The average person might be forgiven for associating the term 'Underworld' with gangsters, evildoers, and criminals. But, the truth is that one of the largest assets of US Households is also managed by one of the least transparent industries - cloaked in the guise of legal language, tons of paperwork, and hidden fees and charges.
US retirement assets were close to $18 Trillion in 2007, according to ICI, the trade association of the mutual fund industry. A large portion of these assets are managed by the big insurance companies, and for a lot of them, it has been business as usual. Although technological advancements have been made, the fees charged to participants are rarely disclosed, and plan employers have NO IDEA just how much they're paying for the service!
If you went out and bought a car, you know exactly how much it costs. There's a breakdown of the cost with taxes, extra fees, and other charges very clearly listed. Unfortunately, there's no law dictating that financial firms provide this clear cut breakdown for their 401(k) products. While some legislation has made it through, it's still up to the employer to take an active role in determining exactly how much he or she is being charged. Often, fees and charges are removed directly from the account, and participants don't receive a bill for these. As a result, they NEVER know how much they're being charged. In a recent post, I linked to a Bloomberg video that did some investigative reporting on this very subject.
So, what's a business owner to do to keep abreast of the situation? If you have a 401(k) plan or are thinking of sponsoring one, make sure you get a DETAILED ESTIMATE of all costs, fees, and expenses. The Department of Labor has created a worksheet for you to submit to financial service companies. Get bids from about 3-5 different firms. Have them fill it out and then compare the total costs to make sure you're looking at an apples-to-apples comparison for similar services. A copy of this worksheet can be accessed on the DOL's website at:
http://www.dol.gov/ebsa/pdf/401kfefm.pdf
If you have a current plan, send the form to them anyways. This will help satisfy your fiduciary obligations that require you to be aware of plan costs and to ensure that they're reasonable for the services provided.
It's preferable to have someone who's compensated on a fee basis manage your plan. If a broker is going to be paid a commission, is he going to put you in funds that perform better or that give him a higher payout? It's best to avoid such conflicts of interest. The more you learn about your plan, the better off you'll be. While you have many priorities as a business owner, ensuring you have a good 401(k) plan will not only mean you're paying reasonable fees, but also keeping your employees happy.
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