401k – A Case Study

By Mark Folgmann

Hopefully you caught 60 Minutes on CBS last week, they had a great segment on all the hidden fees within our 401ks. Katie Couric also picked up the story and did a follow-up on Tuesday. It’s great to see the problem is getting more press on a national basis. We approached a random local company and asked if we could review their plan for our article. We wanted to pick a local company to illustrate that almost all plans are filled with problems and fees that are not disclosed. The company employees over 100 employees and has in excess of 7.5 million dollars in their plan invested with a bank.

This plan was review by the bank recently and the disclosed fees were approximately $39,000 for investment expenses and $6,000 in administrative cost for a total of approximately $45,000. These were the obvious fees and once we started reading all the fine print we discovered revenue sharing fees, additional fund access fees, transaction/brokerage fees and custodial fees. Do you ever wonder why all the questionable fees are in the fine print? By the time we added it all up we were over $120,000 per year in total cost. Our analysis showed that even though the majority of the plan assets were invested in low cost Vanguard funds the bank was charging outrageous fees on top of the Vanguard management fees to allow access within the plan. Virtually all investment choices other than Vanguard were paying kick-backs to the bank to be included in the investment line-up. This pay to play philosophy creates huge conflicts of interest for the plan sponsor. Great funds do not have to pay to play and they stand on their ability to generate excellent returns with low cost. Imagine the bank charging employees 300-600% more that the Vanguard managers charge, just to include them in the fund line-up. This plan prices out at about 1.75% of plan assets with virtually all the cost being asset based, meaning the percentage remains constant on future plan growth. I believe there is another .5 -1% that even I can’t find; most experts agree that overall plan cost are usually in excess of 2.5% per year. If you recall from previous articles I stated that most plans should cost less than 1% of total assets and large plans like this one should be closer to .75% of assets. Overall this would save the employees between $60,000 and $120,000 per year in unnecessary fees. This cost should be able to be obtained while using an advisor that accepts written fiduciary responsibility; which the bank will not. Lastly there was not an Investment Policy Statement in place which acts as the plans guiding principles. It allows for a fiduciary process so the plan sponsors can make smart ongoing decisions regarding the investments within the plan. This statement would have driven different decisions to eliminated most of the conflicts of interest within this plan.

Just wanted to remind you employers out there that we are conducting another “Understanding you 401k” class at NMU on Thurs 5/14 @ 2:00pm. Call the college for details.