Disclosure not the Only Issue with 401(k) Plan Fees

February 3, 2009 (PLANSPONSOR.com) - While clear and complete disclosure of fees and costs can help 401(k) plan sponsors ensure that plan fees are not unreasonable for participants, disclosure alone is not sufficient.

So assert researchers for the Center for Retirement Research at Boston College in a new Issue in Brief. The researchers conclude that the structure of fees commonly used in 401(k) plans tends to transfer wealth among participants and can reduce the returns that participants earn on their savings.

In reviewing the structure of 401(k) plans, the researchers found that most plans charge participants a fee that is expressed as a percent of their assets.

Although this expense ratio often varies by type of asset, reflecting differences in the cost of managing the funds, it is otherwise constant, according to the report. The researchers say charging fees in this way does not allow participants to weigh the ben­efits against the actual costs of their plans' services.

In addition, the constant expense ratio transfers retirement wealth from accounts with higher balances to those with lower balances. The researchers point out that, other things equal, the fees collected from participants tend to be a constant proportion of the balances they hold in the plan, but some of the costs covered by these fees - administrative and sales costs, for example - are relatively constant for all participants, regardless of the size of their balances.

Participants with twice the balances of others do not necessarily incur twice the management cost, but they pay twice the management fee, which reduces the return credited to higher bal­ance accounts and boosts that on lower balance accounts.