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401k price comparisons and the significant negative impact of hidden fees and asset-based charges

Many 401k plans contain significant hidden fees. This is especially true of 401k plans offered to small companies, where it is easier to hide fees from small business owners, who are busy running their businesses and do not have the time or staff to review all the legal mumbo-jumbo of setting up a new plan or reviewing plan documents.

These hidden fees are being lifted from the back pockets of 401k plan participants. The US Department of Labor is trying to force 401k plan providers (banks, mutual fund companies, insurance companies, brokerages, etc.) to come clean about these hidden fees. But there is significant lobbying power at play to stymie the government's effort to force comprehensive 401k fee disclosure.

Here are the facts:

ICI (Investment Company Institute)
and Deloitte

According to a recent study by the ICI (Investment Company Institute) and Deloitte titled, "Defined Contribution / 401(k) Fee Study". the average 401k plan has hidden fees of 0.72% per year. That may not seem like much, but it costs the average participant about $11,000 in hidden fees for the lifetime of his or her 401k. These fees are extracted directly from 401k participants' accounts. In their study, ICI and Deloitte call these hidden fees "all-in" fees. The average hidden "all-in" fee of 0.72% equates to $350 per year, extracted from participants' accounts.

For small 401k plans that cover less than 20 employees and less than $1 million in total assets, the hidden "all-in" fee situation is much worse. For small 401k plan participants, hidden "all-in" fees can jump from 0.79% to a whopping 1.89%, or up to $920 per plan participant per year! For small plan participants, this can mean paying an astounding $28,000 in hidden fees for the lifetime of his or her 401k. See pages 6, 16, 19 and 20 of ICI / Deloitte report by clicking the report cover.
If you are selecting a 401k for your employees, did you know that they could end up losing between $350 to $920 a year in hidden fees?

These hidden fees and asset-based charges are paid by employee participants. Typically it is the employer that pays "above the line" record keeping fees. Below is a accurate comparison of record keeping fees charged by national 401k providers:

401k Easy (Standard) : $995 + [No hidden and other "all-in" fees---ever = $995 per year complete!
The Online 401k : $1,100 + ["all-in" fee of 0.72% to 1.89% of $1 million] = $8,550 to $20,250 per year
Wellington 401k : $1,350 + ["all-in" fee of 0.72% to 1.89% of $1 million] = $8,550 to $20,250 per year
Employee Fiduciary : $1,500 + ["all-in" fee of 0.72% to 1.89% of $1 million] = $8,700 to $20,400 per year
Sharebuilder 401k : $1,080 + ["all-in" fee of 0.65% of $1 million] = $7,580 per year

So it's not rocket science to understand why many plan providers in the 401k industry are blowing smoke to make any discussion about hidden or "all in" 401k fees confusing and bewildering. There is a great deal of money at stake, and all this smoke clouds the fact that many small employers are unknowingly offering their employees 401k plans laden with hidden fees.

Hidden and "all-in" 401k fees are getting noticed by the news media and the legal profession via class-action law suits, and some 401k plan providers that made fortunes mining hidden fees are now scrambling to cover their tracks. They are generating the kind of PR confusion many of us remember from years past, when major tobacco companies tried to explain to Americans that smoking was not hazardous their health. Many in the 401k industry are launching the same kind of PR assault, confusing and clouding the issue, but what is really at stake is the end of their 401k hidden fee gravy train, pure and simple.


A Look at 401k Plan Fees...for Employers

A participant-directed retirement savings plan, such as a 401k plan, is an important tool to help your employees achieve a secure retirement. As part of offering this type of program, you or someone you choose must select the investment options from which your employees will choose, select the service providers for the plan, and monitor the performance of the investments and the provision of services. All of these duties require you to consider the costs to the plan. This brochure can help you ask the right questions to better understand and evaluate the fees and expenses related to your plan.

You or the person you select to carry out these responsibilities must comply with the standards provided under the Employee Retirement Income Security Act of 1974 (ERISA). This federal law protects private-sector pension plans. The law's standards include ensuring that you act prudently and solely in the interest of the plan's participants and beneficiaries.

