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Asset-Based Fees and Expenses are calculated as a percentage of plan assets and can be based on a portion or all assets of the plan.

Participant-Based Fees and Expenses are calculated based on the number of participants in the Plan, and are typically used to pay for services such as monthly or quarterly statements and other administrative expenses.

Itemized Service Fees and Expenses are typically applied as a fixed charge for a specific service provided, such as a participant loan or hardship distribution, plan implementation or plan termination.

Asset-Based Fees & Expenses

The evidence shows that the largest element of costs for retirement plans are asset-based fees and expenses; typically imposed as expense ratios of the investment products, mortality and expense fees imposed on assets in group annuities, and wrap fees. Asset-based fees generally comprise 75% to 95% of the total fees and expenses paid from plan assets. Asset-based fees are found in three categories: Investment Products, Insurance Charges, and explicit Asset Charges.

Investment Products

Investment products come in a variety of forms. Listed below are the most common investment product expenses listed by product type.

Mutual Funds

A mutual fund is a professionally-managed type of collective investment product that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities. They typically have a fund manager that trades the pooled money on a regular basis. The net proceeds or losses are typically distributed to the investors annually. Mutual funds typically have the following types of fees and expenses related to them.

Expense Ratio: An expense ratio is a fee charged as a percentage of the assets invested in a particular mutual fund. A typical mutual fund expense ratio can range between 0.20% and 2.0% of fund assets. The expense ratio can be broken down into three main categories: Investment Management, Administrative and Revenue-Sharing.

Investment Management Fee: This fee is charged to pay for the function of investment management; mainly the portfolio manager's time, the internal research and support of the investment management organization, and other associated expenses related to deciding which securities the mutual fund will acquire or sell. Typically, this fee ranges from 0.25% to 1.0% of assets in the fund.

Special Note on Trading Expense: Trading costs are part of the costs associated with investment management but they are not included in the expense ratio of a fund. Instead, they are paid by the actual shareholders out of the invested assets. In practical terms, this fee represents the cost of buying and selling securities. It includes the commissions charged to buy or sell a security; the liquidity cost for trading the security, which is represented by the spread between the bids and ask price; and the market impact of trading. These expenses can range from an average 0.27% for low turnover domestic equity funds to 1.65% for high turnover domestic equity funds.¹

Administrative Expense: A portion of a fund's expense ratio is allocated to overhead expenses, such as the cost of registering the mutual fund, mailings, maintaining a customer service line, etc. Although these are all necessary costs, they vary in size from fund to fund. Typically, this fee ranges from 0.05% to 0.40% of invested assets.

Revenue-Sharing: This fee usually consists of 12b-1 Fees, Shareholder Servicing fees, Sub-Transfer Agency Fees, and Commissions. We describe each of these fees below.

12b-1 Fees: 12b-1 fees are charged by some mutual funds (see "Sales Charges" under "Other Expenses") to cover the expense associated with marketing and distributing the product. These fees are generally paid to an intermediary, often called the broker of record, for placing clients' assets in the fund. Additionally, these fees can be used to compensate a broker for education, or a Third Party Administrator (TPA) for plan administration or recordkeeping services. We find that this fee generally ranges between 0.25% and 1.0% of invested assets.

Shareholder Servicing Fee: Shareholder servicing fees are similar to 12b-1 fees, but are typically used by no-load mutual fund products. Only service providers such as TPAs, and not brokers, can receive these fees, which can be used to compensate a TPA for recordkeeping, annual administration, and education services. No-load fund products can pay up to 0.25% of invested assets as a shareholder servicing fee without being required by SEC rules to call it a 12b-1 fee. Sub-Transfer Agency Fees (Sub-TA Fees): Usually a payment to a TPA or recordkeeper who holds an omnibus account at the mutual fund company. Omnibus accounting eliminates the need for the mutual fund company to maintain individual participant accounts. Instead, participant accounts are maintained by the TPA or recordkeeper. Because this reduces the cost for the mutual fund company, they pay the TPA or recordkeeper a fee for this service. Typically, this fee ranges from 0.10% to 0.35% of invested assets.

