retirement plans, which drag performance down

Hidden fees are not only common; they essentially help run the entire retirement plan services industry. But these fees aren’t easy to find, even for the trained professional in the industry, let alone a busy business owner or manager.

“After consulting with thousands of employers regarding their retirement plans over the years, I’ve learned that rarely, if ever, do plan sponsors read and understand how all of the fees are charged and to whom,” says Robert Yelenovsky, vice president and manager of Fragasso Retirement Plan Advisors.

Smart Business spoke with Yelenovsky about what you need to know about hidden fees and revenue sharing arrangements.

What’s an example of hidden fees or revenue sharing arrangements?

The plan’s mutual funds — or sub-advised annuity funds if it’s an insurance company plan — have expense ratios, which help pay for asset management, administration, operations, sales and marketing. The portion that covers the account service and sales costs, called 12b-1 fees, may be used to pay the broker a commission, or paid directly to the record-keeper to offset his or her costs.

These kinds of investment expenses can be a burden on the plan and become a drag on participants’ retirement goals.

Does it matter what type of plan you have?

Not really. Whether you have a 401(k), 403(b) or 457 plan, you can expect fees to be part of the overall plan and participant cost.

Didn’t the new government rules address this problem?

The latest fee disclosure rules made an attempt to address the problem of hidden fees. The lobbying efforts, however, of those with the most risk from transparent fee disclosure, such as big banks, big insurance, big fund companies and high-paid commissioned brokers who often take a 1 percent commission upfront to move a plan to a new provider — that means a $50,000 commission if the company has a $5 million plan — caused the Department of Labor to fall short of full transparency.

The rules that came out were a watered down version of the original proposal.

Now, they’re making another attempt, but these newer proposed rules still will likely fall short of really helping both the plan sponsor and participant understand all fees associated with a retirement plan.

What’s the best way to ensure you don’t fall victim to these kinds of mistakes?

Read all of the documentation provided, such as initial sales agreements and all disclosure notices. Ask for a review to ensure you have a good understanding of all associated fees. As a fiduciary, plan sponsors need to make sure plan fees are ‘reasonable;’ you must first understand all fees before you can decide if they are reasonable.

You need to ask specific questions or give instructions to the broker who is paid either by the plan provider or by the plan, such as:

  • Ask for a list of all fees, commissions and ongoing revenues paid to all companies and/or individuals who provide services to the plan in any capacity. There are more than 20 different types of fees and charges to both the plan and its participants. Get to know what they are.
  • Ask for a list of rebates or revenue sharing arrangements between any parties who provide plan services, and specifically who gets what revenue and when.
  • Ask the adviser if he or she is acting under a suitability or fiduciary capacity standard. If he or she is a fiduciary, get it in writing and signed by an officer of the firm as to what specific fiduciary capacity he or she is covering, i.e., to the plan or just to the selection of funds in the plan. There is a big difference.

Is there anything else you’d like to share?

In sponsoring a retirement program, so the company can provide a tax-efficient vehicle to help owners, officers and employees save for retirement, you’ve taken on a fiduciary role. You assume both professional and personal liability for not only the decisions you make, but also for those others may make as well.

Take time to understand your role as a fiduciary, and what is expected of you. You always have the option of seeking help, such as hiring a registered investment adviser to take on the role of co-fiduciary, and share both the risk and the reward, instead of a commission check.

Insights Wealth Management is brought to you by Fragasso Financial Advisors