| In September 2006, eight Fortune 500 companies were named in class action lawsuits alleging they failed to monitor and disclose 401(k) fees under so-called revenue-sharing arrangements. To protect your company or client, watch for these red flags when reviewing a 401(k) plan offering: 
Determine how expenses in group annuities compare to publicly traded funds. Group annuity plan participants don’t own mutual funds—they own a share of a pool of assets. As a result, account statements show prices of “unit shares,” not fund shares. Unit shares do not correlate with any publicly traded mutual fund. This hides the underlying expense ratios of the annuities.
Find out what “fees waived” means. In many cases, the broker’s sales proposal says administrative fees are “waived” or “included.” The point of such language is that the employer has no out-of-pocket expenses, but such statements ignore that participants pay for the services out of their investments. The Department of Labor (DOL) says that an employer must “ensure that the fees paid to service providers and other expenses of the plan are reasonable in light of the level and quality of services provided.” See www.dol.gov/ebsa/publications/.
Don’t confuse the proposal or the adoption agreement with the actual contract. The proposal is a sales document, meant to show the provider in the best light. The adoption agreement helps fit desired plan provisions into a “prototype document.” But the contract is typically delivered after a verbal agreement has been made, or even after a letter of intent has been signed. The contract should be signed only after it has been thoroughly reviewed.
Don’t allow a provider to begin the installation process prior to delivery of the full contract. Frequently, enrollment meetings are held before the contract is delivered and signed. This benefits the provider by making it awkward for the employer to back out.
Examine unspecified “recurring charges.” Often, marketing materials or fund information pages will say, “the reported past performance does not reflect the annuity’s mortality and expense risk charge and other recurring charges.” Employers should determine what the recurring charges are and what the impact of such charges is on the plan and participant holdings over time.
Watch out for onerous surrender charges. Surrender charges lock a plan sponsor into a plan, regardless of plan performance or poor service. Surrender charges often start at 5% and decrease by 1% each year, finally disappearing after five years. The charges can make it extremely costly for a company to change plan providers down the road.
Get a written explanation of fund expense ratios. Funds may be labeled “no-load” when they carry no front-end or back-end sales charge, but some plan providers use “no-load” funds that have higher-than-average expense ratios. A fund’s expense ratio in your proposal may be, for instance, 1.06%. But when you check that fund’s expense ratio on the fund company’s Web site, you may find the same fund has a maximum expense ratio of 2.35%. Ken Weber is the president of Weber Asset Management, Inc., Lake Success, N.Y., www.weberasset.com. | 
