In This Corner: Who is getting rich from my 401(k)? Not me
Published: August 30, 2009
Workers have long counted on their 401(k) plans to sustain them during retirement, only to watch helplessly as they plummet in value. With hints that the worst of the economic meltdown may finally be over, 401(k) participants are looking for direction and guidance on how to get their accounts back to where they once were.
One area that plan sponsors (usually the business owner) and participants should look at first are the fees paid to all parties associated with the retirement plan. Reduction of plan fees can have a tremendous impact when you retire, according to Joshua Itzoe of Greenspring Wealth Management. “A 35-year-old participant who has an account balance of $66,650 makes $7,500 in annual contributions and earns 7 percent annually over 30 years,” said Mr. Itzoe. “Reducing total cost from 2 percent to 1 percent yields a cost-savings sufficient for this worker to retire with an additional $181,440 in assets. Multiplying this value creation across an entire workforce shows how important fee reduction can be.”
According to the U.S. Department of Labor, all plan sponsors are required by law to know the “full amounts of compensation paid to all vendors from whatever source derived.” Those sources include “wrap fees” and revenue sharing. Business owners know their monthly fixed expenses: rent, payroll, utilities. But ask them how the fees of a $2 million retirement plan – which can be more than $40,000 annually – are dispersed, and they will be hard pressed to give you an answer.
Revenue sharing is the amount paid from the internal fees generated by mutual funds. Among others, they go to the salesman of the plan, the record keeper (the company from which you receive statements), the mutual fund manager and, in some cases, the third-party administrator. The different share classes (A, B, C, D, I and R) carry different internal fees generating different amounts of revenue. You can be paying 1 percent more in internal fees for the same mutual fund sold to another plan. This extra 1 percent can make you work several more years than you wanted to – and can have your adviser driving a Porsche. You don’t see a lot of institutional shares or Vanguard funds in 401(k)s because there is no revenue to share with the advisor and record keeper. Some record keepers will offer mutual funds with very low internal fees but have an overall percentage fee – a “wrap fee” – that is charged to each participant’s account. Many participants have no idea they are paying this wrap.
Business owners must know how much revenue is generated from their retirement plan, and how it dispersed among the different vendors servicing that plan. You are then better able to negotiate the pricing of the plan. Are the fees you’re paying comparable to plans of equal size? Knowing this will enable sponsors to evaluate the competitiveness of their total plan’s costs, whether this determination is made internally or by a third party. Plans with assets of less than $50 million should have a yearly audit of total plan fees.
There is legislation working its way through Congress to make all fees associated with a 401(k) transparent. This will help the plan sponsor know the exact amount of income all parties associated with the plan are receiving, and if they are providing an equal amount of service for their compensation. Plan fees are now the No. 1 reason plans switch record keepers. During bull markets, participants could afford to overlook these fees. Not anymore.
ROLAND GRECO is a registered investment advisor with LPL Financial/Jacobi Capital Management, which has offices in Wilkes-Barre and Scranton. Contact him at roland.greco@ lpl.com
IN THIS CORNER features commentary by guest columnists. If you would like to submit a guest column, contact Business Editor Jessica D. Matthews at jmatthews@timesshamrock.com.