401k Plan What Does Free Really Cost

In a 401(k) plan, your account balance will
determine the amount of retirement income
you will receive. Regardless of your
position in the company, if you are a plan
participant, these fees will have an impact
so its essential to have a clear
understanding of what you are truly paying
for with your retirement dollars.
The information below helps define what are
the most common retirement plan fees and is
intended to encourage you, both as a 401(k)
plan participant and plan sponsor, to:

Gain a clear understanding of fees

and hidden costs
Compare all services received with

the total cost
Recognize that free is not really

free

401(k) Plan Costs

There are several different types of fees
that may apply to your plan, but they
generally fall into two main categories:
plan administration costs and investment
expenses.

Plan Administration Costs

The everyday operation of a 401(k) plan
involves fees for basic administrative
services that are necessary for servicing
the plan, including, but not limited to,
producing statements, providing a toll-free
number and Web site, compliance testing,
Form 5500 preparation and contribution
processing. A recordkeeper can charge for
these services in several different ways,
but the most common include:

Per-participant recordkeeping fee:

A dollar amount charged for each plan

participant.
Asset-based fee: A fee charged as a

percentage based on the assets in the plan.
Fixed per-plan fee: A flat dollar

fee charged to the plan.

Investment Expenses

Typically, the largest component of 401(k)
plan fees are attributable to the
investment management fees charged by
mutual funds. These costs are usually
displayed as an indirect charge on your
account because they are deducted directly
from your investment returns. Your net
total return is your return after these
fees have been deducted.

The following are primary types of
investment expenses:

Management Fees

These are ongoing charges for managing the
assets of the mutual fund. They are
generally stated as a percentage of assets
invested in the fund. Management fees are
paid out of the mutual fund assets to the
funds investment adviser (or their
affiliates) for managing the funds
investment portfolio. Management fees may
also be used to cover certain
administrative fees paid to the investment
adviser and can vary widely, depending on
the investment adviser and the nature of
the investment portfolio. All mutual fund
investment options will have a management
fee.

Distribution and/or Service Fees

Distribution fees include fees paid for
marketing and selling fund shares, such as
compensating brokers for selling the funds
shares, paying for advertising, printing
and mailing of prospectuses to new
investors and the printing and mailing of
sales literature. The most common type is
12b-1 fees, which are generally between
0.25 - 0.75 percent of a funds average net
assets (the maximum allowed for marketing
and distribution expenses pursuant to
applicable FINRA [Financial Industry
Regulatory Authority] rules). Information
on the 12b-1 fee is disclosed in a funds
prospectus.

Furthermore, sub-TA (sub-Transfer Agency)
or shareholder servicing fees can be paid
by the fund company to a recordkeeper for
providing all the sub-accounting functions
at the participant level, where there is
only one account established at the fund
company. In contrast to a management fee,
not all mutual funds contain distribution
and/or shareholder service fees; those that
do will usually have higher overall expense
ratios.

Over 94 percent of a 401(k) plans cost is
attributable to investment expenses.

Other Mutual Fund Fees

Other fees charged by a mutual fund include
custodial, legal, accounting, transfer
agent and other administrative expenses.

Variable Annuity Fees

In addition to the types of fees previously
described, an insurance company may offer
products through a group annuity policy
that essentially adds a variable annuity
insurance fee known as a wrapper to the
underlying mutual funds, resulting in an
added cost. A variable annuity is a hybrid
investment/insurance product that adds a
mortality and expense fee that is charged
on top of underlying mutual funds. As a
result, it can be very costly to include
variable annuities as part of your 401(k)
plan.

Long Term Impact to Participants

What matters most is the impact these fees
can have on plan participant accounts. Over
the long term, even a small difference in
fees can translate into a big difference in
a retirement account balance. As a plan
fiduciary, plan sponsors (those sponsoring
your retirement plan) must act solely in
the interest of participants and their
beneficiaries with the exclusive purpose of
providing benefits to them. Therefore, it
is imperative that plan sponsors understand
all fees that are being charged to plan
participants.

When a plan is marketed as free, it is
likely that there are hidden investment
costs that could potentially lower the
retirement nest egg of participants.