Abstract: Small differences in fees and charges can have a huge impact. Here are six typical hiding places for plan costs The 401(k). It's Americas retirement plan of choice. Where you find an employee benefits program, including most banks, you're likely to find a 401(k). But ask human resources about 401(k) plan costs, and you're certain to get an empty look. Never before have so many bought so much with so little idea of what it costs. On the surface at least, all 401(k)s are created equal. With the exception of fund choices, one 401(k) is much like another. It's a commodity sell and 401(k) providers have reverted to price-based marketing. But no matter who's selling or what the claim is, you can count on one thing: whatever costs are pulled from one component will be loaded into another. And in 401(k) plans--and this is the issue--there are a multitude of nooks and crannies, places to hide fees that even those who sell the plans don't know about. A raging bull market and lack of regulatory scrutiny have contributed to the practice of hiding costs. But a year or so of subpar market performance will have companies looking more closely at costs, and a small difference in commissions and fees makes a big difference in the long run. For a participant making the maximum contribution allowed, $875 per month, 1% less in commissions and fees compounds to a whopping $612,226 in 30 years. Commissions and fees are part of the business, but by knowing where fees are hidden, bankers and employers can uncover the true costs of their plans and make better comparisons among plan offers. Six hiding places We've been digging for hidden 401(k) fees for several years. We've learned that there are six places in 401(k) plans for provider fees and charges. In some cases, plan structure determines how charges are applied, and structure is determined primarily according to the source of the plan: * Group annuity plans are designed by insurance companies. These pre-packaged, off-the-shelf programs are typically more expensive at the start, with costs starting to decrease as plan assets grow beyond about $2 million. * Mutual fund companies design 401(k)s to drive investments to their mutual funds. It's working. Participant assets in company-sponsored 401(k) rose to $1.3 trillion in 1999 with no end in sight. Typically, mutual fund plans are less expensive than group annuity plans, but limited to companies with more than 100 plan participants. Investment options, or at least the majority of funds available to participants, are restricted to the funds of the issuing mutual fund company. * Trust arrangements are customized by an investment advisor or trust company and tailored to a bank's specific needs. They offer fewer of the conveniences and flexibility, like web access to information, enrollment support and multiple fund options, common to group annuity and mutual fund plans. Hiding place #1: Investment management fee Whether the bank buys its 401(k) directly from a mutual fund company or through a reseller, each participant in the plan pays a percentage of his or her overall portfolio value each year for investment management. Management expenses associated with mutual funds are listed by Morningstar, but that's not the complete picture. 401(k) plans accrue additional costs to pay for revenue sharing between the funds and the plan provider. If, for example, a bank's 401(k) is a mutual fund plan, but includes fund options outside the issuing fund family, the fund family will have a sharing arrangement with the alliance funds. The same arrangement applies to group annuity funds, where funds share revenue with the insurance company providing the plan. Such alliances breed higher fees, because through those alliances the funds are able to eliminate the kind of competition that lowers fees. Note the absence of some of the larger funds, like Vanguard, from such arrangements. …
Publication Year: 2000
Publication Date: 2000-04-01
Language: en
Type: article
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