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Securian paper tells where to look for hidden fees and revenues to determine a plan’s bottom line cost
ST. PAUL, Minn.--(BUSINESS WIRE)--The US Department of Labor’s 408(b)(2) regulation requires retirement plan providers to provide details about all the costs associated with recordkeeping and administering their 401(k) plans. This means that employers who offer 401(k) plans as employee benefits should now have the means to fulfill their fiduciary obligation in understanding how much those plans really cost, at least with their current provider.
But what if the sponsor decides to evaluate other potential providers? Will they be able to determine and understand how much their plan will cost with another provider?
“When plan providers submit proposals for a company’s retirement plan business, they may not be clear about the revenue they receive from the companies that provide the investments and the actual cost of services provided with the plan,” said Brandon Bellin, FSA, CFA, senior associate actuary, Securian Retirement. Bellin wrote a paper about the “Proposal Games” providers play with their initial proposals.
Game #1: Revenue sharing. Retirement plan providers receive payments, called revenue sharing, from investment companies for including their funds in the provider’s investment array. Providers may show plan sponsors initial proposals that include investment options with low revenue sharing, and therefore lower total cost, implying they are less expensive and a good value. Later, the provider may suggest a “better” lineup that pays higher revenue sharing and drives up plan costs.
Game #2: Proprietary target date funds. Plan providers can generate additional revenue by offering target date funds from an affiliated asset manager. In these cases, investment management expenses can be unreasonably high for the underlying funds. For example, many target date funds that invest in passive index funds have expense ratios more typical of funds with active managers. This additional revenue allows the provider to make its base recordkeeping pricing appear lower.
Game #3: Managed accounts. For an additional fee, employees can purchase “professional management” services for managing the assets in their retirement accounts. These fees can be substantial and may exceed the actual cost of providing managed accounts, again allowing the provider to reduce base recordkeeping fees. Providers may even require employers to offer managed accounts to receive the “lower” pricing offered in the initial proposal.
“Plan sponsors who are unaware of the hidden revenues and fees associated with a particular retirement plan provider’s proposal put themselves at risk if they move their plans to that provider,” said Bellin. “It’s important that they demand full fee disclosure from any retirement plan provider and that they ask the provider to confirm that its revenue does not vary based on the investments chosen.”
Since 1880, Securian Financial Group and its affiliates have provided financial security for individuals and businesses in the form of insurance, investments and retirement plans. Now one of the nation’s largest financial services providers, it is the holding company parent of a group of companies that include Minnesota Life Insurance Company and Securian Life Insurance Company, a New York admitted insurer. Securian Retirement is a unit of Minnesota Life.
Insurance products are issued by Minnesota Life Insurance Company in all states except New York. In New York, products are issued by Securian Life Insurance Company, a New York admitted insurer. Both companies are headquartered in Saint Paul, MN. Product availability and features may vary by state. Each insurer is solely responsible for the financial obligations under the policies or contracts it issues.
© 2005- Securian Financial Group, Inc. All rights reserved.