In the last few weeks, we’ve brought on multiple new clients with existing 401(k)s. The main reason the committees told us that clients were moving to us was that we were able to educate them on how their employees were paying fees.
On page 67 of our book, you can see a picture of the revenue sharing dial; it’s a page we spend a lot of time on when educating prospective clients about all the fees that can be baked into a mutual fund. These can be hard for employers to understand, and even harder for their employees to comprehend.
As shown on the image, there are multiple types of revenue sharing arrangements for different services being provided:
- An investment management fee that is paid to the asset manager. This could be to American Funds, Fidelity, Vanguard, or any other mutual fund company.
- 12b-1 fees. These fees can be commissions that are paid to the broker, marketing, or administrative services.
- Shareholder servicing fees. This is revenue shared by the mutual fund company with the service provider, or in most cases, the record-keeper.
- Sub-transfer agent fees (Sub-TAs). These fees pay for record-keeping and a third party called a sub-transfer agent.
- Asset or wrap fee. This is an additional fee that’s layered on top if the record-keeper isn’t making enough money from the 12b-1s, shareholder, and sub-TA fees.
It’s important to note that not all these fees apply to every fund in a retirement plan. With our clients, we take a different approach: We strip out all the revenue sharing—or the 12b-1, the shareholder, and sub-TA fees—and get the cheapest possible share class or investment management fee. Then, we determine the cost for each of the services being provided, such as record-keeping, administration, and advisory services. We then charge that in a clean, transparent way that can be understood by you, the employer, as well as your employees.
As you can see, there are a lot of different fees to pay attention to and identify so that you can make sure you’re putting your employee’s money in the best possible plan.
If you’re ready to take action and learn how we can restructure your 401(k) plan, please reach out to us. We’d be happy to do a free plan review for you and show you where fees might be hiding.