Refresher on Finding Hidden Investment Fees

With investment options becoming increasingly complex, it is important for participants in defined benefit (DB) and defined contribution (DC) plans, and the trustees administering those plans, to understand the impact of investment management fees on overall returns. Here are some of the ways of learning about those fees:

1- Investment managers are required by law to disclose their fees to the Plan. These disclosures, required under the regulations to ERISA § 408(b)(2), require investment managers, investment advisors, and brokers to disclose direct and indirect compensation to the Plan before the Plan invests in a particular investment so the trustees can determine if their fees are reasonable. If the investment manager fails to disclose its fees, it cannot get paid by the Plan and must return any profits it earned.

2- Plans are required to disclose investment management fees and plan operating expenses to all Plan participants of DC plans with individual accounts. These disclosures, required under the regulations to ERISA § 404(a)(5), are sent to plan participants on a quarterly and annual basis. The quarterly statement includes any fees charged to the individual’s account, and the annual statement includes investment management fees and plan operating expenses.

3- Plans are required to disclose investment management fees as well as other service provider fees to the government. These disclosures are made on Schedule C of the Form 5500, and are available to the public on the Department of Labor website.

4- The Department of Labor is considering new rules which would strengthen fiduciary duties for the financial services industry. The proposed rules create conflict of interest rules for “investment advisory fiduciaries,” which provide investment advice for a fee, and requires a “best interest contract exemption” in order for investment managers to receive compensation for certain investment products. The financial services industry is opposing these proposed rules, so it is unclear which version of the rules, if any, will be adopted as final rules.

For more information about investment management fees in your DB or DC plans, please contact your Trust Fund counsel.

By Kristina Zinnen | December 18, 2015

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