An urban legend is a form of modern folklore consisting of stories usually believed by the teller of them to be true. Whether it’s Proctor and Gamble being Satan worshippers because of an old logo or Kentucky Fried Chicken changing its name to KFC because of some Kentucky state tax, there are stories that are propagated as true that are clearly not. We see these urban legends circulated by chain e-mails and sometimes even passed off as true by the media and we are amazed as to how intelligent people can be conned into believing such fabricated stories. When it comes to the retirement plan industry, the biggest urban legend out there, the Loch Ness monster, the abominable snowman, or drugged travelers harvested for their kidneys legend, is the myth of free 401(k) administration.
The myth of free 401(k) administration is the idea that since the plan provider such as a third party administrator (TPA) charges a nominal up front charge or nothing at all, that is all the cost that a plan is being charged for the administration of their plan. Financial advisors and competing, unbundled TPAs are amazed when potential clients insist that they are being charged nothing or close to nothing for their plan when these plan providers know full well that these plan sponsors are taken to the cleaners. While fee disclosure regulations will be implemented in April 2012, that is still quite some time before these plan sponsors are going to be in for the shock of their life. So hopefully this article will try to lessen that sticker shock when plan sponsors get disclosure from their plan providers.