Commissions: Commissions are usually paid from plan assets to a broker for servicing the retirement plan account. We have found that this fee typically ranges from 0.25% to 1.0% of invested assets.

Collective Investment Trust Funds or Commingled Investment Funds

These products are funds managed by a bank or trust company that pools investments of retirement plan assets from multiple plan sponsors in a manner similar to a mutual fund. These products have similar fee structures to mutual funds, in that they have an explicit expense ratio with a portion of the fees charged used to cover investment management expenses, while the remainder of the fees cover administrative costs and any potential revenue sharing that has been built into the product. Depending on the intent of the company that created the product, the usually lower administrative fee of this product can be passed along to investors in the form of a lower expense ratio, or it may be offset by higher revenue sharing that may be used to compensate a TPA for recordkeeping, annual administration, and education services. The fees associated with these investment products are similar in magnitude to mutual fund expenses.

Stable Value Accounts

Stable value accounts are commonly used within defined contribution retirement plans to provide higher yields than money market funds, with similar stability of principal. These products generally invest in bonds with yields higher than what is available to money market funds, coupled with some sort of insurance guarantee on the portfolio to maintain a stable share price. Products within this asset class can be structured in many different ways.

These products have a similar fee structure to mutual funds in that they have an explicit expense ratio, with a portion allocated to cover investment management expenses, insurance fees, and administrative costs, and any revenue sharing that has been built into the product.

General Account Products or Guaranteed Investment Contracts General account products are offered through an insurance company and promise principal preservation with a guaranteed fixed or indexed rate of return. In general account products, the guarantee is provided by the insurance company and is subject to their ongoing financial viability. The general account assets of the insurer support these products.

In contrast to the other types of investment products discussed in this article, these products do not have a stated expense ratio. Instead, the insurance company generates revenue by investing the assets in instruments with a higher yield than what it has guaranteed to their contract holders. The resulting "spread" is kept by the insurance company.

The fees charged are typically implicit, and may be used to cover investment management expenses, insurance fees, administrative costs, and any revenue sharing that has been built into the product. Because these fees are not explicit, it is very difficult to determine the actual cost to a retirement plan or its sponsor. In some cases, the "spread" cost may exceed 2.0% of assets invested in these products.

Insurance Fees & Expenses

Variable Annuity Contracts

Insurance companies frequently use variable annuity contracts as the funding vehicle for retirement plans. The investment products are generally a mix of proprietary and non-proprietary investment products contained in separate accounts offered to participants. The variable annuity contract can include a "Variable Asset Charge" or other additional fees wrapped around the investment alternatives. Participants select from among the investment alternatives offered, and the returns to their individual accounts are reduced by the amount of any additional charges built into the contract. Variable annuity contracts also include one or more insurance elements. Generally, these elements include an annuity feature or interest and expense guarantees, and sometimes a death benefit is provided during the term of the contract. However, most of the Variable Asset Charge will pay for general administration, recordkeeping, participant services, and commissions paid to the selling agent and/or broker. In addition to investment management fees and administration fees, the following fees are often associated with variable annuity contracts: Mortality and Expense (M&E) Fees: This is a fee charged by an insurance company to cover the cost of the insurance features of a variable annuity contract, including the guarantee of a lifetime income payment stream, interest and expense guarantees, and any death benefit provided during the accumulation period. M&E fees are typically imposed as an asset-based fee on the total assets invested.

Insurance-Related Charges: These charges are associated with investment alternatives that include an insurance component. They include items such as sales expenses, and the cost of issuing and administering contracts.

Surrender and Transfer Fees: An insurance company may charge these fees when an employer terminates a contract (in other words, withdraws the plan's investment) before the term of the contract expires, or withdraws a significant amount from the contract. Surrender and transfer fees may be imposed if one of these events occurs before the expiration of a stated period and commonly decrease and disappear over time.

