401(k) Fees
What You Need to Know
Celia Rafalko
Piedmont Independent Fiduciaries, Inc.
Celia@PIF401k.com
804-888-7765
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The 401(k) Landscape
• There are over 72 million 401k participants in America invested
in more than 483,000 plans which contain over $3 trillion in
assets.
• 71% Believed they paid no fees
• 81% Believed it was very important/somewhat important in
making investment decisions
401(k) Participants’ Awareness and Understanding of Fees, AARP, 2011
•
48% of plan sponsors did not know if their service
providers had revenue sharing arrangements with other
providers.
Government Accounting Agency, April 2012
2
Litigation
Numerous lawsuits have been filed against employers and
investment providers charging they breached their fiduciary
duties by failing to monitor hidden fees and to determine
whether such fees were reasonable.
3
Newark Star-Ledger
August 2010
Why Do You Care About
Fees?
• A plan sponsor is required by ERISA to know all the fees paid to
service providers to the plan and must be able to make an
informed decision that they are reasonable for services
provided.
• Failure to do so makes the plan sponsor personally liable for any
losses the plan incur.
• Fee Disclosure Rules went into effect last year requiring full
disclosure. (ERISA 408(b))
• A plan sponsor fiduciary is PERSONALLY liable for losses
incurred by the plan for a failure.
5
Tussey v. ABB, Inc, Fidelity Trust and
Fidelity Management, Et Al.
• Alleged that the Plan Fiduciaries failed to discharge their
obligations by not properly documenting and monitoring
Fidelity’s fees
• ABB, Inc., the ABB pension and benefits committees, and
the individuals serving on these committees (collectively
“Plan Fiduciaries”) were found jointly and severally liable for
$35.2 million in damages for violations of their fiduciary duty
under ERISA
• Fidelity was liable for $1.7MM in lost income related to float
income it retained
6
What is the Impact of Fees?
1% in excess fees over the average American’s working
lifetime, reduces their nest egg at retirement by 28%.
DOL, EBSA Website
An example:
• A 35 year old investing $800 a month until 65, with
average annual return of 7% net of fees will have
$1,048,500.
• If fees were 1% less, return would be 8% per year for
$1,278,850.
Eliminating 1% of fees makes a $230,256 difference in
the long run!
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Who are the Players?
Every plan has four major functions
• Record Keeper
• Custodian
• Third Party Administrator
• Investment Manager and/or Advisor
All All
can be paid in a variety of ways, both direct and
indirect
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Record Keeper
The Record Keeper is the Accountant for the Participants
• Track contributions by participant and type of
contribution
• Record and implement investment choices and changes
• Provide statements to participants
• Provide a web site for participants to view and change
their accounts
• Work with the Custodian to initiate and execute
investment changes
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Third-Party Administrator
The Administrator designs to plan to meet the company’s
goals for the plan and is also responsible for compliance
testing.
• Recommend plan design choices
• Safe Harbor, Profit Sharing, etc.
• File the Form 5500 annually
• Perform compliance testing
• Assist with remedial actions if needed
All those services can be discrete companies or bundled
together by one company
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Investment Manager and
Advisor
The Investment Manager is usually the Mutual Fund or
Exchange Traded Fund manager. There can also be an
Investment Manager or Advisor to the Plan.
• Manage Investment Assets (Mutual Fund, ETF or
Pooled Fund)
• Provide advice to the plan on investment choices
• Provide investment portfolios for participants
• Select and monitor investments on behalf of the plan
sponsor (3(38) fiduciary
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Types of Providers
A 401(k) Plan can come from many types of providers
• Banks
• Brokers, both$839,126
insurance and securities
• Registered Investment Advisors
$520,692
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The Rules Differ per Provider
• Brokers are regulated and managed on sales
• Suitability Standard of Care based on time horizon
and risk tolerance
• No fiduciary responsibility
• Paid on sales commissions from product providers
and transaction costs.
• Banks are regulated by the OCC and are generally
exempt from SEC oversight.
• Work for and represent their bank
• Paid by fee, payments from product providers
13
Registered Investment Advisors
RIA’s are held to a Fiduciary Standard
• Must act solely in the interests of participants and
beneficiaries
• Duty of loyalty
• With the care, skill, prudence and diligence of a prudent
expert
• Diversify investments so as to avoid the risk of large losses
• Follow the plan
• Paid by fee from the client
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Insurance 401(k) Plan
Contract Asset
Charge
Generally Group Annuity
Plans Bundled with
Administration, Custody and
Record-keeping
Annual
Charges& Fees
No fiduciary services
Inv Mgmt &
Admin Charge
Fees are generally hard to
find
Expense
Ratio &
Transaction
Costs
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Insurance Example
Transamerica Partners Mid-Cap Value*
1.30%
Total Expense Ratio
1.21%
Investment Management & Admin Charge
0.37%
Annual Charges & Fees
0.25%
Contract Asset Charge
1.51%
Transaction Cost**
4.64%
Actual Cost
*This is an actual example from a Transamerica plan.
