401k Fee Question

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401k Fee Question

Postby wootwoot » Fri Sep 25, 2009 8:48 pm

What do Sub-TA fees go to and what do 12b-1 fees go to? Is there any way to cut these out and what are high and low rates for these fees?
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Postby dbr » Fri Sep 25, 2009 9:15 pm

The fee structure in your 401K is controlled by your employer who has negotiated a deal with an administrator and a fund provider. 12b-1 fees are a payoff to brokers for "advice and services" and should not normally exist in a 401K plan. Are you sure you are looking at the costs to participants in your plan distinct from looking up costs on a public website for retail versions of the funds in your plan?

What you can do (about all you can do) is select from the available funds for the lowest cost options and build your total portfolio with these and investments outside the plan.

It might be useful to post your plan fund selection and ER's as taken from plan documents.
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Postby Raabe34 » Sun Sep 27, 2009 10:59 pm

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.

You can work your way around them with a proactive 401k committee you can work to get different fund companies and different share classes. In this environment you have to ask to get things reduced and often you can do it.
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Postby kaneohe » Mon Sep 28, 2009 11:13 am

Is a $70 annual recordkeeping fee considered normal? hi/lo?
Supposedly this is the only fee other than normal ER fee on the specific funds chosen. This is for a few fund companies that have low ERs.
Another custodian has no recordkeeping fees but has higher ERs on their funds so,depending on your assumptions, may come out similar to the others.
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Postby Stonebr » Mon Sep 28, 2009 1:47 pm

Is a $70 annual recordkeeping fee considered normal? hi/lo?


Can't tell because the industry norm is to bury the recordkeeping fees in other fees. Also, plans are as different as dogs. 401k and other Defined Contribution (DC) plan recordkeeping is a lot more complex than just keeping mutual fund accounts or IRAs. The things that make DC recordkeeping different include: payroll deduction, vesting schedules and forfeiture rules, loan provisions and repayment schedules, transfer restrictions, hardship withdrawals, nondiscrimination testing for highly compensated employees, company stock (if any) in the plan, audit requests from the employer, as well as coordinating 401k with other related plans like profit sharing. To make matters worse, these provisions are not all the same for all plans, and certain participants my "grandfather" into some provisions, while others do not.
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Postby Raabe34 » Mon Sep 28, 2009 10:52 pm

kaneohe wrote:Is a $70 annual recordkeeping fee considered normal? hi/lo?
Supposedly this is the only fee other than normal ER fee on the specific funds chosen. This is for a few fund companies that have low ERs.
Another custodian has no recordkeeping fees but has higher ERs on their funds so,depending on your assumptions, may come out similar to the others.


I wish I could tell you but I really can't with just that much information. If you could post your tickers I could do my best for you. It may be a steal if you are getting access to instituitional level vanguard indexes or you could be in american funds r-2 shares and be paying a heck of a lot more. Also if you posted a rough total amount of plan assets that would help also. Big difference with a 500,000 plan to a 10,000,000 plan.
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Postby Josh Itzoe » Fri Oct 09, 2009 10:18 pm

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.
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Postby Raabe34 » Fri Oct 09, 2009 11:58 pm

R-2 0.65 to 0.75% of 12b-1 and 0.45% of Sub-TA


So for Growth Fund of America R-2 RGABX that would be .75% for 12b-1 .45% for sub-ta for a cost of 1.2% without the fund management cost according to your numbers. The expense ratio per morningstar is 1.36%. I think their typical fund management cost is around .30%.
Last time I looked the sub-ta for American's r-2 class was .25% and r-3 was .15%. It's been awhile and I'm not in the broker world.
If I am on the wrong track please let me know.
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Postby Josh Itzoe » Sat Oct 10, 2009 5:42 am

So RGABX has an expense ratio of 1.48%. Whether the 12b-1 is .65% or .75% depends on which 401k platform you are in - American Funds has a number of different types of products (PlanPremier, PlanPremier TP, Recordkeeper Direct plus availability on other providers platforms.) These different products have certain requirements to them (e.g. whether the plan requires exclusive use of AF).

Not relating to the situation where another provider is involved (and where revenue sharing arrangements may be custom negotiated) and where AF is directly involved in some aspect from a recordkeepinng and/or administration standpoint, I believe you can only get an R2 share if the plan has less than $3m in assets. In that case, the revenue sharing credit for sub-TA is .45%. If the plan is in one of the PlanPremier products, then the 12b-1 is .65% but if it is in the Recordkeeper Direct product then the 12b-1 is .75%.

Therefore, in the case of RGABX in one of the PlanPremier products, the breakdown should be:

Gross Expense Ratio (ER) = 1.48%
12b-1 Fee = .65%
Sub-TA = .45%
Net to AF = .38%

And in the case of RGABX in the Recordkeeper Direct product, the breakdown should be:

Gross Expense Ratio (ER) = 1.48%
12b-1 Fee = .75%
Sub-TA = .45%
Net to AF = .28%

I'm pretty sure with AF there can also be expense reimbursements that are involved that may change the numbers very, very slightly.

Understanding the economics of retirement plans is often a complex and confusing undertaking. Backing out the math isn't hard, but gathering the data points can be.
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Postby Trev H » Sat Oct 10, 2009 8:12 am

12b-1 fees

In my case (company 403b plan) there is a local benefits provider that our company management works with to provide the employees a retirement plan.

This guy comes in once or twice for a company meetings (over a span of several years) and gives basically no good advice to anyone.

He is our "registered representative".

