Even as the Securities and Exchange Commission conducts a federal investigation into conflicts of interest and rebating practices of 401(k) plan administrators nationwide, industry sources say that employers could help themselves by being more careful when setting up plans with administrators, according to the Spokane Journal of Business.
"A plan administrator can get the worst deal possible for employees and still not be violating the law. There is no law that says an administrator has to be competent," said John Nester, an SEC spokesman.
Nester said that a plan administrator could have a potential conflict of interest, for example, if he serves as a speaker on the side at events for which mutual fund companies pay him. Shady rebating practices can occur, Nester said, when mutual fund companies offer kickbacks to employers from the investment fees they collect from employees.
Employers need to be more cautious when selecting plan administrators and when deciding how the plan is to be set up, consultants say. "The burning question about fees seems to be how much commission will be paid?" said Michael Otis, a consulting broker at FRP Benefits, based in Spokane, Wash., who said he has spent much time educating employers about administrative fees.
Those fees can vary by as much as a full percentage point for two employers even if they are getting two same-sized plans administered by the same administrator.
What complicates the matter more is that employees, for the most part, remain uninformed about the basics of their plan. They don't understand the administrative fees they're paying for. That problem arises, consultants say, because administrative fees remain largely hidden, or buried in the many pages of a contract.
But solutions to the problem of hidden fees are emerging. For instance, independent third-party administrators, who are not affiliated with mutual funds, do a better job of informing employers about 401 (k) plan costs than do those associated with mutual fund companies, said Mark Towers, president of National Associates Spokane, which acts as a third-party administrator.
Similarly, mutual fund companies have now started bundling services, which means that they cut out the role for the third-party administrator and collect fees directly from the employee fund.