Undisclosed Employee-Paid Fees

[Guest cstroble]

What recourse does an employee have upon discovering that her 401k account is being charged significant fees that were not explained or disclosed by her employer when the employer implemented the 401k plan 6 years ago. She formally requested that the employer (Plan Administrator) furnish a complete disclosure and explanation of all employee-paid fees over 3 months ago, however the Plan Administrator has failed to respond to her request.

[Mike Preston]

I'm not aware of any *requirement* that specific fees (other than those that are rung up when a participant takes action) be disclosed in advance other than generically. That is, most plans (and Summary Plan Descriptions) state that allocations to participant accounts will be subject to additions for earnings and subtractions for expenses. Sometimes they combine these two into one statement indicating that net investment earnings (earnings after expenses) will be credited. Yes, sometimes net investment earnings are negative.

Expenses in this context are not usually delineated in advance. This means that as expenses are incurred the fiduciaries must consider whether it is appropriate for the plan to pay the expenses. If the plan is supposed to pay the expenses then those expenses operate as a negative adjustment to the overall investment earnings allocation.

At issue is a fiduciary decision over the proper treatment of plan expenses. The fiduciaries have a duty to make these decisions in a manner that does not violate their fiduciary duty to participants. Note that this does NOT mean that fiduciaries are precluded from making a decision that a given expense is appropriately borne by the plan. It is much more complicated than that.

You did not give details as to the amounts being charged. To do so may require you to disclosre more on a public bulletin board than is in your best interest.

[Guest cstroble]

Thanks for your insight, Mike. The dollar amount of the fees is relatively small (varying from $5 - $20 per month) and supposedly are based on some unknown percentage of her total assets in the plan (about $20k). There are three major points of contention here

1. The fees never were reported to her or appeared on any of her quarterly "summary" account statements - My friend only found out about the fees when the asset manager accidentally sent her a detailed statement last Fall showing all account transactions (contributions, transfers, fees). Only after nearly 2 months of arm-twisting, letters and eMails to her employer and the asset management firm was she finally able to get them to make the detailed transaction information readily available. Prior to that, it seemed as if it was a big secret and they were trying to conceal the informaiton from the plan participants.

2. To date, the Fund Administrator (aka employer) has failed to furnish a complete description or explanation of these employee-paid fees. In fact, when the plan was announced to the employees, the employer's announcement memo stated that all plan administrative expenses would be paid by the firm - there was no mention whatsoever of ANY employee-paid plan expenses, other than the "normal" expenses associated with each of the funds in the plan (i.e., the expense ratios, which incidentally are all inflated by about .80% to cover plan management & reporting expenses of the asset management firm).

3. Had her employer fully disclosed these asset-based, employee-paid expenses when the plan was implemented, she in all likelihood would not have participated in the plan.

My friend is understandably infuriated by the lack of candor and feels she was led down the primrose path. Ideally, she would like to withdraw her assets from the 401k plan and roll them over into an IRA. She's only 56, but under the circumstances it seems as if she should be4 able to do something to rectify these deceptive practices. To whom can she go for help?

[Mike Preston]

You are welcome. I think there is a lot of emotion attached to these sorts of things, and I try to eliminate as much of that as I can. Once your friend sees the forest, rather than the (expense) trees, she is likely to decide that while the plan might be a bit more expensive than originally thought, it has still been a darn good thing. Might it have been better? Possibly. But, then again, what can't we say that about in 20-20 hindsight? The 401(k) market is constantly in flux and what might have been a great deal 6 years ago may not look quite so good today. It is very possible that the fact that the deal was "so good" 6 years ago caused the employer to sign a deal that essentially locking the employer into this particular funding vehicle for a long time. I don't know the details of your friend's situation, obviously, but hopefully this gives you a feel for the complexity of the situation.

On to your questions and comments.

1. It is not uncommon for asset related fees to operate as a negative adjustment to earnings and not be delineated. In fact, up until a few years ago, it was just not done at all. Things are a bit more "transparent" these days, thanks to Enron and WorldCom and the like, but there is still no requirement to have detailed, line item by line item, expenses delineated. In fact, I'd say it is somewhat unusual for her to receive the complete detail, even upon request. I understand she did receive that information for at least one period. Some vendors can't even produce it! It is not necessarily so that the employer was trying to conceal the information (although I admit that is one of the possibilities). It is very possible that a decision was made to "buy" certain administrative services with asset-based fees. This is not as nefarious as it sounds. Running 401(k) plans is not free. Don't let anybody convince you that it should be free. There are many employers who believe that asset-based fees are more equitable than "per capita" fees. I don't want to try and convince you one way or the other, just to let you know that the marketplace considers these sorts of asset-based fees to be commonplace. And asset-based fees, as mentioned in my last response, are frequently netted against what the investment return would otherwise be and reported as a "net" gain (or loss).

2. Well, I think that most vendors, these days, although certainly not all, have the ability to split out the asset based fees into their component parts. Somewhere, deep in the prospectuses (prospecti?), or the Summary Plan Description, you will likely find that the fund expenses have been disclosed, even the asset-based expenses. Determining that these things have NOT been disclosed is a difficult task. One must really examine all disclosures your friend has been given in the last 6 years and search each one in detail. She may be right that there was absolutely no disclosure. More likely, however, is that a phrase or a word here or there satisfied the technical definition of "disclosure". It is likely that these fees were not highlighted and splashed across the Summary Plan Description, though. That just isn't usually done.

3. While your friend is probably not in the mood to do this much work, she should ask herself whether she would be in a better position had she, in fact, not participated. My guess is that she wouldn't. And that doesn't even count the intangibles, like the probability that in the absence of putting her deferrals into the plan she might have just spent the money (what was left after taxes, of course), rather than invested it.

As indicated in another thread, she can't get her money unless she quits. Alternatively, if the plan allows for hardship withdrawals and she qualifies for same, then maybe she can withdraw her money that way. Note that she would nto be able to roll over a withdrawal made in this manner and since she is under age 59 and 1/2 would probably be subject to an additional excise tax of at least 10% in addition to the regular income taxes she would have to pay on the amount received. Sounds like biting off one's nose to spite one's face, if you ask me.

If, after reading all of this, and taking a walk around the block, and doing the mathematical analysis mentioned above, she still feels that she has been terribly wronged, she has four courses of action available to her (at least):

1. Contact an attorney to see whether the attorney thinks she has a case against her employer.

2. Contact the Department of Labor to see whether they think the facts warrant opening an investigation.

3. Quit, and take her money out of the 401(k) plan.

4. Work with the Plan Administrator/employer to fix the problems that she perceives. In the business world, the way to get what she is looking for is for her to ask the Plan Administrator to change the plan's practices so that these fees are disclosed on a periodic basis. Ideally that would mean every statement (quarterly?) or available on the web. If her request is denied or ignored then getting a group of participants to make the same request would be the next step. Maybe there is a way to short circuit the process, if the employer already has a mechanism for receiving comments/complaints about its program.

There are probably other courses of action available, too.

Good luck.