No matter what plan financing approach a 401(k) plan sponsor chooses, it is important to begin communicating about plan fees in advance of required disclosure.

Required fee disclosure is coming soon to a 401(k) plan near you, courtesy of the U.S. Department of Labor. Here's a look at the structure of those fees.

Required fee disclosure is coming soon to a 401(k) plan near you, courtesy of the U.S. Department of Labor. In our last post, we talked about the key drivers of 401(k) fees and the importance of benchmarking fees before disclosure begins to ensure that your plan is paying fees that are reasonable.

Now, let's take a look at the structure of those fees. A report authored by Gosselin Consulting Group shows that so-called revenue sharing fee arrangements lead to participants with larger account balances pay more in plan administration fees than participants with smaller account balances. In effect, these with more retirement savings are subsidizing participants who save less. Revenue sharing fees arrangements involve using a portion of the expense ratios of a 401(k) plan's investments to pay for all or part of plan recordkeeping and other administration.

Because expense ratios are paid as a percentage of invested assets, participants in plans with revenue sharing fee arrangements who have larger account balances, and therefore more to invest, pay higher fees than participants with lower account balances. Although revenue sharing arrangements are widely used, the report indicates that disclosure of these fees could raise fiduciary liability issues if employees do not like what they see.

The report provides some interesting modeling that shows why fiduciary liability can be a concern under these revenue sharing arrangements. The model shows the impact on total fees paid when participants with higher balances subsidize the plan fees for participants with lower balances. The example compares the fees paid by four types of participants under a revenue sharing arrangement that charges plan fees as 0.35% of assets.

To make things a bit easier, we will focus on two participants. Both participants join the plan at the same age and salary level and have the same annual salary increase and annualized return on their plan assets. However, one participant begins maxing out on his plan contributions from age 35 to age 69, while the other participant leaves his original contribution rate unchanged.

Because the second participant maxed out his contributions for so long, his account balance at age 70 was considerably higher ($5,346,427) than the first participant who kept his contributions constant ($1,541,280). However, because plan fees were charged as a percentage of assets, the second participant also paid significantly more in plan fees by age 70 ($204,649) than the first participant ($65,547).

To avoid these issues, 401(k) plan sponsors can consider shifting to other plan financing arrangements. One option is to have the plan sponsor shoulder the full cost of plan administration. Another option is to have plan fees charged on a flat-dollar per-participant basis. However, given the losses many participants experienced during the recession, seeing this fee taken out of their accounts may not be welcome by those participants. The Gosselin Consulting Group paper provides a series of questions plan sponsors should be asking as they determine which plan financing approach is best for their plans.

No matter what plan financing approach a 401(k) plan sponsor chooses, it is important to begin communicating about plan fees in advance of required disclosure.

The full report is available here.