At the end of 2006, more than 500,000 plans were in place with 47 million participants and combined assets of $2.9 trillion dollars. However, numerous fees are keeping plan holders from receiving monies that are rightfully theirs. The majority of these fees are kept hidden from plan holders.
There are four types of fees within 401(k)s: contract, fund, employer and employee. Both contract and fund fees can remain hidden and are responsible for a significantly smaller return.
Contract fees are charges by the plan administrator and are only disclosed in original set-up documents, meaning once implemented, the fee is not disclosed in a manner that allows plan holders to examine them. These fees are expressed as basis points and 100 basis points represent a 1 percent charge to the total assets in the plan. Typical plans have contract fees of 100 points to 350 points. The administrator nets these fees against fund balances, making it highly unlikely that the plan holder will ever see the total amount of fees once the plan is implemented.
Fund fees are charges for various funds selected by the plan holder inside the 401(k) portfolio. These include 12(b)1 fees and transfer agent fees. In some cases, fees may also include other payments arranged between the plan administrator and the fund, also known as contingency fees. Like contract fees, they are netted against each individual fund’s balance.
The effect of hidden fees in a 401(k) can be alarming.
Gross Investment Return 9.00%
Less Fund Fees (netted out and hidden) 2.00%
Less Contract Fees (netted out and hidden) 2.50%
Investment Return Reported 4.50%
For a company 401(k) that has been established for many years and a plan with an accumulated $1 million in overall assets:
Gross Investment Return $90,000
Less Fund Fees $20,000
Less Contract Fees $25,000
Net Investment Return Reported $45,000
How can this be? While laws inside the Securities and Exchange Commission (SEC), National Association of Securities Dealers (NASD) and Employee Retirement Income Securities Act (ERISA) require the disclosure of fees and revenue sharing agreements, the industry is worth more than $3 billion. Most plans disclosure includes the bare minimum, neglecting to include information regarding both the contract and fund fees. Third-party administrator charges to the employer for record keeping, plan design, testing and other administrative functions are all included in employer fees. Employee fees are charged by the plan administrator directly to the employees and typically, are deducted from participant’s 401(k) balances each month or quarter.
However, there is a way to avoid hidden fees – by utilizing a Professional Employer Organization (PEO) that can act as a plan trustee and maintains an ERISA bond. The PEO allows for a company to hold no liability or cost, and is able to submit all contributions electronically. Additionally, initial rates are lower than most traditional plans, and rate reductions occur automatically at $1 million, $3 million and $5 million.
Unlike traditional plans, all 12b(1) commission payment, transfer fees and contingency payments are returned directly to participants. Even if a plan holder selects the same investments as a traditional 401(k) provider, a plan holder with a PEO will earn substantially more over time because they are able to keep 100 percent of the commissions and discretionary payments. Not only can this save a company substantial money, it also provides a much larger return for plan holders.