December 20, 2012 (PLANSPONSOR.com) - Plan sponsors can avoid paying hidden
provider costs by asking detailed questions.
The Department of Labor’s (DOL’s) 408(b)(2) regulation requires
retirement plan providers to give plan sponsors information about the costs
associated with recordkeeping and administering their 401(k) plans. Employers
now have the means to fulfill their fiduciary duty in understanding the true cost
of plans, and some may consider changing providers as a result.
But sponsors should beware when evaluating other potential providers
that hidden costs may exist. “When plan providers submit proposals for a company’s
retirement plan business, they may not be clear about the revenue they receive
from the companies that provide the investments and the actual cost of services
provided with the plan,” said Brandon Bellin, senior associate actuary at
At the time of the proposal, there is no obligation for providers to
show 408(b)(2) information—rather, the information may be provided at the point
of signing the provider documents, Bellin told PLANSPONSOR.
Bellin explained the “games” providers can play with hidden costs, and
the questions plan sponsors and advisers can ask to ensure they have the proper
#1: Revenue sharing.
Retirement plan providers receive payments, called revenue sharing, from
investment companies for including their funds in the provider’s investment selection.
Providers may show plan sponsors initial proposals that include investment
options with low revenue sharing, and therefore lower total cost, implying they
are less expensive and a good value. Later, the provider may suggest a “better”
lineup that pays higher revenue sharing and drives up plan costs.
to ask: Does your pricing depend on the investments chosen? If the provider says yes, that is a warning sign
that it makes more money on certain investments than others, Bellin explained.