Fees related to variable annuity contracts typically range between 0.4% and 1.5% of invested assets.

Wrap Fees & Expenses

In cases where the vendor does not receive revenue sharing and does not utilize an insurance contract, they may assess a wrap fee on the retirement plan. The wrap fee is an all-inclusive assetbased fee imposed on the value of total assets in an account. These fees are a catch-all that can be used to pay for plan services from compliance testing to trust reporting. A wrap fee may cover all the expenses with the exception of itemized fees and investment management costs, and will be in addition to the fees the investment products charge.

As outlined, asset-based fees are charged as a percentage of plan assets, and are frequently deducted directly from the participants' accounts without the participants' knowledge. These fees can cover:


Custodian services;

Administrative services, including annual compliance testing and the preparation and filing of the retirement plan's Form 5500 ; and

Participant services, including educational materials, enrollment meetings, statements, and a retirement plan website and call centers.

Participant-Based Fees

Participant-based fees are calculated as a flat charge multiplied by the number of participants in or employees eligible for the retirement plan. These fees are traditionally used to pay for employee education and communications options that were not included in the vendor's base package, such as additional enrollment books, and the use of non-electronic data inputs.

These fees are similar to itemized expenses in that they can be charged for recordkeeping and administration. The difference is that these fees are based on the total number of people for which the service is performed, rather than on the specific service being performed.

Participant-based fees are typically assessed as a per participant charge in addition to the annual base fee. Depending on how the retirement plan is structured, the expenses are charged directly to the participant's account, or billed directly to the plan sponsor. A typical fee structure could range between $10 and $50 per participant for each additional service.

Itemized Service Fees

Itemized Service Fees are generally charged on an as-incurred basis, and may be paid by the plan sponsor, by the retirement plan, or by the participant. They are fees for specific services detailed in the vendor's service agreement. Some itemized fees are participant-based (i.e., fees charged on a per participant basis) while others are charged for a specific service to the entire retirement plan.

Examples of itemized services that would be paid by the plan sponsor, the retirement plan or the participant are services related to creating or terminating a retirement plan, acting as the retirement plan trustee, the preparation and filing of the Form 5500, originating and maintaining a participant loan, and making distributions from the retirement plan.

Examples of an itemized service fee include $50 for the origination of a participant loan with $10 per quarter loan maintenance fee; $1,500 for annual non-discrimination testing; and $2,500 for trustee services.

Brokerage Window Fees

A brokerage window is a plan investment option that allows a participant to establish a self-directed brokerage account inside the retirement plan. To allow this type of option within the retirement plan, there can be a plan-level charge, as well as a participant-level charge for each participant electing this option. Additionally, the participants may have to pay brokerage commissions on each trade within the self-directed brokerage account.

Investment Advice Fees

More and more sponsors of individual account retirement plans (e.g., Code Section 401(k) plans) are entering into agreements with organizations that agree to provide individualized investment advice to retirement plan participants. In exchange for fees that are paid by either the plan sponsor, from the assets of the retirement plan or from the accounts of the participants who elect to use the advice services, the organization agrees to be a fiduciary of the retirement plan. From our experience, these fees range - on average - between .40% and .75% of invested assets.

Outside Asset Fees

Outside asset fees are a catch-all category of fees charged for hard-to-trade, illiquid assets (e.g., real estate) or assets held by a former vendor that the current vendor cannot access for daily valuations. Fees for outside assets will vary, but usually there will be a fixed fee charged for the manual recordkeeping process required to maintain the asset.

These fees are typically structured as an annual fee, along with either a small asset-based fee or per participant charge. The fees are highly dependent on the asset in question, and the total revenue generated by the retirement plan for the vendor.

Custody Fees

Custody fees are expenses associated with a service provider (such as a bank) holding the assets of the retirement plan. Custodians often carry the responsibility and liability associated with executing trades, investment directions, and distribution requests from participants, recordkeepers, and plan administrators.

