I’ve written about how recent fee disclosure requirements for 401(k) retirement plans have brought a spotlight on bad 401k plans and their potentially embarrassed plan sponsors.
But after reading the fee disclosure on my wife’s own 401(k) plan, I must say that I’m now thinking that maybe nothing really happened at all. Check out what mine says under “Potential General Administrative Fees and Expenses”:
Administrative Fee – Per Account When applicable, other general administrative fees for plan services (e.g., legal, accounting, auditing, recordkeeping) may from time to time be deducted as a fixed dollar amount from your account. The actual amount deducted from your account, as well as a description of the services to which the fees relate will be reported on your quarterly benefit statements.
Translation: We might charge you some fees. We might not. Helpful, eh?
There’s more:
Administrative Fee – Pro Rata The plan incurs general administrative fees for ongoing plan administrative services (e.g., recordkeeping) of up to 0.21% annually of assets held in the plan investment options. These fees may be paid, in whole or in part, from revenue (e.g., 12b-1 fees, administrative fees) that Transamerica Retirement Solutions or its affiliates receive from the plan’s investment options. If this revenue is not adequate to cover the fees, the plan administrator will decide if the shortfall will be deducted on a pro rata basis across some or all investment options held in your account or as a fixed dollar amount from your account, unless paid from other sources.
General administrative fees other than the charge above, for administrative services (e.g., legal, accounting and auditing) may from time to time be deducted on a pro rata basis across some or all investment options held in your account.
The actual amounts deducted from your account, as well as a description of the services to which the fees relate will be reported on your quarterly benefit statements.
Translation: We have to spend some money to manage these 401k plans. (Duh.) Certain mutual funds kick us some money back in the form of 12b-1 fees. (So thanks, those that buy these more-expensive funds! Vanguard doesn’t ever pay 12b-1 fees. Boo Vanguard!) If those aren’t enough, then we might charge you some fees. Unless we don’t. But we might. We’ll let you know after we charge them.
Plan Service Credit – Plan service credit represents an expense refund for one or more of the investment funds offered by your plan. When applicable, a Plan Service Credit is added to your account and lowers the effective annual expense ratios of the investment fund(s) for which a plan service credit applies. Any plan service credit will be reported on your quarterly benefit statements.
Translation: We might refund you some money from time to time. *Grin* Highly unlikely, but heck, who knows? We’ll get back to ya.
What’s the point of requiring these disclosures when all they do is drop tons of gobbledygook on you? They should be required to list hard numbers, at the very least what they charged for the trailing 12 months. The mutual fund expense ratios were disclosed clearly, but they were easily available in the past as well.
The bottom line is that – just as before – you need to check your statement carefully. Don’t just stuff it into a drawer. Realize that even “small fees” like between 1% to 2% annually are huge destroyers of your wealth. If you don’t know why, watch the PBS Frontline TV episode The Retirement Gamble which brought attention to how significantly a bad 401(k) can reduce your eventual nest egg amount as compared to a good 401(k). Not all 401ks are created equal, and the one I make fun of above is actually not bad, but some are truly horrendous.
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The truth is the actual fee calculation is complex and variable from period to period, so you will have to examine your actual statement for hard numbers. The plan sponsor could probably report that same information again to participants annually, but that would have a cost associated with it, and as you point out, fees and expenses can be a big drag on your wealth creation. ; )
You are correct that Vanguard does not change 12 b-1 fees, which are marketing or distribution fees that generally go to advisers or brokerage platforms. But Vanguard most definitely does rebate back to plan sponsors some “revenue” they receive from their fund management fees that can be used to offset other expenses Vanguard charges, such as administration fees, or other allowable expenses incurred by the plan at the company level. Every does, and Vanguard needs to compete with other providers. The amount of “revenue share” is negotiable based on the size of the plan, etc. Vanguard is an excellent deal and has very low management fees, but arguably this means they could be a little lower. I know this from direct experience, as a (small) part of my job involves managing our defined contribution plans.
Agreed, this is all quite confusing. Perhaps the most logical approach would be to consider the worst-case fee scenario when evaluating investment plan options.
That said, a few fund managers seem to have some awareness about being at least somewhat competitive with their fees. They might use temporary fee waivers (in which case the net expense ratio will be lower), or slash to be more attractive versus another fund family.
Still, I’ve reviewed my plan’s options and switched to index funds where available and appropriate. Still, nowhere even close to Vanguard or the cheaper index ETFs, but I shaved off probably an average of 0.3% in absolute terms on the whole account.
My wife works for a large nonprofit organization that switched their 403-B plan from an excellent provider — TIAA-CREF — to one that has mediocre investment choices and charges a ridiculously stiff quarterly administrative fee to boot. Those fees are offset to some extent by the “plan service credit” you reference in your description of your wife’s plan but they seem to have no rationale to them. My first assumption was that they were there to reward longer term investor by refunding some of their expenses. In the time she’s been with the new provider, she’s maybe gotten a little more than half here fee deductions back. The only reason she stays in the plan is for a matching contribution she gets from her employer — which I think is very unusual for a 403-B. It is the kind of thing you really have to study and monitor closely to decide if there’s a point where you should stop participating and just put the money into an IRA instead.
