401(k) Fee Disclosure – Cutting Through the Jargon

After many years of waiting, the 401(k) Fee Disclosures are finally here.  If you haven’t received yours, you will likely be getting one in the mail in the coming month.  401(k) plans have a lot of expenses wrapped into the costs of the plan and it’s been hard to pinpoint exactly how much clients were being charged in the past.  The new forms aren’t perfect, but they certainly are a step in the right direction.

Your form should show what each investment option available inside of your 401(k) plan costs you per $1,000 invested.  It should also show on your quarterly statement how much is deducted from your account to cover plan-level fees, like the cost of administering the plan.  Many employers spread these costs out over the account balances of all employees, so as your account balance grows, you’re paying a greater percentage of the fees of the plan than new participants are.  Here are some of the other terms I’ve seen that clients often don’t fully understand.

  • Revenue Sharing Offset – Some 401(k) plan providers have received compensation from investment managers in exchange for offering their funds inside of a 401(k) plan platform.  This revenue sharing either was passed along to the plan sponsor (i.e. your employer) or the plan provider simply retained the additional income.  One way that plans did this was through 12b-1 fees
  • 12b-1 Fees – Mutual funds have an expense ratio that covers the expense of the fund’s operations, and some funds also have a separate 12b-1 fee.  This fee is for ’marketing, distribution, and other services’.  Essentially, it’s money that pays for things like Revenue Sharing Offsets, or is paid as a sales commission back to a selling broker.
  • Expense Ratio – This is the meat and potatoes of what it costs you to own an investment.  Funds deduct this amount from the mutual fund’s activities to cover everything from employing a fund manager and analysts, to putting out prospectuses.
  • M&E Fee (or Mortality Risk & Administrative Fee) – Some plans are offered through insurance companies, and these plans may include an M&E Fee (which is derived from the industry term Mortality & Expense, I realize it doesn’t match up with the more formal description above).  M&E Fees cover a wide range of costs, such as commissions, selling expenses, administrative charges for running the program, and any insurance guarantees that may be offered.
  • Front-End Load – These have largely disappeared from 401(k) plans, but other retirement plans may still have them.  A Front-End Load is a sales charge that comes off of the top of your deposits into your plan.  This amount typically goes to the selling agent, and can range from 1% to 5.25% on the high end.

One last note – just because you’ve chosen an investment option in your 401(k) that is traditionally low-cost, it doesn’t mean that the one inside of your plan is.  This great piece by Brent Hunsberger of The Oregonian details the huge expense difference between an average S&P 500 Index Fund and the one that was being offered in a reader’s plan.  Take a few minutes to read and understand your disclosure form when it arrives, and make choices that are right for you and your future.

Do you have any questions about the new 401(k) Fee Disclosure Forms?  Are there other investing terms that you have questions about?  Please let me know!