The Lazy Man's Guide to 401k Fees

Ok, we're really NOT calling you lazy.  But we know you're busy.

We've heard several folks say that they really aren't sure what is included in 401k fees and fund expenses.

Well...the industry doesn’t want you to.  That’s why we routinely see fee disclosures that are 30 pages long and “explanations” written in vocabulary that most humans don’t readily understand.

Here’s the simple scoop.  There are 5 basic expenses that a 401k plan incurs on an ongoing basis.  We’ll tell you exactly what they are, in dollars, and how they are calculated.  Here’s the list with our definition of what they are (not necessarily the industry’s definition!)

1.    Fund expenses – In the Revolt plan: the lowest possible percentage charge on each mutual fund in your plan.  This cost is assessed by the funds in your plan and netted out of participant returns.  Funds express this fee as “basis points” but it’s simply a percentage of assets.  1 percent = 100 basis points.  This is the largest cost associated with your plan.

2.    Record keeping and Administration – self-explanatory, should be largely an explicit per participant fee. Total cost should be expressed in dollars; increase only with consent.

3.    Investment Advisory – In the Revolt plan:  selects funds, builds the model portfolios, monitors and reports performance.  Flat annual fee;  increase only with consent.

4.    Trust/Custody – Holds funds, executes trades, etc:  only other asset-based cost.

5.    Employee Education – In the Revolt Plan, services include custom plan identity/logo, 2 PowerPoint presentations (current employee and new hires), Web-based live seminars, customized employee booklet/forms, website design, quarterly participant updates with reports on model portfolios, retirement expense/income worksheet. – Flat annual fee for these services; increase with consent only.

For more information on the Revolt plan, check out our sample cost page here.

Why the Big Name 401k "Powerhouse" Companies CAN'T Fix your 401k Plan

Our “service team” firms are not exactly household names...we know.  You might be doing business with John Hancock or Merrill Lynch right now.  How can we expect you to make the switch to our no-name team? 

We are not “big name” by any measure – although you’ll note that our senior members have worked with major firms and large clients in prior lives.  Our common thread is that we now all work as wholly independent advocates – always serving the best interest of our clients. 

In the 401k world, the huge firms that advertise at the Olympics and during football games are the ones who have caused the need to revolt.  They are the ones selling high-cost funds (Vanguard excepted) and siphoning exorbitant fees from your participants’ accounts.  They are the ones providing services that result in 60% (or lower!) participation and poor investment behaviors by participants.  Looking to them to do away with high-priced, actively managed funds is asking them to put themselves out of business.  It’s not going to happen.

So you really need to work with a more “maverick” firm on this problem.  We’re not beholden in any way to the 401k establishment and we are not competing for assets.  The “big name” players in our solution are TD Ameritrade (trust/custody) and Vanguard (investments).  But the biggest name player is you and your company.  Ultimately it’s your company’s plan and your participants’ money.  We are providing a solution that is in your best interest and we are your advocate in getting you to a successful plan.

Does Caring = Compliance in 401k Plans?

Technically no—but if you really care about the success of your plan and your employees, it gets you way down the road!

If a 401k plan sponsor never laid eyes on a compliance checklist and never met an ERISA attorney, he could exceed the purpose of compliance laws simply by caring about how his employees and participants were impacted by his plan provisions.  Think about it.

Nearly all the rules deal with participation, discrimination and/or cost.  They’re all intertwined.

Do you have lousy participation in your plan?  We use the word “lousy” because the majority of plans have bad participation—which the industry would have you believe is…..good!  Bad participation is the benchmark!  Got 33% of employees staying out of the average plan?  No worries; that’s right on target, they’ll say.  A Schwab study a few years back concluded that employers need to lower their expectations for participation, because industry by industry statistics proved you can’t get the average above 65%!  In other words, “our failure is so widespread and so consistent; we’ve decided to redefine it as success”!  Seriously?  Do you care that a third of your people have no retirement plan or are you happy to meet the benchmark?

Bad participation, either in number or deferral percentage, is the cause for failing most of the non-discrimination rules.  And why don’t plans have better participation?  Could it be they are still using the strategies and materials produced by the entrenched providers?  Are they still immersing participants in myriad investment choices and investment education—hoping that after 30 years of trying, it will suddenly start working?  Employees and participants have consistently signaled that they don’t want investment education, they want help.  Do you care to give it to them?

When it comes to cost, most participants don’t have any idea how much they’re paying to be in a 401k plan (and that’s after the new disclosure rules); yet they bear most of the cost.  Perhaps that’s why many plan sponsors, even in their role as fiduciary, don’t have much of a handle on plan costs either.  Now, the new law says plan sponsors must know their plan cost and must ensure that they are “reasonable”.  But forget about the law for just a second.  Do you care what your participants (and you as a participant) are paying?  If you can’t list the cost of each service in your plan and express the cost in dollars, then you don’t.

When you look at 401k lawsuits today, more and more of them are being brought by participants.  Two weeks ago, Fidelity 401k participants filed a suit against the Fidelity plan.   (Maybe that green line isn’t leading anywhere good?)  Merrill Lynch seems to find their way into the legal news quite often as well. (Total Merrill, Total Bull?)  Regardless of the outcome of such suits, it’s safe to say none of them helped to build employee appreciation for the plan—so everyone involved really loses.  Did these disputes happen because the plans were technically out of compliance or did they happen because the participants didn’t believe their plan sponsors cared enough to make sure they were getting a good deal?

The reality is, there are some plan sponsors that have addressed poor participation and high cost successfully.  But the solution was not found in the 401k establishment of actively managed funds, a compliance checklist or even in the office of an ERISA attorney. It started with the plan sponsor.  Do you care enough to make sure your participants are in your plan?  Do you care that their costs are as low as they can be (or is someone else’s definition of “reasonable” OK)?   Do you care that your participants make bad investment decisions once in your plan?

In the absence of plan sponsors looking out for them, participants are increasingly looking out for themselves.  They’re not poring over plan regulations and non-discrimination rules—they’re simply saying, the investments are not in my interest and my cost is too high.  Many, if not most, are right.  By today’s rules, most plans may be compliant and some may even have “reasonable” costs—yet they remain a failure for sponsor and employee/participant alike.  And participants have a legitimate gripe.

Your plan must be compliant, but it may be more important that you actually care about your employees/participants.  If you start there, you’ll find compliance checklists easy to complete.  Your ERISA attorney will not be billing you a fortune.  Your employees will get into your plan.  Your participants (including you) will be doing as well as they can.  And your plan will be both compliant and successful.

Do you care?