He convinced company management to go with OneAmerica (a insurance company based retirement plan provider) rather than a good one like Vanguard, Alerus, etc...

As a result we have 2 index fund options available in our plan - 500 index and Russell 2000 index and the rest are mostly high cost actively managed funds.

Also the index funds have ER's that do not have index fund like cost at all.

For example the State Street Equity 500 index fund has a total ER of .70
Russell 2000 index fund has a ER of 1.1%.

If you drill down into the 500 index fund prospectus (which probably 99% of the company employees have not done) you will find that that .70 ER is made up of this:

.10 investment management expense
.60 12b-1 fee

The 12b-1 fee is collected and shared by OneAmerica and our Registered Representative.

On top of that - OneAmerica charges us .15 quarterly (.60 annually) to admin the plan which has a total of 1.5 million in assets.

There are some Target Retirement type funds in our plan with ER's in the 1.6% to 1.2% range (which also include similar 12b-1 fees of .50).

OneAmerica can tell company management (and the employees) that they are only charging us .15 quarterly to admin the plan (.60 annually) but the real truth is that is you consider the 12b-1 fees (that 99% of the employees do not know about) they are actually charging us much more and sharing part of that with our "friend" the local benefits guy.

And all of this happens over and over again in company plans all over the USA even though ERISA guidelines specifically state that the Company Retirement Plan must be setup and run in such a way as to be in the "best interest" of the plan participants (the employees).

Any company retirement plan that includes funds charging 12b-1 fees (which are really just under the table kickbacks for those who have their hands in your cookie jar) is not being adminstered in the best interest of the employees.

12b-1 fees do not benefit the plan participants at all.

Ongoing 12b-1 fees are simply a way to (sort of hide) a load. Front End or Back End loads are a bit more obvious to the investor - usually stated plainly, but if that fee is changed to a ongoing 12b-1 fee, it is sort of hidden down in the details of the ER (which many investors don't understand is actually a load) and not actually part of the cost of "managing" the investments.

===
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Postby Raabe34 » Sun Oct 11, 2009 11:21 pm

Josh Itzoe wrote:So RGABX has an expense ratio of 1.48%. Whether the 12b-1 is .65% or .75% depends on which 401k platform you are in - American Funds has a number of different types of products (PlanPremier, PlanPremier TP, Recordkeeper Direct plus availability on other providers platforms.) These different products have certain requirements to them (e.g. whether the plan requires exclusive use of AF).

Not relating to the situation where another provider is involved (and where revenue sharing arrangements may be custom negotiated) and where AF is directly involved in some aspect from a recordkeepinng and/or administration standpoint, I believe you can only get an R2 share if the plan has less than $3m in assets. In that case, the revenue sharing credit for sub-TA is .45%. If the plan is in one of the PlanPremier products, then the 12b-1 is .65% but if it is in the Recordkeeper Direct product then the 12b-1 is .75%.

Therefore, in the case of RGABX in one of the PlanPremier products, the breakdown should be:

Gross Expense Ratio (ER) = 1.48%
12b-1 Fee = .65%
Sub-TA = .45%
Net to AF = .38%

And in the case of RGABX in the Recordkeeper Direct product, the breakdown should be:

Gross Expense Ratio (ER) = 1.48%
12b-1 Fee = .75%
Sub-TA = .45%
Net to AF = .28%

I'm pretty sure with AF there can also be expense reimbursements that are involved that may change the numbers very, very slightly.

Understanding the economics of retirement plans is often a complex and confusing undertaking. Backing out the math isn't hard, but gathering the data points can be.


Mr. Itzoe, I am not disputing you but I am having a hard time trying to understand. I did not know that their are two different products of RGABX. Also I see no where that the Exp Ratio is 1.48%, everything I come across shows the expense ratio @ 1.36%. All I can comment on is what I know from plans I have come across and would love to learn more about it if you have some good sources. TIA
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Postby Josh Itzoe » Mon Oct 12, 2009 4:20 pm

Here's a link from the American Funds website (just did a Google search for "American Funds R shares") that shows the expenses for the R-2 share class (and other R share classes via the drop down): http://tinyurl.com/yj6ux3d

I realize this differs from what you see on the Morningstar website that lists the expense ratio as 1.36%. I also doublechecked the expense ratio against our recordkeeper database (for non-AF recordkeepers and TPAs) and saw that the expenses for this fund ranged from 1.43% to 1.48%. Morningstar is the only place I have seen it listed as 1.36 and their data is not always infallible.

Also, there are not two RGABX products. There are multiple 401k products/platforms that American Funds offers that have different revenue sharing arrangements associated with the funds offered in each product. The total expense ratio for RGABX should be the same regardless of the product, although the broker and TPA will make more or less from revenue sharing depending on which product your company is in. While my experience is that the different pricing arrangements are not proactively disclosed to plan sponsors (much less participants), I believe American Funds is a reputable company and I'm pretty confident that if you asked your contact at American Funds they would tell you the differences. As an aside, if you go to this link, http://tinyurl.com/yjwcujn, you will find the SEC registration for the American Funds Target Date Retirement Series and if you search for "unaffiliated entities" you'll see that the R-2 share class provides for different compensation structures depending whether the payments are made to affiliated or unaffiliated entities.

From my perspective, understanding and accounting for the different types of revenue sharing is complex, confusing and cumbersome and can lead to errors. I think this validates my belief that services (apart from expenses ratios on mutual funds) should be paid for with direct, fully disclosed fees as opposed to through revenue sharing.

I hope this helps.
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