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Understanding the True Cost of Your 401k Plan

    
By Kevin S. Harley, CEBS, Vice President and National Sales Manager of Employee Benefits Services at Marshall & Ilsley Trust Company N.A. in Milwaukee, WI.

An employer-sponsored 401k plan can assist your employees in building long-term savings and help them replace income after retirement. In addition to selecting the plan investments available to your employees, monitoring the performance of those investments, and overseeing the quality of service received from your plan providers, you need to consider the true costs associated with operating the plan.

All plan expenses, whether paid by the company, passed on to your participants or shared, should be clearly documented and as ERISA requires "reasonable." Reasonableness can be determined by evaluating the services included and by benchmarking against other plans with similar characteristics and features.

Fees and Expenses May Not Always be Apparent

To determine the source of fees and compensation that a provider receives in connection with the plan, you'll need to review non-explicit fees and expenses as well as revenue sharing arrangements with each investment option. Key non-explicit fees include:

Soft dollars: Soft dollar "excess commissions" are monies paid to brokerages as defined by Securities Exchange Commission (SEC) Rule 28(e). Ask your provider who receives soft dollar benefits from mutual funds or other investments in your plan and what benefits have they received or continue to receive.

Sub-TA fees: Sub-shareholder (participant) servicing fees a.k.a. "sub-transfer agent fees," "sub-TA fees" or "shareholder servicing fees." Are your providers receiving sub-transfer agent or shareholder servicing revenues, and if so, are the revenues offset against the costs as described in your service agreement? Check to see if you have signed a disclosure form that specifies each type of fee and the specific number of basis points or per participant charge assessed for each type of fee.

12b-1 fees: Account servicing and account distribution (sales) based 12b-1 fees. Your provider may also receive 12b-1 fees. What is the basis point rate of the 12b-1 gross revenue they receive? Did they place your plan's assets in a particular share class for a reason? You should have signed a disclosure form detailing the basis points charged as a 12b-1 fee for each fund in your plan.

Plan Sponsor Checklist

  • Ask your providers for an annual written statement describing all compensation, both direct and indirect, received by the provider for plan services including the estimated costs of administration, recordkeeping, mutual fund management and administration fees, 12b-1 service fees, shareholder servicing fees, sub-transfer agency fees, any start up or conversion-related charges, any service provider termination expenses, and any separately imposed charges for participant services. If your plan is with an insurance company, be sure administration, annuity, insurance, and other costs are specified, whether charged initially as fund costs or against your plan assets.
  • Obtain from your provider all information on fees and expenses as well as revenue sharing arrangements with each investment option. Determine the availability of other mutual funds or share classes within a mutual fund with lower revenue sharing arrangements prior to selecting an investment option. You may want to select a share class with higher revenue sharing to cover the costs of recordkeeping and other services of your plan, but this should be an informed, conscious decision by you.
  • Identify distribution-related costs including who is receiving any sales commissions, finder's fees and 12b-1 distribution fees and how much is received from each investment option.
  • Periodically monitor asset-based fees. Fees can grow with the size of your plan's assets regardless of whether any additional services are provided.

Questions Employees May Ask

  • What investment options are offered under my company's retirement plan?
  • Do I have all available documentation about the investment choices under the plan and the fees charged to the plan?
  • What types of investment education are available to me under the plan?
  • What arrangement is used to provide services under my plan (i.e., are any or all of the services or investment alternatives provided by a single provider)?
  • Do most participants use many or all of the optional services offered under the plan, such as participant loan programs?
  • If administrative services are paid separately from investment management fees, are they paid for by the plan, by the company, or are they shared?
  • Are the investment options compared to an established market index?
  • Are the investment options compared to a recognized universe of similar managers?
  • Do any of the investment options under the plan include sales charges (such as loads or commissions)?
  • Do any of the investment options under the plan include any revenue sharing fees, such as 12b-1 fees, sub-transfer agent or shareholder servicing fees, insurance charges or surrender fees? How much are they and who receives them?

Monitoring Fees Is An Ongoing Responsibility

Plan fiduciaries have an obligation under ERISA to prudently select and monitor plan investments made available to participants and the firm providing services to their plans.

Evaluating plan fees and expenses associated with the plan's investments, investment selection, and services are part of a plan fiduciary's responsibility. Consistently monitoring plan fees and expenses to determine whether fees and expenses are fair in light of services received is part of making informed decisions for your plan and your employees.

Portions of this article are excerpted from the 401k Plan Fee Disclosure Form and the 401k Plan Fees for Employees -- A Look at 401k Plan Fees for Employees a brochure published by the Employee Benefits Security Administration of the U.S. Department of Labor.

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