There is no such thing as a free lunch. The 401(k) has been marketed to plan sponsors with no administration costs. Plan participants will learn how much ‘free’ costs when the new fee disclosure regulations become effective later this year.

“Plan sponsor’s awareness of fiduciary responsibilityand risk, especially as it pertains to fee oversight, is at an all-time high,” according to Bill McClain, a principal in Mercer’s Seattle office.  These new fee disclosure regulations will give participants “sticker shock,” McClain said.In his new paper, “Fee Allocation: Trends and Strategy,” released December 2011, McClain

Bill McClain of Mercer

noted that the new DOL fee and revenue sharing disclosures have created two developing trends,  One is fostering an alternative method for calculating administrative fees to a per-participant approach versus the second, older method of basing fees on plan assets.

Traditionally, plan sponsors did not focus on administrative fees since the revenue sharing payments made by the mutual funds or plan recordkeepers, which administered the plans, were applied to cover administrative expenses.  But this practice is now being scrutinized, McClain said.

“Plan sponsors are openly asking whether a participant with a $400,000 401(k) balance should pay ten times more in administrative fees than another participant with a $40,000 balance in the same plan,” he said.  This does not make sense since it costs the same to administer both accounts, regardless of their account balances.

Fees….Fees are not created equally. This issue will become center stage for all 401(k) plans.

Please comment or call to discuss how this affects you and your company.