Understanding fees and expenses is important in providing for the services necessary for your plan's operation. This responsibility is ongoing. After careful evaluation during the initial selection, the plan's fees and expenses should be monitored to determine whether they continue to be reasonable. While ERISA does not set a specific level of fees, it does require that fees charged to a plan be "reasonable."

Of course, the process of selecting a service provider and investment options should address many factors, including those related to fees and expenses. You must consider the plan's performance over time for each investment option. This selection process and continual monitoring will make it possible for your employees to make sound investment decisions.

As part of your evaluation process, here are 10 questions to help focus your consideration of fees and expenses:

l. Have you given each of your prospective service providers complete and identical information with regard to your plan?

2. Do you know what features you want to provide (e.g., loans, number of investment options, types of investments, Internet trading)?

3. Have you decided which fees and expenses you, as plan sponsor, will pay, which your employees will pay, and/or which you will share?

4. Do you know which fees and expenses are charged directly to the plan and which are deducted from investment returns?

5. Do you know what services are covered under the base fee and what services incur an extra charge? Do you know what the fees are for extra or customized services?

6. Do you understand that some investment options have higher fees than others because of the nature of the investment?

7. Does the prospective service arrangement have any restrictions, such as charges for early termination of your relationship with the provider?

8. Does the prospective arrangement assist your employees in making informed investment decisions for their individual accounts (e.g., providing investment education, information on fees, and the like) and how are you charged for this service?

9. Have you considered asking potential providers to present uniform fee information that includes all fees charged?

10. What information will you receive on a regular basis from the prospective provider so that you can monitor the provision of services and the investments that you select and make changes, if necessary?

401k Tip--

Mutual fund 401(k) plans have been aggressively promoted to the small business communities both by no-load fund companies (e.g., Fidelity Funds, Vanguard Funds) and load fund companies (e.g., MFS, John Hancock, Putnam). recent new articles, however, have reported a trend among many of these plan vendors to abandon the very small plans because the costs of providing 401(k) services for such plans versus the revenue generated from them has proved to be a losing proposition. For economic reasons, the sales target for mutual fund bundled plans has been raised, and now companies with fewer than 100 employees are not being actively solicited by most of these vendors. One company that has enjoyed the benefits of a 401k using no-load mutual fund investments is Target Labs (www.targetlab.com) a small employer.


  • Provide all prospective service providers with complete and identical information about the plan and what you are looking for so you can make a meaningful comparison. This information includes the number of plan participants and plan assets as of a specified date.
  • Consider the specific services you would like provided. For example, the types and frequency of reports to employer, communications to participants, educational materials and meetings for participants and the availability and frequency of participant investment transfers, the level of responsibility you want the prospective service provider to assume, what services must be included and what are possible extras or customized services, and optional features such as loans, Internet trading and telephone transfers.
  • Make informed decisions in selecting and monitoring your plan service providers and investments.
  • Fees are just one of several factors you need to consider in your decision making.
  • All services have costs. Compare all services to be provided with the total cost for each prospective provider.
  • Consider obtaining estimates from more than one service provider before making your decision.
  • Cheaper is not necessarily better.

Ask each prospective provider to be specific about which services are covered for the estimated fees and which are not. To help in gathering this information and in making equivalent comparisons, you may want to use the same format for each prospective provider. See www.dol.gov/dol/pwba for an example of a uniform fee disclosure format to assist in your selection and monitoring process.

Fees and expenses can have a significant impact on your employees' retirement savings.


When recordkeeping and administration services are purchased from outside vendors, fees directly attributable to these services reflect widely varying combinations of several fee elements. The most commonly used fee components are:

1. Base administrative charges;

2. Per-participant or per-eligible additional charges;

3. Any minimum charges that exceed the charges generated by the base and per capita charges;

4. Charges for discrimination testing;

5. Charges for filing of the Form 5500 by the service provider; and

6. Charges for payment of distributions from the plan.

Expenses directly charged for recordkeeping and administration services vary widely. Some providers offer many recordkeeping services at no specific charge. In those cases, the expenses are included in the overall charge.

