What Your 401(k) Record-keeper & Advisor Should Be Telling You
As I work with new retirement plan fiduciaries, they often tell me they know what they’re paying in retirement plan fees because their prior providers informed them. I hate to be the bearer of bad news, but this is often not the case.
Their assumption is driven by the U.S. Department of Labor (DOL) final rule, effective in 2012, requiring retirement plan fees to be disclosed to 401(k) employers and their employees. The passing of these regulations, 408(b)(2) and 404(a)(5), under the Employee Retirement Income Security Act (ERISA) has led many to assume all plan costs are openly disclosed, discussed and accounted for as part of the annual fee disclosure process.
The Service Provider and Participant-Level Fee Disclosures of 2012 pertain to disclosure of assets owned by the plan. Unfortunately, investment in insurance company “fixed accounts” often passes the ownership of those assets off to the insurance company itself, not the plan trust or members. Investors in such accounts are merely creditors to the insurance company and have a right to future payment of those assets.
The result of passing this ownership is that insurance companies do not need to disclose the revenue associated with these investments to plan fiduciaries or their employees. Insurance companies may be pocketing two, three, or even four percent in hidden revenue on these investments without their clients’ knowledge.
Consider this: If a bond mutual fund or equity mutual fund were charging a fee of two, three, or four percent, would it fit the criteria of your Investment Policy Statement?
Furthermore, these so-called “safe” investments may actually be subject to the default proceeds of an insurance company. In essence, they are similar to owning an insurance company bond, but they often pay a much lower yield. As a fiduciary, do you feel comfortable making your employees’ most conservative investment subject to creditors of an insurance company?
Finally, these investments will often come with withdrawal restrictions or penalties called Market Value Adjustments (MVA’s). The financial formulas used to calculate these penalties are complex and far too detailed to explain here. That said, a general rule of thumb is that the penalties increase in tandem with interest rate increases. With our current interest rate environment, there isn’t a better time to start addressing your long-term liquidity liability.
Contact a M3 Financial Retirement Plan Consultant to learn more.
Investment advisory services offered through M3 Financial, a registered investment advisor and separate entity from M3 Insurance.