How to understand and manage the costs associated with your retirement plan

Gene Craciun, Financial Planner, Skylight Financial Group

Participants in 401(k) plans have always paid fees, but many don’t realize they are doing so.

While quarterly statements contain information about net gains and losses, they don’t currently break out how fees impact those figures. However, that is changing with second-quarter statements in 2012. Employers need to understand those fees and begin educating employees about them now, says Gene Craciun, a financial planner at Skylight Financial Group.

“With 401(k)s, the biggest item is disclosure, not only at the plan sponsor/employer level but at the employee level,” says Craciun. “The employer has a fiduciary responsibility to understand the fees of the plan and communicate that information to the plan participants.

That needs to start now, because I think people will be surprised when they see additional information on their statements that shows how the stated earnings were calculated and that there are fees involved.”

Smart Business spoke with Craciun about how to understand and manage the costs associated with your company’s retirement plan, and how to prepare for the coming change.

How are statements going to change?

Statements will begin to break out fees. There has always been information about the beginning balance, what you’ve contributed and what you’ve earned or lost for that quarter as a net number. But many people have the perception that there is no cost involved with that investment.

The new statements will be broken out into gross performance, the investment level fee, if there was any plan level fee taken out and then the net number. It’s going to expand that calculation and show the participant how it arrived at that net number, rather than just showing the net number you see today.

What steps should employers take to prepare for the change?

Employers need to begin communicating these changes to employees so that when they see those fees on their statements, they won’t panic. You need to have a plan of attack to help participants understand the fees. You also need to make sure the fees are reasonable.

If your employees see transactions on their statements that they’ve never seen before, they are going to be confused. Your plan adviser can present a formal session to educate employees and physically walk them through the statement, showing them what it will look like, what each section means and how to read it. Take a preemptive approach so your employees are not surprised when they see something new on their account and question why money is being taken out.

Why should an employer be concerned about fees?

As the fiduciary, the employer has an obligation to make sure that fees are adequate and reasonable, and have supporting documentation that shows those fees are regularly being reviewed. Just because one plan might be more expensive than another does not mean it’s a poor choice, but you have to ensure the fees are reasonable for the level of service.

The fiduciary may not be aware that there is an additional asset fee in addition to the cost of the mutual fund. It may not know the share class of mutual funds the plan is using, and that it may be able to qualify for a less expensive class.

Even if you are satisfied with your plan vendor, you should be doing an overall cost analysis/benchmark cost analysis every three to five years to assess fees.

Who should an employer work with to perform a cost analysis?

You need to work with someone who is not just an investment specialist but a retirement specialist. The market has become a niche specialty, so if you’re using someone who is not specifically working in the retirement plan marketplace, you could be left behind.

Too many companies use someone such as a stockbroker to handle their 401(k) because that person handles their portfolio. But has that person talked to you about how to educate your employees to make sure you are meeting your fiduciary obligations? Is that person reviewing your plan not only for performance but for fee and cost structure? Those are the items that need to be tapped into, and while investment advisers know the basics of 401(k)s, they don’t know all the details. You can hurt yourself financially as a company if you don’t do this the right way.

How can a specialized adviser help lower plan fees?

The investment vehicles for 401(k)s are usually mutual funds, which pay subtransfer fees for revenue sharing back to the 401(k) provider. For example, if the mutual fund charges a fee of 1.25 percent, it will pay a portion to the company managing the plan as an offset.

With the asset fee, vendors base the fee on plan size. If your plan is new, with a small amount of assets, the vendor won’t make much money, so it charges an additional asset fee. That could be a fraction of a percent or a percent on top of the published investment costs, and participants incur that cost to help pay for the plan.

In theory, as the plan grows, that asset charge should drop. If you started with 100 employees and have $1 million in the plan, and now you have 125 employees with $5 million, the plan should become less expensive. But often, the plan sponsor and the adviser aren’t aware they can go back to the vendor to negotiate a lower fee.

Every couple of years, as your plan grows, go back to negotiate that fee. That’s why benchmarking cost analysis makes sense; it gives you leverage to ask for lower fees.

Eugen Craciun is a financial planner at Skylight Financial Group. Reach him at (440) 397-5770 or [email protected] Eugen Craciun is a registered representative of and offers securities, investment advisory and financial planning services through MML Investors Services, LLC. Member SIPC. OSJ: 1660 W. 2nd St., Ste. 850, Cleveland, OH, 44113, (216) 621-5680. CRN201310-153299