At the Department of Labor's hearings on November 12, 1997, one major 401k bundled service provider offered its perspective on the factors it considers in determining appropriate plan administration fees. Six major considerations were cited:

• Number of plan participants;

• Number of potentially eligible participants;

• Number and diversity of payroll sources;

• Level of administrative activities outsourced to the provider;

• Frequency of transmission of contributions; and

• Participant education needs.

Taking these and other factors into account, the provider negotiates a fee structure with the plan sponsor. Typically, the resulting basic administrative charge is either a flat per-plan fee or a per-participant charge. The sponsor, in turn, then decides whether to pay the administrative fees, or to pass some or all of the costs to plan participants (McNabb, November 12, 1997).

In this expense category, there are significant economies of scale enjoyed by larger plans. Significantly higher per participant costs for smaller plans reflect several aspects of how recordkeeping and administrative fees are structured. First, most providers charge a base fee, then add per-participant or per-eligible charges on top of the base amount. Second, the additional per capita charges typically include a downward-sliding scale, such as $25 extra for each of the first 100 participants, $20 for each of the next 200 participants, and so on. Third, most plans impose a mandatory minimum fee for very small plans. Fourth, among those providers that charge additional fees for plan testing and/or preparation of the Form 5500, most charge uniform fees regardless of plan size or, at best, only a slightly lower charge for small plans. Additional non-profit websites that include relevant unbiased information about 401k plans include www.401kclassroom.com and www.no-load-401k.com.

Table IV-4 shows estimated average recordkeeping expenses based on the price quotations of major 401k service providers. Actual fees billed and expenses incurred can vary widely, based on fee negotiations.

Table IV-4

Average 401k Plan Recordkeeping Fees, 1995
By Number of Plan Participants

Number of Participants  Costs Per Participant
200  $42
500  $37
1,000  $34

 (Source: HR Investment Consultants, November 12, 1997, as published in Corporate Cashflow, May 1996.)

Basic per-participant administrative charges typically reflect minimum charges and sliding scales that substantially reduce per capita costs as plan size increases. Average per-distribution charges are fairly constant across all plan sizes. The average charges for plan testing and Form 5500 preparation increase in absolute terms as plan size and asset volumes grow. However, on a per participant basis, or as a percentage of plan assets, larger plans generally benefit from economies of scale in these cost categories as well (Valletta, November 12, 1997).


Loan expenses typically reflect charges for the origination of new loans and per-annum charges for the maintenance of existing loans. As with basic recordkeeping and administration charges, some providers offer loan-related services at not additional charges. Presumably, in these instances, the costs of offering the loan services are offset by revenues generated elsewhere in the provider's fee structure.

A 1997 survey by Hewitt Associates captured the range of loan-related charges within a sample of 460 plans. Among 205 respondents, loan application fees ranged from $3 to $100 per loan. The median fee was $40, and the most common fee was $50. Among 102 respondents, loan maintenance charges ranged from $3 to $75 per year. The median charge was $15 and almost half the charges were from $10 to $15.

There are, however, many different fee permutations. Some providers charge a relatively high loan origination fee, but no fee or a low fee for loan maintenance. Others do the exact opposite. Still others provide both services at zero or very low cost, but recoup this discount elsewhere in the fee structure.


Trustees' fees are expenses associated with the service provider holding the plan assets in trust, and the preparation of all documents associated with the trusteeship. Some providers do not offer trustee services at all. That is why trustees' fees are shown as a separate cost item outside of the "bundled services" typically offered by major providers.

Among providers who offer trustee services, some provide them at no additional cost. When trustee fees are charged, however, they vary widely. Most providers charge either a flat fee regardless of plan size, or a sliding scale fee that rises slightly for larger plans. However, even these sliding fee structures generally have ceilings that make the per-participant fees lower as plan size increases. In most instances, trustees' fees fall in the range of a few hundred to a few thousand dollars.

Some providers, however, charge trustees' fees as a percentage of plan assets. These fees can be substantial. Among providers charging fixed or modestly increasing fees, there are some fee structures that can generate high per-participant costs for small and medium size plans. However, a small or medium plan faced with high trustee fees from a particular provider has a significant number of lower-fee alternatives available in the 401k marketplace.


