401k and 403b Fees – A Simple and Comprehensive Guide. One of the primary responsibilities of a 401k and 403b plan fiduciary is to make sure that plan expenses are reasonable which starts with knowing what they are along with benchmarking. But finding out what the fees are for the services provided can be a challenge for plan sponsors not familiar with the industry language and arrangements among various vendors to share revenue.
The Multnomah Group, an industry consultant, and advisor, breaks down all fees in a relative simple manner in a recently released white paper (free registration required).
First, fiduciary oversight is only required for fees paid out of plan assets – if a plan sponsor decides to pay these fees directly, there is no fiduciary liability associated.
There are three basic types of fees based on:
- Assets
- Participants
- Itemized services
Most common are asset fees which emanate from the following investment products:
- Mutual Funds – Many plan sponsors and participants might think that the expense ratio paid to the mutual funds is used to manage the money. While partially true, that money can also be used to pay administrative expenses to run the fund as well as revenue sharing in the form of 12b1 and sub TA fees to pay other providers like advisors, record keepers and TPAs.
- Collective Investment Trusts (CITs) – Similar to mutual funds though they tend to be cheaper as there is less compliance and legal expense.
- Stable Value – Part of the capital preservation investments family and more popular than money market funds in a low interest rate environment, they are also similar to mutual funds.
- Guaranteed Investment Contracts (GICs) – Once the most popular investment for defined contribution plans in the 1980s and early 1990s, they do not have an expense ratio. Instead, the provider gets paid a “spread” or the difference between what is paid to investors and the returns from the underlining investments. A subject of many lawsuits alleging the spread was unreasonable, that expenses are hard to determine.
- Annuity Contracts – A wrap fee on top of the underlying investments is charged to cover plan expenses
- Wrap Fees – With the advent of no revenue sharing investments, the provider will charge an overall fee on assets to pay expenses.
Participant 401k and 403b fees are a flat charge by participant traditionally use to pay for education and communication.
Itemized fees are charged as services and used to pay for termination of the plan, loans and distributions as well as:
- Brokerage windows
- Advice
- Managing outside assets like real estate
- Custody
- Trustee services
All of these 401k and 403b fees should be detailed in DOL required fee disclosure forms 408b2 (to plan sponsor) and 404a5 (to participants).
The same mutual fund may have different fees depending on the share class which may include higher revenue sharing above and beyond the cost of managing the money. Many of the 401k and 403b lawsuits have claimed that plan sponsors did not negotiate the best deal to get the cheapest share class available to plans like theirs.
There are a myriad of other issues which plan sponsors need to consider consulting with advisors who are experts in the area including:
- What is the internal revenue sharing arrangement between a record keeper and proprietary funds above and beyond the stated fees?
- Different funds pay different revenue sharing resulting in some participants paying a great share of the plan costs. Is that fair?
One way to simplify matters is for plan sponsors to pay vendors directly and have participants just pay the fund’s management fee in what is called no revenue sharing funds also know as R6 shares. Short of that, an overall wrap fee can be charged using no rev shares which makes the disclosure exercise easier and also means that no participant is paying a greater percentage of the costs.
