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Lifting the Lid on 401(k) Fees

The coming mandatory disclosure of plan fees could give participants a nasty shock.

Russ Banham, CFO Magazine
December 1, 2011

Another perspective...

If your organization's leadership believes employees' trust in the organization's leaders is essential to the organization's success, you may have an other problem with fee disclosure. That's because 70 percent of employees, according to a recent AARP survey, believe 401(k)s are free. (A majority of CFOs believe most employees are aware of the fees.) Next summer, many employees will be learning for the first time that the organization has allowed their money to be taken to pay for various parts of the 'organization's' 401(k) plan. From their perspective, the organization has allowed them to believe the 401(k) plan is free by not telling them that it wasn't. There may be a backlash. Employees might be upset because of the size of the fees -- but also because the organization never told them about fees before now. If employees' trust is highly valued, and if fees haven't been communicated clearly, it's time to talk about communication strategy with your CEO and HR leaders. As part of the required fee disclosure, there are at least three other things to address. You may want to talk with your ERISA counsel, recordkeeper/fund providers and other members of your staff to help prepare the communication. 1. Why didn't you communicate this before now? This may be the hardest question to answer. You should have a good, or at least honest, reason. Maybe you'll decide to say something like 'historically the mutual fund/retirement industry, for whatever reasons, has not made prices abundantly clear. Recently, the government has required the industry to provide more and clearer fee information.' (It would be good to have a better reason.) You may also want to offer an apology. Something like 'We are sorry that our company did not do a better job of making employees aware'. 2. What should employees do with the fee information? Unless you make it clear, employees could believe that the purpose of the disclosure is to endorse the lowest priced fund. So you may want to mention, 'low fees are important, but the lowest-priced funds may or may not be best for you. It's like any purchase; sometimes paying more for a fund that better matches your needs could be worth the extra cost.' 3. What will the organization do to ensure this won't happen again? To show employees you're intent on addressing all their questions about fees and the funds, you may want to conduct employee meetings (in person and via video). Be sure representative from the funds and the 401(k) administrator are there and play a major role. Also sure to explain what things you intend to do to ensure that all the information about the 401(k) is being made available to employees. Dennis Ackley (dennisackley.com)

Posted by Dennis Ackley | December 01, 2011 04:43 pm

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