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My company was recently acquired and the 401(k) plan is being rolled into the acquiring company's plan. I'm a fan of indexing and was disappointed that the index funds in the new plan have between two to four times the expense ratios than equivalent index funds in the old plan. The justification given for the higher expense ratios was that the previous plan had apportioned the 401(k) plan fees more heavily towards the non-index investment options and the new plan apportions the plan fees evenly across all the investment options. Paraphrasing the justification, the index funds would no longer be able to "freeload" on the backs of the other investment options.

So that made me wonder:

Can expense ratios on investment options in a 401(k) plan contain part of the overall 401(k) plan fees? Can a plan be setup to shift the costs to a subset of the plan's investment options?

Edit: I've re-written the question to removing the confusion about the type of fees/costs/expenses.

Update: I've looked through the plan prospectus and besides listing the expense ratios of each investment options, the only other disclosure of fees was (paraphrased) that plan administration fees could be charged at the end of the year to account holders if the plan sponsor didn't cover all of them and that some of the fees may have been paid through revenue sharing agreements with one or more of the plan's investment options. Revenue sharing agreements would be reflected in the expense ratio for a fund, right? So perhaps the justification was that in the old plan the index funds had no revenue sharing agreements (and therefore lower expense ratios) and the new plan's index funds (which are different funds but the same benchmarks) have revenue sharing agreements, and thus higher expense ratios. Would that make sense?

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    That sounds specious to me, though I'm quite far from an expert. 401(K) plans shouldn't cost much to administer, and the two companies I've worked for both seemed to keep that entirely to themselves - fund expense fees were basically equal to or less what Vanguard would charge me as a personal investor. Is it possible to get a breakout of fees separately - ie, expense ratios, mutual fund fees, and plan fees, as three separate bits (see money.stackexchange.com/questions/22728/…)? – Joe Dec 11 '14 at 16:23
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    The fees should be detailed in the fund prospectus. – littleadv Dec 11 '14 at 17:12
  • @littleadv - if there's overhead from the administrator, won't that be above and beyond fund fees? – JTP - Apologise to Monica Dec 12 '14 at 18:32
  • @JoeTaxpayer wouldn't that be charged separately? – littleadv Dec 12 '14 at 18:57
  • @littleadv - I'd think so. Is the company using higher expense funds so the provider doesn't charge extra fee? There's a lot we can't answer. Need to talk to HR/ Admin. On reading OP's edit, he suggested this as well. – JTP - Apologise to Monica Dec 12 '14 at 19:04
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There are several things being mixed up in the questions being asked.

The expense ratio charged by the mutual fund is built into the NAV per share of the fund, and you do not see the charge explicitly mentioned as a deduction on your 401k statement (or in the statement received from the mutual fund in a non-401k situation). The expense ratio is listed in the fund's prospectus, and should also have been made available to you in the literature about the new 401k plan that your employer is setting up.

Mutual fund fees (for things like having a small balance, or for that matter, sales charges if any of the funds in the 401k are load funds, God forbid) are different. Some load mutual funds waive the sales charge load for 401k participants, while some may not. Actually, it all depends on how hard the employer negotiates with the 401k administration company who handles all the paperwork and the mutual fund company with which the 401k administration company negotiates. (In the 1980s, Fidelity Magellan (3% sales load) was a hot fund, but my employer managed to get it as an option in our plan with no sales load: it helped that my employer was large and could twist arms more easily than a mom-and-pop outfit or Solo 401k plan could). A long long time ago in a galaxy far far away, my first ever IRA contribution of $2000 into a no-load mutual fund resulted in a $25 annual maintenance fee, but the law allowed the payment of this fee separately from the $2000 if the IRA owner wished to do so. (If not, the $25 would reduce the IRA balance (and no, this did not count as a premature distribution from the IRA).

Plan expenses are what the 401k administration company charges the employer for running the plan (and these expenses are not necessarily peanuts; a 401k plan is not something that needs just a spreadsheet -- there is lots of other paperwork that the employee never gets to see). In some cases, the employer pays the entire expense as a cost of doing business; in other cases, part is paid by the employer and the rest is passed on to the employees. As far as I know, there is no mechanism for the employee to pay these expenses outside the 401k plan (that is, these expenses are (visibly) deducted from the 401k plan balance).

Finally, with regard to the question asked: how are plan fees divided among the investment options? I don't believe that anyone other than the 401k plan administrator or the employer can answer this. Even if the employer simply adopts one of the pre-packaged plans offered by a big 401k administrator (many brokerages and mutual fund companies offer these), the exact numbers depend on which pre-packaged plan has been chosen. (I do think the answers the OP has received are rubbish).

  • Looks like I conflated some expenses in the question. I'll update it to see if i can't remove the confusion. Thanks for such a complete answer on 401k-related fees/expenses. – Spig Dec 12 '14 at 17:52
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I question the reliability of the information you received. Of course, it's possible the former 401(k) provider happened to charge lower expense ratios on its index funds than other available funds and lower the new provider's fees. There are many many many financial institutions and fees are not fixed between them. I think the information you received is simply an assumptive justification for the difference in fees.

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