Raabe34 wrote:Sub T/A fees are paid by the fund company to the recordkeeper for "selecting" said funds. For example if you are using an American Funds R-3 class share the recordkeeper gets 15 bps and the "advisor" on that fund gets 50 bps.
Actually, this statement is somewhat inaccurate. There are generally two types of "revenue sharing" arrangements in a 401(k) plan.
12b-1 fees are the commissions that go to pay a "registered representative" or "broker" for services provided to a plan.
Sub-TA fees (TA stands for transfer agent) generally go to the third-party administrator (or TPA) for administrative services (discrimination testing, preparing and filing the Form 5500, etc.). TPAs typically do not select funds for a plan as this would be deemed to be a fiduciary function.
Both types of fees are "shared" from the gross expense ratio of the share class of the fund. Revenue sharing can make it easier for the industry to sell a retirement plan because a lot of the fees are hidden from view. It also can help plan sponsors because it can greatly reduce or eliminate the direct administration expenses for the plan, thereby saving the company money. For instance, American Funds has 6 different retirement share classes for their funds with the following revenue sharing arrangements:
R-2 0.65 to 0.75% of 12b-1 and 0.45% of Sub-TA
R-3 0.35 to 0.50% of 12b-1 and 0.30% of Sub-TA
R-4 0.20 to 0.25% of 12b-1 and 0.15% of Sub-TA
R-5 0.00% of 12b-1 and 0.05% of Sub-TA
R-6 0.00% of 12b-1 and 0.00% of Sub-TA
For example, a fund may have a total expense ratio of 1.25% with .50% going to the broker, .30% going to the TPA and the remaining .45% being kept by the fund manager.
Revenue sharing, if not fully disclosed or utilized properly can create fiduciary issues. Sub-TA revenue is not inherently wrong if utilized properly, but is not necessary in a properly designed plan. To use sub-TA revenue properly, plan fiduciaries should negotiate a hard dollar, "billable" fee for the TPA's services and then use any sub-TA fees to offset that billable fee. Unfortunately, many plan fiduciaries (often unknowingly) allow TPA's to incorrectly use this compensation as an additional revenue stream as opposed to an offset. Also, since sub-TA fees are asset-based, the fees go up, often unreasonably, as the plan grows. A savvy 401(k) fiduciary will know how much sub-TA exists, and use this knowledge wisely when negotiating. It also begs the question as to why plan assets should have any bearing on the cost of administration and recordkeeping services (which are per participant functions). If a plan has 100 participants this year and 100 participants next year, the cost of services should be roughly the same (perhaps a slight increase in the second year). However, if the fees to underwrite these services are asset-based, the amount of compensation could go up significantly depending on the growth in plan assets.
Better still, plan fiduciaries should do away with indirect revenue sharing arrangements and negotiate direct fees with plan services providers. This is especially important when revenue sharing payments are uneven, for instance, if a plan has some funds that pay a broker .50% in 12b-1 commission and other funds pay the broker .25% in 12b-1 commission. Major, major conflicts of interest.
In terms of an average recordkeeping/TPA fee, depending upon the services required to administer a plan, the fees should probably range from $50 to $100 per participant. A lot of the larger providers will tell you it costs them $120-180 per participant to deliver their services. I don't necessarily believe that. A small number of recordkeepers/TPAs will charge less than $50 per participant, which may or may not work for a plan depending upon their needs. Many recordkeeper/TPAs charge less than $50 per participant as a "billable" charge, but will have total per participant fees higher than this when any sub-TA revenue is accounted for.
There's quite a bit more I could say about the economics of 401(k) plans. However, to summarize, asset-based fees are better for service providers and fixed fees are better for participants.
[commercial message and link removed
I hope this helps.