NorthWestern Mutual 401k fee

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wootwoot
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NorthWestern Mutual 401k fee

Post by wootwoot »

We use NorthWestern Mutual to pick out different 401k plans that fit our budget. I am curious why my company uses them and what they provide. They tack on a .25% fee regardless of whether or not you make money and I fail to see how they help my company. Can someone shed some light on what their role is and how I can convince the company to ditch these guys?
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living for dividends
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Re: NorthWestern Mutual 401k fee

Post by living for dividends »

wootwoot wrote:We use NorthWestern Mutual to pick out different 401k plans that fit our budget. I am curious why my company uses them and what they provide. They tack on a .25% fee regardless of whether or not you make money and I fail to see how they help my company. Can someone shed some light on what their role is and how I can convince the company to ditch these guys?
all 401Ks charge a fee. 0.25% is probably not bad. at least they tell you how much it is. What counts more is how high are the ERs of the funds within the plan.
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mickeyd
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Post by mickeyd »

I am curious why my company uses them and what they provide. They tack on a .25% fee regardless of whether or not you make money and I fail to see how they help my company
NWM is probably acting as the Third Party Administrator (TPA) and they have a lot of expenses to pay (agent, sales expenses, web site, glossy pamphlets, mailings, profit, etc) that must be paid or they would not be in the business of being a TPA. The ER of the funds offered, as mentioned before, is the only thing that you can control.

The NWM representative probably wined and dined the folks in your company who make these kind of decisions in order to get the deal. Were you invited?
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livesoft
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Post by livesoft »

Their role is to have the plan audited each year and file the IRS forms for the plan. They also must receive the money from the employee paychecks and make sure it ends up in the right place. Their role is also probably to have someone come to your place of employment once or twice a year and explain the plan to the employers.

It costs money to do all this because this stuff does not magically happen by itself. They need to charge you (i.e. the employer and the plan) money to cover these costs and to provide a small profit. Otherwise, why would they be in business to lose money?

It is also possible that the NWM guy convinced your company that they would CYA when selecting mutual funds. It is simply liability insurance so that you when you get sued for having crummy funds you can point to this person and pay damages anyways.

In your previous posts, you wrote that you were on your company's 401(k) selection committee and ending up going with DWS. What's up with NW?
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wootwoot
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Post by wootwoot »

How can we get a cheaper TPA? From the answers I have a hard time understanding why a computer could not do the job of this company.
CaveatEmptor
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Re: NorthWestern Mutual 401k fee

Post by CaveatEmptor »

wootwoot wrote:We use NorthWestern Mutual to pick out different 401k plans that fit our budget. I am curious why my company uses them and what they provide. They tack on a .25% fee regardless of whether or not you make money and I fail to see how they help my company. Can someone shed some light on what their role is and how I can convince the company to ditch these guys?
The cost of record-keeping for a company's 401k plan depends on the number of employees and not on the total dollar amount in the plan -- the cost to the record-keeper, that is. This is because every employee is a record in a computer system, and the computer does not care whether employee X has a small or large balance in mutual fund Y or annuity Z. When the record-keeper's compensation (for record-keeping, we're not talking expense ratios of funds) is a percentage of plan assets, every increase in the plan's assets gives the record-keeper a raise, so it is highly lucrative for them even when the yearly fee is a very small % of assets. A fixed per-employee yearly charge is almost always better than a % of total assets, but employers are usually hesitant to do it because it is regressive (in the more common "percentage of assets" system, the high balance employees subsidize the record-keeping costs of the low-balance employees).

I would like to hear from others what they think the current (industry average) dollar amount is for "yearly cost of record-keeping per employee", because if that cost is C then you could decide whether your plan is a good deal or not by comparing the two numbers (C * number of employees) and (0.25% of plan assets). A few years ago I got the figure of $35 per employee per year for C, but it has probably gone up since then (actually I'm not sure ... computer prices have been deflating for years).
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BruceM
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Re: NorthWestern Mutual 401k fee

Post by BruceM »

wootwoot wrote:We use NorthWestern Mutual to pick out different 401k plans that fit our budget. I am curious why my company uses them and what they provide. They tack on a .25% fee regardless of whether or not you make money and I fail to see how they help my company. Can someone shed some light on what their role is and how I can convince the company to ditch these guys?
You need to look at the big picture.

Are they administering the 401(k) plan? If so, administering a 401(k) plan is not real expensive, but it is an expense. Record keeping is one thing. But most TPA's will file the annual 5500 with all attachments required to demonstrate the plan is compliant with non-discrimination rules, such as coverage tests, top heavy tests and ADP testing. Then there is administration of loans, hardship withdrawals (if allowed), distributions, rollovers (in and out), QDRO's, and so on. A lot of work. Depending on the size of your plan (number of participants) and assuming they are not billing the employer separately for these administrative services, .25% each year would seem to be a reasonable charge.

BruceM
OhioGozaimas
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Post by OhioGozaimas »

Timely, accurate 401(k) record-keeping requires a robust software platform and significant, ongoing IT and CSR support. (No. of participants X no. of payroll and match deposits; loans issued, loan repayments from each pay, etc. etc. Each participant transaction is unique. Plus, plan-level administrative reporting.)

As a result, economies of scale are vital for providing good -- and ultimately profitable -- service delivery. This is why there has been consolidation in record-keeping (as well as perhaps why insurance companies seem to have a leg up on small plans).

As one example, Franklin-Templeton tried to do their own 401(k) record-keeping in-house, had big and ongoing problems, and eventually hired Great-West to do the record-keeping for their plans on a "private-label" basis. (Ultimately F-T sold their plan accounts to G-W.)

Caveat is right about comparing the %-assets to $-per-participant costs, but I think the %-assets does tend to win out, for the reason he mentions...

[A lot of this echoes the good points of BruceM, who posted while I was writing...]
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MossySF
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Post by MossySF »

wootwoot wrote:How can we get a cheaper TPA? From the answers I have a hard time understanding why a computer could not do the job of this company.
There are cheaper TPAs .... but remember it's cheaper to your employer that's important. If your current TPA is free to employer but 0.25% charge to participants, it will be hard to switch to a plan that's $25/per head charged to employer but no fee to participants.
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