A typical fee structure for custody services might include an annual fixed expense for ownership of a custody account, and possibly include a small asset-based fee as well.

Trustee Fees Trustee fees are expenses associated with a service provider holding retirement plan assets in trust, and preparing all tax filings and documents associated with the trust. Some providers do not offer to serve in the capacity of trustee. Among those providers that offer the services, some provide them at no additional explicitly-billed cost. When trustee fees are charged, however, they vary widely and are dependent on the scope of trust services provided. A directed trustee serves primarily as the custodian of plan assets with limited liability, as they are "directed" exclusively by the plan sponsor or the plan administrator as to investments. A discretionary trustee, on the other hand, has additional exposure to liability because it acts in an expanded fiduciary capacity, with discretion over investments.

Traditional fee structures include a flat fee regardless of retirement plan asset size and a sliding fee scale based on assets in the retirement plan. However, even these sliding fee structures generally have ceilings that make the fees lower when calculated per participant as asset size increases. In most instances, trustee fees average a few basis points per year.

Other Expenses

The fees discussed so far in this article are the most common types of fees paid for the ongoing services provided to retirement plans. The other expenses that might be charged include Sales Charges, Redemption Fees, and Market Value Adjustments.

Sales Charges

One set of expenses that is becoming less common, although some retirement plans still pay them, are sales loads. Many mutual funds have sales loads. There can be a front-end sales load investors pay when they purchase fund shares or a back-end or deferred sales load investors pay when they redeem their shares. For all but the smallest retirement plans, these two sales loads are usually waived.

While front-end or back-end sales loads are relatively rare for retirement plans, another type of backend fee is still in use. These back-end fees are usually built into an insurance contract or the recordkeeping service agreement. This back-end fee is sometimes called a "contingent deferred sales charge" (CDSC).

The CDSC is charged by vendors to help them recoup the initial costs they incur for taking on a new plan. Taking over a plan from another vendor requires a significant amount of work. Most vendors do not charge an implementation fee, and those that do rarely charge a fee that covers their total costs in the first year. Instead, the vendors amortize that implementation cost over the number of years they expect to provide services to the retirement plan. As a result, they may include back-end fees in case their services are terminated earlier than anticipated. The period of time that these charges typically apply ranges from two to ten years.

Depending on the circumstances, a CDSC can be the same for all participants in a group plan or specific to each participant in an individual agreement. (Individual agreements are commonly found in Code section 403(b) plans.) In most cases, the timeline during which a CDSC may be applied begins from the date of initial transfer of retirement plan assets into the contract. However, in some insurance contracts, each contribution into the retirement plan can have its own timeline. The amount of the charge will depend on what the plan sponsor agreed to in the contract and how long the investor (e.g., a retirement plan) holds its shares. The charge is typically graded; decreasing to zero if the investor maintains his or her shares for sufficient time. For example, a CDSC might be 5% if an investor holds its shares for one year, 4% if the investor holds its shares for two years, and so on until the CDSC is eliminated. The rate at which this charge will decline will be disclosed in the fund's prospectus.

Exchange Fees/Early Redemption Fees

Mutual funds, particularly those that invest in less liquid asset classes, may also charge exchange/early redemption fees designed to limit short-term trading in the fund. These fees are charged by the fund to an investor as a back-end expense when the investor sells out of a fund after a short period of time (usually 60 to 90 days). Although a redemption fee is deducted just like a deferred sales load, it is not considered to be a sales load because it is paid back into the fund to compensate the fund for the costs of the investor's short-term trading activity. The SEC generally limits redemption fees to 2% of invested assets.

