How to Spot Hidden Provider Costs

December 20, 2012 ( - Plan sponsors can avoid paying hidden provider costs by asking detailed questions.

By Corie Russell | December 20, 2012
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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 Securian Retirement.

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 information.


  •  Game #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.

What 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.