The Ugly Little Secret About 401(k) Fee Disclosures

If you’re an HR leader who believes that continuing to earn and strengthen the trust employees have in the organization’s leaders is essential to the organization’s success, you may have a problem.

The Department of Labor’s required 401(k) fee communication next summer could be an employee-trust damaging event. That’s because more than 70 percent of employees, according to a recent AARP survey, believe 401(k)s are free.

If employee trust is highly valued, and if fees haven’t been communicated clearly, it’s time to talk with your CEO.

The CEO needs to be aware that many employees will be learning for the first time that the organization has allowed their money to be taken to pay for various parts of the 401(k) plan.

Here’s the ugly part: From the employees’ perspective, the organization has allowed them to believe the 401(k) plan is free by not telling them that it wasn’t. So there may be a backlash. Employees could be upset because of the size of the fees – but also because the organization never told them about fees before now.

As part of the fee disclosure, there are at least three other things to address. You may want to talk with your ERISA counsel, recordkeeper/fund providers and other members of your staff to help prepare the communication.

1. Why are you telling employees now – and not before?

This may be the hardest question to answer.

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You should have a good, or at least honest, reason. Maybe you’ll decide to say something like…‘historically the mutual fund/retirement industry, for whatever reasons, has not made prices abundantly clear. Recently, the government has required the industry to provide more and clearer fee information.’ It would be nice to have a better reason.

You may also want to offer an apology. Something like…‘We are sorry that our company did not do a better job of making employees aware that they have been paying for many of the 401(k) plan services.’

2. What should employees do with the fee information?

Unless you tell them, employees could believe that the purpose of the disclosure is to endorse the lowest priced fund. So you may want to mention, “low fees are important, but the lowest-priced funds may or may not be best for you. It’s like any purchase; sometimes paying a little more for a fund that better matches your needs could be worth the extra cost.”

3. What will the organization do to ensure this won’t happen again?

To show employees you’re intent on addressing all their questions about fees and the funds, you may want to conduct employee meetings (in person and via video). Be sure representative from the funds and the 401(k) administrator are there and play a major role. Also sure to explain what things you intend to do to ensure that all the information about the 401(k) is being made available to employees.