Market Value Adjustments

A market value adjustment (MVA) is the cost that is incurred to liquidate an investment earlier than what was initially anticipated. It is found on investment options where liquidity is limited and is dependent on the market environment at the time liquidation is initiated. The most common examples are stable value or guaranteed investment products. The way an MVA works is simple. If an investor makes an early liquidation of an investment that has an MVA provision, the market value of the investment product may be higher or lower than the book value that is reported to the investor at the time money is withdrawn. For example, if interest rates in the market are higher than when the investor initially purchased the annuity, the adjustment may cause the redemption value to be lower. Similarly, if interest rates in the market are lower than they were when the investor invested in the annuity, the redemption value may be higher than it would be without the MVA.


The retirement plan market is host to a myriad of fees that can make it difficult for plan sponsors to truly understand the cost that they, and plan participants, bear for maintaining their retirement plan. This is compounded by the convoluted way by which many vendors get paid. Fortunately, market forces are pushing retirement plan vendors to better disclose the revenue they receive and to simplify the way they price their services. It may be some time before costs are fully transparent, but it starts with each plan sponsor understanding what is being charged for the services being provided to their retirement plans.

Whatever happened to 12b-1 fee regulation?

The regulatory debate is not playing out in the offices of the Securities and Exchange Commission (SEC) but in disparate courthouses across America, according to a new Cerulli report. "In the publicized lashing of the mutual fund industry and its fees in 2003, many expected the SEC to further clarify, if not overhaul, rules regarding revenue-sharing and remuneration,' the report says. "But rather than clarification, uncertainty has lingered.'

In 2007, the SEC said it planned to address the issue of 12b-1 fees (see "Cox Says 12b-1 Fees a "Sales Load in Drag" ). The agency solicited open comments. Since then, the issue has faded into the background. A Cerulli survey of asset managers in October 2008 found that 36% see fees and revenue-sharing concerns moving to the back burner as the SEC has "bigger fish to fry.' Another 37% think concerns about fees and underperformance of active managers will lead to more interest in exchange-traded funds (ETFs), and 27% were unsure.

Cerulli said even mild reform scenarios of such fees could post industry problems. For instance, the SEC has hinted that one outcome is for 12b-1 fees to be divided and relabeled into two fees: one for fund distribution and the other for shareholder servicing.

Proposed regulation from the Department of Labor, which was never passed before the new Administration took over, did not address the issue head-on. Cerulli notes information about expense ratios, loads, and redemption fees (such as 12b-1 fees) was absent from the proposed regulations. Advisers and others expressed concern about the haziness around indirect compensation in the proposed fees (see "Advisers Still Headed for More Fee Transparency' ).

Instead of regulation, lawsuits might decide what the future holds for mutual fund fees, Cerulli says. A myriad of cases about 401(k) fees have surfaced in the last few years (see "Fee for All' ). Most recently, a lawsuit about unreasonable fees filed against Deere & Co. and two units of Fidelity Investments was dismissed (see "Appellate Court Backs Revenue-Sharing Case Dismissal' and "IMHO: "Winning' Ways' ).

Consultant View

According to a survey by Cerulli, the largest number of institutional investor consultants (57%) said once plan costs have been defrayed, all excess revenue-sharing should benefit participants in the form of vital services or reduced fees (37% were neutral). Forty-five percent said revenue-sharing can be beneficial for all parties when fully disclosed. Almost half (49%) said hard-dollar pricing is the wave of the future. However, 38% (55% neutral) said recordkeepers and custodians would exit the business if revenue-sharing were eliminated.

Advisers using revenue-sharing might also face tighter regulation. It is unclear if Congress or regulation will step up, but getting paid out of mutual fund revenues could be at risk, said Louis Harvey, president of DALBAR, Inc., to PLANADVISER last month. "If I were starting a retirement plan practice today, there's no question I would make it fees and not the 12b-1 route,' he said.

401(k) Fees Are Still Exorbitant, Buried Secrets:

While the new U.S. pension-reform law gives a few savings plums to employees, it still hides the pitfalls of 401(k) plans in the form of excessive expenses.

Middlemen in 401(k)s who provide administrative support and line up mutual funds for employers may conceal their compensation in individual fund expense ratios, an annual percentage deducted from your plan assets.