I hope you don’t mind but I just plugged You and this Blog on my Facebook page.
If One wants to eliminate the garbage on this hot topic; Then One first must understand the mindset of the Plan Provider, their marketing process and the massive revenue stream these Plans generate.
” They Do No Want the Truth to be Known; The Advisor Community Does Not Understand and nor does it Care, so long as their Service Fees roll on!”
There is a massive economic shift in the works with Boomers retiring and that shift will crush the Plan Providers, unless of course they can manage to Keep Participant Assets on their books. As such the Advisor Community is their ultimate enemy.
As for Vanguard John and the low fee no fee mantra, remember that they too are a Major Plan Provider! Providers are always looking to take market share from their Peers. Fee Disclosure is a Boon for them!
Vanguard too has its own Advisory in house for the 500,000 and up client. They will gladly service your other outside assets on their trading platform too. Do you all think this Vanguard service is 15 basis points too?
Whenever One sees advertising THAT SAYS ” FREE or ALMOST FREE ” you CAN PRETTY MUCH BET that it is NOT!
CAVEAT EMPTOR
The ‘plan service credit’ is apparently to refund some of the expense fees if you pay high expense fees for certain funds. So it would depend on the investment funds you buy and what their expenses are. They can’t state that generally.
Sorry typing on my phone…
Reporting fees after the fact as a line item is still an improvement, isn’t it??
Thanks, but no thanks. I have no idea what the f I’m doing with investing and now, the one place I thought was good, my 401k, may suck!? But I have no idea what to do, or if it really is good or not, and what if I find out it is terrible? I don’t really have a choice, and what am I going to do manage my own investments? It’s a full time job.
Klein, it does seem daunting. Pick the % you want in stocks every year and rebalance to that number once a year. The other choices are just that choices. Pick the ones that fit your needs and move on with life. Above all save more money and live a conservative life.
I guess I was working under the hope/assumption that most of the fees were listed somewhere, but the point of the legislation was to make it easily accessible in a clear and concise annual and quarterly disclosure form. Otherwise, what is the point of these quarterly PDFs that I get which tell me nothing. If some plans are so bad that the fees were nowhere and now they are somewhere on the statements, then I guess that is an improvement.
I think we will see an improvement to the disclosures over time. A lot of vendors were scrambling to meet the disclosure deadline and put into place a short-term fix that meets the letter of the law. As they invest the money to update their systems they will probably provide more informative disclosures over time. The primary thing for participants to worry about is their management fee, and to avoid any kind of fee from a financial adviser within their plan, which can be pretty expensive. I think the public got riled up about some of these big-dollar administration fees because collectively they look like huge amount of money, but ultimately per participant they aren’t that significant and I believe in a lot of cases these disclosures will reveal that, at least for the better providers.
To Andy : Just who is the Plan Sponsor going to hire besides an advisor or broker to run the plan and assure compliance on sight?
Commisions are a pimple on a giant as part off overall plan expenses . Especially true for new or small plans.
Not sure we are using the same terminology. If a plan sponsor (the employer) hires a big fund management company like Vanguard or Fidelity, there is no broker or financial adviser involved in the equation. The participants select their funds, and the plan sponsor has an legal requirement to stand behind the investment options offered to the participant.
Some vendors will offer another layer of “advice” which allows participant can use the services of a financial adviser for their assets in the plan in exchange for additional fees. Financial advisers usually charge around 100 bps per year on top of the fund management fees and may have an incentive to put participants into funds with excess fees, such as mutual funds with loads or annuities. That’s the layer of fees I’m suggesting participants avoid.
I thought the same when I read my disclosure. It basically said we will show it on the statement if and when we charge you, but it didn’t give any indication what it would be. At least you will see the fees as a line item on your statement after the fact. That is a big improvement.
There was this old article in the LATimes around 2006 about 401k plan fees (http://articles.latimes.com/2006/apr/23/business/fi-retire23 or look up “Amgen” “401k”)… it had some quotes that struck me:
“Administrative fees are another matter. They usually don’t show up on quarterly or annual statements… Employees have to work hard to find out how much they’re paying — for instance, by scouring their plan’s website for a record of all activity in their accounts…. The payments do not appear as line items on employees’ quarterly statements. Rather, Benefits Sources takes a cut of the mutual fund shares in each account. That makes the fee all but invisible…. To detect the deductions, an employee would have to track his or her shares rigorously enough to notice that the number isn’t climbing as fast as it would otherwise.”
I’m assuming… that the law changed this. I know for a fact that one of our old 401k plans had a noticeable “dip” at the end of the year in its NAV, where there was no dip in the market on that date, so I assumed this was a fee being scraped out.
We all have power to control 401k expenses. Lobby your trustees of the plan where you work to be a better fiduciary of the plan. If your company has any size to it the trustees have many options to make sure the expenses stay around 1%.