Part II: 401(k) Hidden Fees – 5 More Fees to Look Out For!
Part I of our 401k hidden fees series focused on investment related fees. It explained asset manager/ advisor fees and how you can be duped into thinking the fee is all inclusive without realizing you must also pay for the funds the advisor has recommended. These mutual funds can include both fixed and variable costs. The fixed costs are usually included in the annual expense ratio, whereas variable costs such as brokerage commissions and trading expenses can be much more difficult to unveil. Keep in mind as a plan sponsor you have the right to ask that your plan carries institutional shares that are much less costly allowing participants to bypass front-end loads and back-end loads that are associated with retail shares of mutual funds. Here are additional fees to be aware of:
4. 12b-1 fees- This fee was usually coined as the annual marketing or distribution fee for a mutual fund. Long ago, when mutual funds were first introduced, many thought this fee was relevant because it would increase the number of investors in a fund and lower overall expenses.(i.e., spread actual costs over more individuals). However this hasn’t been the case. Just recently ING received kickbacks in the form of 12b-1 fees and is currently being sued by Healthcare Strategies. Today, this fee is mainly used to reward intermediaries for selling a fund’s share. Basically it’s an additional commission.
5. Annual audit fees- This is the cost of ensuring the plan is compliant. However, one-third of these audits have been found to be defective by the Department of Labor.
6. Participant education fees- Whenever the broker or investment advisor shows up and talks for 2 minutes about the different investments available in your plan, you’re getting charged. The worse part is more than likely, you didn’t understand a word that was said and was forced to thumb through lengthy prospectuses in order to put a full portfolio together for which you have no expertise.
7. Investment transfer expenses- These are fees that a plan participant can incur if and when they decide to change their investment allocation, time horizon, risk tolerance etc. in their plan. It can turn out to be extremely costly if a participant is indecisive or unclear about their goals.
8. Non-discriminatory testing fees- This is usually administered by the third party administrator. The main purpose of this testing came into play because of an IRS rule that limits the maximum deferral by a company’s “highly compensated employees” based on the average deferral of the company’s non-highly compensated employees. The more testing that is needed, the higher this fee can be.
In closing:
- 12b-1 fees
- Annual audit fees
- Participant education fees
- Investment transfer expenses
- Non-discriminatory fees
are additional fees that can be tucked away in a retirement plan and can eat away at retirement savings. Currently, some 401k plans are costing participants as much as 3% to 4% per year. However with some effort and diligence, plans sponsors, business owners and plan trustees can drastically reduce these costs.
For a Free Evaluation of your 401(k) Plan contact us or Download our Free 401(k) Hidden Fees Kit.
About Charles Massimo
Recognized as industry expert and guest speaker at national industry conferences, Charles Massimo is a published author and media subject expert on topics ranging from wealth/asset management to investment and financial planning for high net worth families.