**All mutual funds have transaction costs
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Where is the Disclosure?
• Prospectus – 72 pgs
– 9 pgs reference fees, compensation or conflicts of interests
• Statement of Additional Information– 285 pgs
– 17 pgs reference fees, compensation or COIs
• Annual Report – 44 pgs
– 6 pgs reference fees, compensation or COIs
• Semi-Annual Report – 36 pgs
– 8 pgs reference fees, compensation or COIs
• Group Annuity Contract – 33 pgs
– 5 pgs reference fees, compensation or COIs
• Plan Level Documents – 58 pgs
– 9 pgs reference fees, compensation or COIs
• Administrative Service Agreement – 11 pgs
– 2 pgs reference fees, compensation or COI
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Securities Broker
• Typically a bundled product with all services
included
• Paid by Investment Share Class
– Commission (up to 5.75%)
– Annual 12-b1 fees (distribution fees)
– Annual Sub Transfer Agent fees
• No fiduciary services
• Can provide investment advice to plan but not
management for either plan or participants
• Suitability Standard
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Investment Costs
American Funds EuroPacific Fund
Fee /Share Class
A
R-1
R-2
R-3
R-4
R-5
R-6
Management Fee
0.43%
0.43%
0.43%
0.43%
0.43%
0.43%
0.43%
12b-1 Fees
0.24%
1.00%
0.75%
0.50%
0.25%
none
none
Sub-TA Fees
0.18%
0.21%
0.48%
0.22%
0.18%
0.13%
0.09%
Total Expense
Ratio
0.85%
1.64%
1.66%
1.15%
0.86%
0.56%
0.52%
Annual Cost per
$1MM
$8,500
$16,400
$16,600
$11,500
$8,600
$5,600
$5,200
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Another Example
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How Do Those Fees Look?
• $7,726.30
Management Fees
• $11,141.38
12(b)(1) fees
• $3,941.08
Sub-TA fees
• $22,808.76
Total (67.7% higher )
• $15,082.46
.75% for other fees
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Banks
• Typically a bundled product with all services
included
• Paid by a fee and Investment Share Class
– Negotiated Record-keeping/Admin fee
– 12-b1 fees (distribution fees)
– Sub Transfer Agent fees
• No fiduciary services
• Can provide investment advice to plan but not
management to plan or participants
• Some banks credit back 12b-1 fees, others add on
fees where there is no 12b-1
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A Bank Example
$6,000,000, 71 participants
Bank Example
Service
Rate
Cost in Dollars
Record Keeping
0%
$0.00
Administration
$4,500 + $34 per
participant
$6,914.00
Custody
0.00%
$0.00
Mutual Fund Expense Ratio
average
1.46%
$87,600.00
1.58%
$94,514.00
TOTAL
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Registered Investment Advisor
• An independent model with each service provider a
separate company
• Paid by fees negotiated with the plan sponsor
• No sales commissions or product fees so not tied
to product sales agreement
• 12b-1 fees credited back to the plan
• Fiduciary services available to plan and to
participants
• Fiduciary Standard of Loyalty and Care
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An RIA Example
$6,000,000, 71 participants
Independent Providers
Service
Rate
Cost in Dollars
Record Keeping
$40 per participant
$2,840
Administration
$2,400 plus $30 per participant
$4,530
Custody
0.06%
$3,600
Investment Expense Ratio average
0.15%
$9,000
Investment Advisor Fee
0.55%
$33,000
TOTAL
1.18%
$52,970
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Conclusions
The way a 401(k) is purchased determines how fees are
structured and now easy it is to find them.
It is a requirement that plan sponsors know the fees
charged and understand the value for the services
provided.
Failure to do so can result in significant penalties for the
plan sponsor.
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Piedmont Independent Fiduciaries is a Registered
Investment Advisory Firm that specializes in Deferred
Compensation Plans.
Investment management for Plan Sponsors
Portfolio management for participants
Service provider recommendations
Plan expense consulting
Plan review consulting
Ongoing participant support and education
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Contact Information
PIF401k.com
Info@pif401k.com
10900 Nuckols Rd, Suite 200
Glen Allen, VA 23060
800-767-8772
Celia Rafalko, CEO
Celia@PIF401k.com
800-767-8772, ext. 103
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