In addition to the annual expense
ratio, plan participants may be buying fund-share classes with front-end
or back-end loads. Such loads reduce the actual amount invested
when fund shares are purchased or, in the case of back-end loads,
are paid when shares are sold.
On top of that, 12b-1 fees are
commonly assessed, and they serve one of three functions: They compensate
a broker or registered rep for selling funds within a plan, pay
for a fund's advertising or marketing costs or help defray costs
related to account services. The 12b-1 fee is generally paid out
of fund assets and typically ranges from 0.25 percent to 1 percent.
Plan administration requires payment one way or another
and involves record keeping, accounting, trustee/custodian, legal
and auditing services. These may be offered separately from several
providers, or may be "bundled" together and made available
through one source, such as the investment adviser.
And communication services -- such
as customer service assistance, educational seminars, investment
advice, retirement-planning software, online access to account information
and online transactions -- all cost money. The idea is that employees
need help in making investment decisions, but the effort to educate
them isn't free. This can be paid for as part of the 12b-1 fee,
as a portion of the expense ratio, or as a separate add-on fee,
explains Meigs of 401khelpcenter.
The hidden layers of fees
It's hard enough to get a breakdown of the fees for the services
mentioned above. Yet there are other more subtle forms of compensation
going on in the retirement-plan industry.
Mutual fund firms have come under attack lately for
revenue-sharing agreements struck with brokerage firms. In these
arrangements, fund firms pay higher fees, more than the usual sales
commission, to brokerage firms, who in turn place the funds on a
preferred list. You thought the funds in 401(k) plan lineups were
selected on the basis of merit? Sometimes, but not always.
Also, fund firms buy and sell securities all day long
as part of their daily operations. Some direct their trade-execution
business to brokerage houses in exchange for favored status among
the sales force. In return, they may also get investment research
from the brokerage firm. These "soft-dollar" arrangements
have been going on for years, but only recently have come under
the glare of regulatory scrutiny. And these fees are particularly
difficult to uncover by plan sponsors.
Prod your fiduciary
In its brochure, "Understanding
retirement plan fees and expenses," the Labor Department
states that plan sponsors "have a responsibility to ensure
that the services provided to their plan are necessary and that
the cost of those services is reasonable." In fact, federal
law requires that fiduciaries follow this mandate.
That brochure provides general information to plan
sponsors about stuff they should already know. But another brochure
would help plan sponsors enormously in their efforts to uncover
fees and expenses that are not readily transparent. Called the "Intermediary
and service provider annual disclosure statement," it demands
a complete inventory of all fees and expenses associated with a
plan by the plan provider. The Revere Coalition, a consortium of
fee-based independent retirement-plan consultants, designed the
Does the plan sponsor at your place of employment
know about this relatively new disclosure form? If you're concerned
about 401(k) expenses, try sending it to the attention of the human
resources department, and ask your contact there to forward it to
the person who oversees the 401(k) plan at your workplace. Include
a nice note that explains your concerns about plan fees and how
difficult it is to get a handle on them. If you want to give your
memo a little edge, say that it is your understanding that exorbitant
plan fees can pose a huge liability risk to employers who don't
pay close attention to them. Then, politely ask to see a copy of
the disclosure form after the plan provider has had a chance to
fill it out.
While your plan sponsor likely won't share the results
of the completed questionnaire, there's a good chance that it will
get sent to and filled out by the 401(k) plan provider. And if you're
stuck in a high-expense plan that is not serving the best interests
of plan participants, then it would behoove the plan sponsor to
oversee a change, such as a renegotiation of fees or perhaps the
unveiling of a whole new plan.
Such changes may make a huge difference in how much
you accumulate for your retirement -- the difference between livin'
lean and livin' large.