In some cases, third-party administrators and broker- consultants may be raking in one-third or more in total expenses through what the industry calls revenue sharing or soft-dollar deals. That's like a car dealer taking a $10,000 commission on a $30,000 vehicle.

Administrators are able to pass along their fees to you because they can legally hide them in expense ratios, and their compensation isn't disclosed in the 5500 form that employers must file with the U.S. Labor Department.

Matthew Hutcheson, an independent pension fiduciary in Lake Oswego, Oregon, who audits 401(k) plans for employers, says "deals between fund managers and brokerages are not disclosed directly."

"It's hidden from most people and only a few know where to find revenue sharing and soft-dollar disclosures at the 'trade' level," Hutcheson adds. "This is possibly the highest area of expense to a plan. Add up all of the fees and you get 1.5 percent to 5.75 percent (deducted from your assets annually). About one- third is hidden, and maybe more."

Breaking Down the Fees

Using a legal practice common in the brokerage industry, administrators, also called record-keepers, can engage in revenue sharing and soft-dollar practices where expenses are shifted between third parties.

Here's how a revenue-sharing deal works. An employer tells a record-keeper to set up a 401(k) plan with a certain number of mutual funds and services. The record-keeper typically tells the employer their labor is "free," then collects a percentage from the expense ratio paid to fund managers or from a per-employee charge called an "investment offset."

Say you're charged 0.75 percent annually for a fund. From 0.10 percent to 0.50 percent may be paid back to the record- keeper for plan administration, auditing, communication and other services. Who pays this added expense? In many cases, you do, not the employer. This mostly hidden expense has a corrosive effect on your retirement fund.

Let's say 0.50 percent a year is added to a fund already charging 1 percent annually. If you have $100,000 initially in your plan, over 30 years at an 8 percent annual return the extra half-percent has cost you about $105,000. Run your own cost comparisons using the SEC mutual-fund cost calculator at http://www.sec.gov/investor/tools/mfcc/holding-period.htm.

Employees in the Dark

Very few employees are aware of this practice and have no idea it's ravaging their investment returns.

Leslie Smith, a director of New York-based Deloitte Consulting LLP, said a recent survey conducted by her company found that slightly more than half of the record-keepers told employers the total costs of revenue sharing. Her study covered more than 800 plans of varying size. For fund companies offering in-house or "proprietary funds," Smith found that 89 percent of administrators didn't disclose these arrangements.

"Although we've seen an increase in awareness of this issue, it might not be transparent," Smith said.

"Since the average mutual fund's return averages about 3 percent less than the stock market's total return and since a basic 401(k) plan could be run for far less than 1 percent of plan assets, participants are being bamboozled out of more than two-thirds of the investment return they should be getting," said Brooks Hamilton, a Dallas-based retirement-plan attorney.

What You Can Do

Not all plans are gouging you, and the best 401(k)s have most expenses absorbed by employers. Since U.S. law doesn't mandate full point-of-sale fee transparency, though, you're on your own and need to ask a few questions of your human-resources department or plan administrator:

-- Does my plan's record-keeper engage in revenue sharing or other soft-dollar arrangements? If so, how much is added into expense ratios to cover these services?

-- When was the last time your employer "benchmarked" the plan or put it up for bid to obtain lower fees? Ideally, shopping around for a better plan should be done every two to five years, said Smith, who found that 401(k) expenses averaged 0.75 percent annually.

More Revenue-Sharing 401k Questions

-- When was the last time your employer did an investment review of fund performance within your plan? Does it have an investment policy statement that provides for dumping poor performers? It should.

-- When will your employer add automatic enrollment and increase features, diversification and advice provisions to your plan? Under the new pension law, this is all perfectly legal and will help you contribute more and lose less.

When you get some answers -- your employer must provide this information -- you can also suggest to your boss to start disclosing and cutting costs. That's the way they run most of their business. Since you have to police a 401(k), that's the way you can run yours.


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