Fidelity 401(k) Price-Fixing Scheme Cost Retirement Savers Plenty

Bigger does not necessarily mean better. The Wall Street bullies have taking advantage of investors for far too long. Relying on Wall Street to take the best interest of the client first is a very dngerous strategy.

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Employers that hire Fidelity to provide 401(k) administration have always been told they can freely choose between Fidelity and non-Fidelity funds as investment options.  In my experience, freedom to choose, in industry parlance “open architecture,” rarely truly exists. 401(k) plan administrators or record-keepers almost always attempt to steer clients into proprietary products and services. The challenge for employers and participants is to understand the unique devices different plan administrators employ to lead clients into their own funds and the related dangers.There’s a lot of blame to go around for the failure of 401(k)s to achieve their even limited potential to provide retirement security to workers. Investors should not rush to conclude that they or unforeseen market forces are entirely to blame for the poor results of their 401(k) accounts.  I can assure you that there have been longstanding 401(k) abuses that have been concealed from employers and participants by the industry. Even regulators have failed to grasp the extent of industry skimming.

In a truly competitive environment, with the requisite transparency, Fidelity’s policy of capping 401(k) revenue sharing would have had economic consequences. The fact that it did not reveals that in the retirement plan industry, pricing machinations are not readily apparent.

Plan sponsors should begin to realize that the ‘big’ providers do not have their best interest in mind when making recommendations.

Please comment or call to discuss how this might affect you and your organization.

Posted via email from Curated 401k Plan Content

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Why your employees may balk at their 401(k) fees

Most plan sponsors are unaware of the scope of fees that the plan participants pay for their 401(k) plan. This will be a game changer for many [lan providers as pln participants become aware of fees later this year. Remember higher fees result in lower returns and lower retirement accounts. Not all fees are created equal, in that some add no value to the plan.

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The individuals responsible for the plan will need to first understand the fees. Here are some of the main types of fees that 401(k) providers commonly charge:●Recordkeeping and administrative fees: This is what the provider charges to keep track of participant accounts and process their transactions. These fees also typically include services to keep the retirement plan in compliance.

●Investment adviser fees: Some plans have an independent adviser select and monitor the plan’s investment options.  These fees cover the adviser’s services.

●Expense ratio: This will usually be the largest component of plan fees. Most plans utilize mutual funds that will have expenses associated with them. Investment companies charge a fee to run the funds, and they generally take a certain percentage off the top. But built in to those fees can be other fees paid to third parties, arrangements loosely known as revenue sharing.

Many plan sponsors are unaware of the fees charged their employees. Many believe that their plan is free with no administrative costs to them. This will become clear when the new regulations become effective later this year.

Please comment or call to discuss how your plan compares to your peers.

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Plan Sponsors Need to Be More Aware of Administrative Fees

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When the new fee disclosure rules become effective in 2012 plan participants will learn what they are paying for in their retirement plan. An independent analysis of your plan will help determine how and if the plan should pay for administrative fees.

“Direct contribution plans have a lot of moving pieces that can be relatively complex,” Lucas said. “They need to get their arms around these fees. They need to know how they are paying these fees. The plan sponsoralso needs to be able to explain why some are paying fees and some are not.”Other results from the survey show 37.5% of sponsors that credit revenue sharing back to plan participants do not know how this happens. Also, more than 16% of plan sponsors are uncertain if their plan offers an ERISA (expense reimbursement) account.

The survey also found the leading compliance concern among plan sponsors was the lack of clarity on how to comply with the U.S. Department of Labor’s 408(b)2 fee disclosure regulations; however, coming in a strong second was no concerns at all about compliance. Lucas said she is under the impression that plan sponsors who lack concern in this matter are looking to their recordkeepers to ensure compliance

Plan sponsors should be more concerned with the quality of retirement plan they provide for employees. Many rely on their service provider with mixed results often poor.

Please comment or call to discuss how the new regualtions might affect your plan.

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Broker-dealers up in arms 401(k) fee disclosure

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This cash cow is about to end for many broker dealers. The writer of ERISA never intended for the 401(k) plan to be utilized as it is today. It is used more as a specualtion tool rather than a retirement savings vehicle.

Some industry observers say the brokerageindustry only has itself to blame for the fact that its compensation arrangements are so complicated.”This is a reflection of the broker-dealers choosing to operate in an environment where they charge everyone differently for identical services,” said Mercer Bullard, an associate professor of law at the University of Mississippi. “The industry… created the complexity and now they are complaining about having to disclose it.”

Revenue sharing agreements, by which mutual funds share revenue with broker-dealers, are just a part of doing business, said Brian Graff, CEO and executive director of ASPPA.

“If everyone paid the same amount of compensation for everything, it would be less complicated but… that’s now how the free market operates,” Graff said.

Brokers are also reluctant to disclose how much different fund families are paying them to be on their platforms. “No one wants to air their dirty laundry,” said one brokerage executive, who declined to be identified because the issue is sensitive for his firm. “There is a lot of vulnerability.”

Right now, each broker-dealer is taking a different approach in its efforts to comply, officials said.

Some firms are opting for a “phone book approach” to the disclosure, which means they are listing the fee they receive for any investment option available to investors with self-directed accounts.

Other firms are disclosing a possible range of compensation for each fund the firm offers.

Confusion is the brokerage industry’s most powerful weapon. They are able to generate huge amounts of cash flow at the investors expense. This must stop particularly in retirement accounts.

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

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New 401(k) Revenue Sharing and Fee Disclosures Could Re-Shape DC Plans

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.

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The Free 401(k) and the Prohibited Transaction

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Regulation 408(b)2 regarding fee disclosure will end the free 401(k) for plan sponsors. Employees will be informed of what fees thet are paying and to whom. What questions will they ask when they realize their employer is paying anything for this benefit?

For many plans it is very common for the adviser to work one-on-one with participants and provide advice recommendations.  Let’s say that the adviser recommended an actively managed fund that pays revenue sharing, over an S&P 500 Index fund that does not.  While we all know there may be very valid reasons to do so, but ERISA is very clear that fiduciaries must act solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them.

By recommending a fund that pays revenue sharing over a fund that does not, that adviser (acting in a fiduciary capacity) has just influenced their own compensation, or their firms, thus creating a prohibited transaction.  Therefore, what started out as a qualified financial professional providing assistance to a plan participant, ended up in creating a prohibited transaction for the plan.

In my experience, most plan sponsors do not realize the risk they are putting themselves and their plan in by entering into such arrangements.   This is where you can help them understand the inner-workings of the plan services and fee arrangements to help them from inadvertently creating a prohibited transaction.

Many plan sponsors are unexpectedly allowing the adviser to their plan to commit a prohibited transaction. This can and should be avoided, not only to protect the plan sponsor but also to protect the participant.

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

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