|
Guest Article Looking Under the Hood of Your 401k to Understand the Real CostsBy Jeb Graham CEBS, CIMA® of CapTrust Financial Advisors, an independent consulting/advisory practice focused on the institutional retirement plan market, serving corporate, closely held, non-profit and governmental organizations. You may contact Jeb at 813.218.5008 or jeb.graham@captrustadv.com. One of the big challenges facing plan sponsors is determining their plan's real overall cost in light of the various interdependent cost components: plan design, service provider selection, investment management, recordkeeping, plan administration, participant services. Meeting this challenge requires a level of expertise, industry knowledge and experience that most plan sponsors don't have, and often don't invest the time or effort to gain access to. 401k plan costs are either paid by the employer in hard dollars, or paid from trust assets in soft dollars. Although many plan sponsors pass all costs on to participants, the norm is for the employer to pay for plan level services and participants to pay for investment management and services related to participants. Hard dollar costs are fairly easy to monitor…fees to pension administration firms for required IRS filings and compliance testing; fees to ERISA attorneys for plan document drafting and review; fees to a CPA firm if a plan audit is required. Most plan sponsors have a reasonable understanding of these costs relative to services provided. Soft dollar costs are a different matter. As multi-fund manager platforms have become more in demand, the revenue sharing arrangements among the fund managers on the platforms have become increasingly significant. And increasingly complex. The challenge for plan fiduciaries is to understand what they are paying for…and determine if they are getting their money's worth. The 401k investment platforms are a good starting point to develop a basic understanding of the cost structures. Virtually all 401k arrangements fall into one of the following: Proprietary Mutual Fund - A mutual fund family offers full service recordkeeping and plan administration, with a requirement to use some or all of their proprietary funds on the investment platform. If outside funds are made available, these participating funds share part of their revenue with the sponsoring fund family, primarily to subsidize recordkeeping costs. To keep pricing to plan sponsors reasonable, the proprietary fund family must have some of the "house" funds on the platform. Group Annuity - An insurance company offers a series of pooled investment accounts that are unitized into shares in order to be reflected on a daily valued 401k recordkeeping system. There are two types of group annuity platforms. The first one invests the pooled accounts exclusively in shares of retail mutual funds. Since these pooled accounts are invested only in shares of a particular mutual fund, the value fluctuation is almost identical to the actual fund. The only difference is an asset charge or contract fee that is imposed on top of the mutual fund expenses. The second type is a sub-advised arrangement in which the pooled accounts are managed with objectives similar to a particular mutual fund or managed portfolio, but not invested in the actual fund itself. These sub-advised funds may either be exclusive to one particular financial institution or made available to a select number of banks and insurance company platforms Sub-advised Collective Funds - this arrangement is similar to the sub-advised arrangement described in the previous paragraph, with one difference. It is not structured as a group annuity contract. The pricing format is similar, the investment structure is similar, but the contractual arrangements are different. Open Architecture - The hub of this arrangement is the recordkeeping entity as opposed to a mutual fund, bank or insurance company. This format allows the plan sponsor to select virtually any fund to be included in a customized platform specific to their plan. Advances in recordkeeping and trading technology have made this arrangement an available and reasonably priced alternative. But before you jump on this, beware of the impact of revenue sharing. If a specific fund does not subsidize the recordkeeping entity through revenue sharing, the apparent costs will be higher. You might ask, where do the revenue sharing dollars come from? The answer…internal expenses charged by the fund. Some funds have created special retirement class fund shares with increased internal expenses to allow for revenue sharing. If this sounds complex, it is. The number of possible pricing structures is almost endless. From a pricing standpoint, the complexity of this is mind boggling, even to experts. At the end of the day, there is no one best solution. Informed decision making is not magical. It is suggested that the best practice is hiring the necessary expertise, either on your payroll or via an experienced 401k advisor or consultant. This material is distributed solely for information purposes and is not a solicitation of an offer to buy any security or instrument or to participate in any trading strategy. The views contained herein are the opinions of the author. It is not intended as legal or tax advice. CapTrust Advisors, LLC is a Registered Investment Advisor with the SEC. CapTrust is not a legal or tax advisor. Other articles by Jeb Graham: Looking Under the Hood of Your 401k to Understand the Real Costs, Does Your Organization's Retirement Plan Measure Up? and The Importance of Legal Counsel Review. ### 401khelpcenter.com is not affiliated with the author of this article nor responsible for its content. The opinions expressed here are those of the author and do not necessarily reflect the positions of 401khelpcenter.com. This article is for informational and educational purposes only and doesn't constitute legal, tax or investment advise. | ||||
|
About
| Glossary
| Privacy Policy
| Terms of Use
| Contact Us
|
