Keeping a sharp eye on your 401(k) plan’s expenses — a fundamental duty of fiduciaries — can require the use of a magnifying glass, at least metaphorically speaking. Take the case of what’s paid out of retirement plan investment funds, as opposed to paid directly by the plan or the company as the plan sponsor. Individual pieces can be measured in basis points (hundredths of one percent), but they add up. This means that even small distinctions can substantially affect participant investment returns over time.
Common Contributors to Gross Expense Ratio
A fund’s gross expense ratio encompasses charges paid by plan participants. It represents the total percentage of the fund’s assets that are used to run the fund. It can be complicated when revenue sharing — payments by the asset manager to recordkeepers, custodians and brokers — is involved.
The following are some common plan expenses that count toward a plan’s gross expense ratio:
Asset management fee. This is the cost of paying people who actually are responsible for making decisions about the fund portfolio’s investments. These fees will be significantly lower for passively managed funds, such as index funds vs. actively managed funds.
“Shareholder servicing” and “Sub T/A” fees. Service providers charge these fees to cover recordkeeping, administrative and custodial services.
12(b)-1 fees. These are payments to brokers who sell funds to the plan and service those accounts.
ERISA budget accounts. Some recordkeepers credit any payments they receive from asset managers to a plan’s “ERISA budget account.” Fees the plan pays directly for those services are adjusted accordingly so that the plan doesn’t overpay.
Some funds may enter into fee waiver or expense reimbursement agreements to minimize costs to participants. And remember, ERISA requires disclosure of certain information to plan participants.
A Critical Task
It’s important to know exactly what you’re paying and to whom so you can benchmark those fees to determine reasonableness and negotiate fees. Ask whether the funds have lower cost share classes that may reduce potential costs to participants. This is a highly simplified introduction to plan expense review — one of the most important aspects to understanding and properly managing a 401(k) plan. Contact your benefits advisor for more information about the many complexities surrounding this critical task of plan fiduciaries.