Misbehaving Savings - Part 4 of 5

Responding to Intriguing Participant Requests
Nov. 2008 – Fee Disclosure Follies

During my three-plus decades in plan sponsor roles (1979-2010), I often studied workers’ savings elections and took the opportunity to frequently ask them to explain their contribution, investment and withdrawal decisions. I shared a few of those encounters – the first, second and third – in previous blog posts.

Prior to Oct. 1, 2008, we charged 10 basis points to cover the administrative costs of operating the 401(k) plan. Different levels of administrative costs had been charged to participants in the form of a basis-point charge for decades.

Effective Oct. 1, 2008, we changed administrative fees to a per capita charge of $3/month, plus a variety of transaction fees on loans, any elective distribution, QDRO’s, etc. Some transactions, like mandatory minimum required distributions, did not have a fee.

We made this change largely because of the increased administrative costs the plan had incurred from adopting automatic enrollment features. For example, automatic enrollment increased the number of participants by almost 25 percent with a commensurate increase in administrative processing and costs. As a result, we needed to increase administrative fees to cover the increased costs. Had we continued to use a basis point methodology, the majority of the administrative cost incurred on behalf of new participants would be borne by longer-term participants with a lifetime of savings in the plan.

In the interest of full disclosure, we notified each active, term-vested and retired participant and every beneficiary. That notification identified and highlighted the change from 10 basis points to approximately $3/month, around $36/year, plus any individual transaction fees.

This action also required a change in how fees were communicated. The 10-basis-point charge had been disclosed to participants in quarterly fund profile sheets alongside the basis point charges for investment management. Both fees were assessed against investment returns. So, we disclosed fee “rates,” not actual dollar and cent costs. For comparison, the monthly administrative and transaction fees would be itemized as specific charges expressed in dollars on each quarterly statement.

Early in 2009, after the first quarterly statement reflecting the changes had been distributed, my firm’s CEO got a letter from a Congresswoman representing one of our retirees. This retiree had a lifetime of savings in the plan: more than $400,000. The letter to the Congresswoman complained that this was the first fee in more than 40 years of participation in the plan since inception in 1968.

The letter was passed down to me. I received the assignment to confirm that the $3/month, $36/year fee for 2009 was a little less than the more than $400 this retiree had paid in 2008.