Last year, we wrote an article about a growing number of websites that claim to use technology to help sponsors or participants understand or uncover 401(k) fees. At the time, we were not fans of any of these sites. We wrote “To fill the gaps in the two DOL fee regulations, private company websites have begun to spring up to meet the underserved needs of sponsors and participants. I try to stay current with these new offerings. So far, no one has managed to pull the sword from the stone. Efforts range from potentially helpful in providing some basic information to downright misleading. All have significant shortcomings that anyone using the sites should be aware before making any decisions based on the information reported.”
Unfortunately, our opinion of these websites has not changed – they are generally useless due to the limitations of their underlying data. That makes these sites dangerous for 401(k) participants and fiduciaries to rely upon when evaluating plan fees.
Self-help icon Tony Robbins to the rescue? Not so much
I wanted to write again about the efficacy of today’s online 401(k) fee analyzers because of an article I read in Entrepreneur magazine by Tony Robbins. Best known as a self-help guru, Tony recently wrote a book called “Money, Master the Game” where he shares his tips for investing, including saving for retirement. In his Entrepreneur article, Tony mentions a “fee checker” he says readers should check out “to assess your company's plan.”
What Tony fails to mention is the significant limitations of the checker he’s promoting, which in my opinion, render the tool useless. He also fails to mention that he’s a partner in the firm offering the fee checker.
The problem is Form 5500 data
Tony Robbins’ fee analyzer relies on Form 5500 information. For those that don’t know, a Form 5500 is like a tax return for retirement plans. It reports information about a plan’s financial condition, investments and operations to the IRS, DOL and PBGC. All plans with at least one non-owner participant must file Form 5500 annually. You can find a copy of your plan’s latest Form 5500 filings on the DOL website.
Form 5500s have very limited, if any, fee information. That makes them a terrible source for a fee analyzer. The extent of available fee information depends upon whether a plan is a “small plan” or “large plan” Form 5500 filer. A plan must file a large plan Form 5500 if it covers at least 100 participants.
Small plan Form 5500s only disclose fees paid directly by plan sponsor or deducted from participant accounts. They do not disclose the amount of fees paid from investments (e.g., revenue sharing or wrap fees). These fees are considered “indirect compensation.”
Large plan 5500 may disclose indirect compensation on its Schedule C if that compensation is not considered “eligible” indirect compensation. In my experience, most providers that receive indirect compensation consider their compensation “eligible” for purposes of Schedule C and don’t disclose it.
Investment expense ratios are not disclosed by either the large plan or small plan Form 5500
What’s the value of fee analyzers that fail to consider investment expenses?
That’s kind of my point of this blog – there’s no value in fee analyzers that fail to consider investment expenses. I’m sure these analyzers are an excellent marketing hook for their sponsors – most people are happy to give their contact information in return for an analysis of their plan fees – but they simply don’t offer meaningful information.
What’s the alternative?
Unfortunately, there is no “Google-esque” shortcut for evaluating the reasonableness of retirement plan fees, regardless of what Tony Robbins or other companies offering free online fee analyzers might tell you.
Instead, fiduciaries must take the time to understand the 408(b)(2) disclosures given to them by their plan’s service provider(s) and benchmark the fees disclosed against competing providers. This can be time consuming, but it’s the only way for fiduciaries to appropriately evaluate 401(k) plan fees.
Participants also need to understand plan fees and expenses. The corrosive effect of excessive fees can make the cost of ignorance too great. The best source for participants to find plan fee information is their annual 404a-5 fee disclosure. If a participant thinks they’re paying too much, they should say something to their employer.