401(k) Plans Fees and Expenses

By Fred Reish and Bruce Ashton

In late 1997, the DOL initiated an inquiry into the fees paid by 401(k) plans to investment and service providers. The DOL's concerns were: (1) the extent to which the fees are affecting the value of participant accounts by reducing the rate of return; (2) whether plan fiduciaries are conducting appropriate levels of inquiry (or "due diligence") to understand and evaluate the fees being charged; (3) whether service and investment providers are meeting their disclosure obligations under ERISA.

While the inquiry is ongoing, it has already produced a DOL pamphlet entitled "A Look at 401(k) Plan Fees" and a study entitled "Study of 401(k) Plan Fees and Expenses." (Both publications can be obtained from the Web site of the DOL's Pension and Welfare Benefits Administration (PWBA) at http://www.dol.gov/dol/pwba or by calling 1-800-998-7542.) In addition to holding hearings, the DOL initiated 60 field investigations on plan fees and expenses. The authors understand that out of this sample group, the DOL has identified 16 cases where it believes excessive fees may have been charged. These activities have heightened the awareness of plan sponsors and fiduciaries regarding their obligations to investigate and monitor the fees in 401(k) plans.

The DOL pamphlet is directed at participants. It describes the types of fees and suggests 10 questions that participants should ask their employers about their 401(k) plans. These questions are useful for plan fiduciaries, as well as participants, because they are a convenient checklist of issues for the fiduciaries. Employers and plan fiduciaries should be able to answer those questions and should have due diligence files that document the answers. Third party administrators should also be familiar with these questions because they may be raised by their clients, and investment providers should volunteer the information needed to answer the questions and should be able to respond clearly and concisely if they are raised by the plan sponsor.

Listed below are two of the questions with our comments:

(1) "Do you have all available documentation about investment choices under your plan and the fees charged to your plan?" A related question asks: "Do any of the investment options include any fees related to specific investments, such as 12b-1 fees, insurance charges or surrender fees, and what do they cover?"

Comment: Plan sponsors and fiduciaries have an obligation to investigate and fully understand all costs associated with a particular investment option, not just the commissions being charged but any asset-based charges and other fees and expenses built into the investment. The information documenting their investigation should be maintained in due diligence files.

(2) "If administrative services are paid separately from investment management fees, are they paid for by the plan, your employer or are they shared?"

Comment: This question addresses whether the costs will affect the rate of return to the participants. The employer and fiduciaries must understand the impact of the expenses and also have proper documentation of the investigation and decisions.

Employers and fiduciaries of 401(k) plans should review the DOL's 10 questions, analyze their plan investments and services to evaluate the reasonableness of the expenses, and document that work in their due diligence files.