ERISA 408(b)(2) and 404(a)(5) will certainly be game-changers in the industry. Many companies and advisors are worried that their clients will view their fees as too high. As we march closer to the disclosure deadline, it's time to educate participants about the various fees and their necessity.
Hard- vs. Soft-Dollar Expenses Plan expenses can be divided into hard-dollar and soft-dollar categories. Hard-dollar expenses include the fees charged for the day-to-day operations of the plan, such as plan administration, design and compliance. Employers usually pay these costs, but there are exceptions to this rule. Some employers pay for these expenses out of the assets of the plan, causing the participants to pay indirectly. Other hard-dollar costs include optional individual services, such as loan and distribution provisions, that typically charge one-time fees.
Soft-dollar fees cover many services, including record keeping, website services, automated access to investment information, customer education and advice services. The costs associated with money management, such as investment management fees, 12-b1 fees, sub-transfer fees, asset-based or wrap fees and revenue-sharing fees, are also soft-dollar expenses.
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Money Management and Fund Expense Fees Mutual fund companies that manage participants' money automatically deduct the money management, or fund expense, fees. Since these fees may have a significant impact on the performance of investments, it is important for participants to understand how they work. Let's look at the individual fee classes:
Investment Management Fees This type of fee is charged by mutual fund companies to pay for investment managers. The companies charge these fees as a percentage of assets invested (like a quarter of a percent to two percent) and deduct them from investment returns.
12-b1 Fees Mutual funds pay these distribution expenses from fund assets. The 12-b1 fees include broker commissions, marketing expenses and other administrative costs and may range from a quarter of a percent to one and a quarter percent of assets invested.
Sub-Transfer Fees Record keeping and other services related to participant shares are usually contracted to third parties, called sub-transfer agents. Brokerage firms and mutual funds may pay their cost as a fixed fee on a per participant basis, an asset basis or some combination of the two. This fee is usually 0.05 percent of assets invested in a mutual fund.
Revenue-Sharing Fees Some mutual funds pay a revenue-sharing fee to operation companies. The expense covers a portion of management fees, record keeping and other services. Revenue-sharing fees are similar to slotting fees, the price that supermarkets charge cereal companies to slot, or place, their products on the shelf. A 401(k) provider's platform is like a supermarket shelf. Mutual funds pay a slotting fee for the best placement in their offerings.
Plan Consulting Fees These are fees paid to registered investment advisors, or consultants or are commissions to brokers for advisory services. Employers may pay this as a hard-dollar expense or participants may pay them indirectly through deductions from investment assets in each fund.
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