What’s a “hidden” 401(k) fee? As the name suggests, it’s likely one that’s not readily disclosed or easily accessible. If you use this definition, almost all fees are hidden because they’re too hard to find.
“The plan sponsor/employer does receive an annual fee disclosure,” says Stuart Robertson, CEO of ShareBuilder 401k in Seattle. “However, this can still be a lot to go through to ensure you understand.”
To address ongoing concerns about fee transparency relating to 401(k) plans, in 2010 the Department of Labor (DOL) adopted two new rules “requiring plan administrators to disclose certain plan and investment-related information, including fee and expense information, to participants and beneficiaries in participant-directed individual account plans.” One rule was designed to help plan participants, the other for helping plan sponsors.
“Retirement plan regulations require that 401(k) plans disclose fee information,” says Hannah Whatley, Financial Advisor at Rather & Kittrell Capital Management in Knoxville, Tennessee. “For plan participants, this is found on 404(a)(5) participant fee disclosures. For plan sponsors, this is found on 408(b)(2) disclosures.”
In theory, you would want to look at these disclosures (at least as a start) to begin to determine whether your plan is in for a “fee surprise.”
“The fee disclosure form is the best place to look,” says Eric Phillips, Director of Financial Partnerships at Human Interest in San Francisco. “Make sure to refer to the list of transaction fees associated with your 401(k) plan for both admins and participants.”
The 404(a)(5) disclosure is by far the easier of the two required disclosures for you to get your hands on. It’s the one designed for plan participants and it should be delivered on a periodic basis. It will include all the fees reported by your 401(k) plan’s various service providers to your company.
“A 404(a)(5) disclosure should describe the general plan administrative fees and expenses and explain how they are allocated to plan participants,” says Thomas J. Scalici, Chief Executive Officer at Cornerstone Advisors Asset Management in Bethlehem, Pennsylvania. “These include costs for recordkeeping, legal, advisory, and accounting services.”
While a little bit harder to read, the 408(b)(2) disclosure that goes directly to the plan sponsor (i.e., your company) contains far greater detail. Unfortunately, the DOL provided no template in the final Rule for this fee disclosure. As a result, there’s no way to say for certain what is disclosed, where it’s disclosed and how to interpret the data that is disclosed.
“Employers and employees who seek clarity on plan fees should start with the 408(b)(2) fee disclosure,” says J. Marcel Louimeus, Founder and Managing Principal at EXOS Wealth Strategies, LLC in The Woodlands, Texas. “Depending on the 401(k) provider, the fee disclosure may be easily accessible through the online portal or may require that a request be sent to the provider from the Plan Administrator via email requesting access to the fee disclosure. These fee disclosures can be extremely difficult to comprehend depending on provider and plan platform.”
Here’s the problem with all these DOL required disclosures: there’s no guarantee you’ll see all the fees.
The DOL, in its final rule, says, “the Department will not take enforcement action against any plan administrator who reasonably determines it would be impracticable, or impossible, to obtain the information necessary to meet the disclosure requirements” for certain specific investments.
The most effective way to uncover any potentially “hidden” fees is to go directly to the documents provided by the investment companies themselves.
“The best place for the plan participants or sponsors to look for hidden fees would be in the prospectus of the plans themselves,” says Josh Simpson, Vice President of Operations and Investment Adviser with Lake Advisory Group in Lady Lake, Florida. “The Securities and Exchange Commission requires all fees within 401(k)s to be disclosed in the prospectus and the DOL requires a copy of each fund’s prospectus to be made available to all plan participants. It may be tedious reading that cures insomnia, but it could also help you to uncover the fees within your plan that you need to know about.”
Unlike the DOL, the SEC is quite exacting in its required fee disclosures for mutual fund prospectuses. You’ll find a table of “Shareholder Fees (fees paid directly from your investment)” immediately upon opening your fund’s prospectus. These are required to be listed in the following order and identified as a percentage of your total investment:
Shareholder Fees (fees paid directly from your investment)
- Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of offering price)
- Maximum Deferred Sales Charge (Load) (as a percentage of _____)
- Maximum Sales Charge (Load) Imposed on Reinvested Dividends [and other Distributions] (as a percentage of _____)
- Redemption Fee (as a percentage of amount redeemed, if applicable)
- Exchange Fee
- Maximum Account Fee
Note, the fees of a mutual fund are different than the fund’s operating expense (which you might recognize by its more familiar name “expense ratio”). That being said, just below the “Shareholder Fees” table is a table of “Annual Fund Operating Expenses.” Among these expenses is something called “Distribution [and/or Service] (12b-1) Fees.”
The SEC has recently been going after abuses of 12b-1 fees and also a similar kind of fee called “revenue sharing.” Because revenue sharing fees are not usually disclosed in fund prospectuses, these might be classified as truly “hidden” fees.
Bear in mind, identifying fees is one thing. Identifying their significance is quite another.
“The DOL says fees must be viewed in relation to the value provided,” says Mohamed A. Desoky, Academic Dean at SKEMA US Inc. in Raleigh, North Carolina. “How would you measure value?”
Desoky says it’s measured by “annual return, less any fees (ideally on a % basis),” but value doesn’t have to be measured only by numbers.