Estimated total plan costs can be developed from provider-based fee schedules. The estimates reviewed in this section reflect the combination of bundled expenses for the full array of major plan services -- investment management, recordkeeping and administration, and loan processing, plus trustees' fees.

The 401k Provider Directory Averages Book provides a summary of the variations in observable plan expenses based on the fee schedules reported by major providers of services within the 401k marketplace. Because these data include the major banks, insurance companies, and mutual funds that dominate the 401k marketplace, the findings appear to provide the most systematic measurement of the range of estimated plan expenses across the universe of providers offering the full array of plan-related services.

For comparison purposes, ESI also reviewed a 401k plan "price-shopping" survey conducted by Stephen J. Butler of Pension Dynamics Corporation and published in Money Magazine (Wang, April 1997). The survey solicited price quotations for two plans - one with 100 participants and $2 million in assets, a second with 4,000 participants and $20 million in assets. Cost estimates for The smaller plan reflect the average of quotations from 17 major 401k providers. Estimates for the larger plan are based on 8 quotations.

Butler's survey findings can be compared to the two most comparable plan prototypes presented in the Averages Book. In order to standardize the cost estimates across differing assumptions about asset volumes, we have translated our "dollars-per-participant" estimates into "basis points" as a share of plan assets. Under this presentation, per-participant costs of $300 in a calculation assuming $30,000 of assets per participant, would equal costs of 1% of assets, or 100 basis points. The results of this comparison are shown in Table IV-5.

Table IV-5

Comparison of Estimated Total Plan Costs
401k Provider Directory and Butler Survey
Costs as Basis Points Applied to Plan Assets

40I(k) Provider
40I(k) Provider
Plan Size 100 100 4,000 2,000
Participants Participants Participants Participants
$2 million $3 million $20 million  $60 million
assets assets assets assets
Average 132 140 99 110
Cost basis points basis points basis points basis points

(Sources: Butler, Pension Dynamics Corporation, as reported in Wang, Money, April 1997; H.R. Investment Consultants, 401k Provider Directory Averages Book, 1997)


The Butler survey is based on a limited sample of major 401k service providers. It does, however, effectively capture the wide range of expenses that result from the diverse fee structures within the 401k marketplace. Table IV-6 illustrates the range of fee quotations for the prototype plan with 100 participants and $2 million in assets.

Table IV-6

Projected Total Annual Plan Fees
100 Participants, $2 million Assets
(17 major service providers)

 Total Annual Fees As:


Total Dollars per Percentage of
Fees Participant Plan Assets
Lowest $11,375 $114 0.57%
Mean $26,435  $264 1.32%
Median $25,600 $256 1.28%
Highest $42,775 $428 2.14%

    (Source: Butler, Pension Dynamics Corporation, in Wang, Money, April 1997)

Based on fee quotations from only 17 of the approximately 200 firms providing fully bundled 401k plan services, projected plan expenses vary widely. The highest projected cost is nearly four times the lowest projected cost.


The wide variation in projected total expenses for a standardized plan prototype reflects the disparate - and potentially confusing - manner in which service providers charge for the full package of services involved in administering a 401k plan. The following discussion illustrates three possible fee structures and the expenses these structures would generate for a 401k plan with 100 participants and $2 million in total assets. The three fee structures represent potential fee structures that would result in low, average, and high expenses for such a plan.

Table IV-7 shows the component elements of three illustrative fee structures for a plan with 100 participants and $2 million in assets. Each fee structure includes a possible mix of fixed-dollar, per-capita, per-transaction, and asset-based charges typically involved in the purchasing of 401k plan services. The examples do not represent the advertised or quoted fees of any particular 401k plan provider. They reflect ranges in various fees and charges within the bounds identified in the available literature.

Table IV-7

Illustrative 401k Plan Fee: Schedule of Charges
Plan with 100 Participants, $2 million in Assets


Recordkeeping / Administration  
Base administrative fee $8,500 $2,000   $1,500
Charge per participant $ 25  $ 28  $ 33
Charge per distribution  $ 0  $ 0  $ 35
Nondiscrimination testing $ 0  $ 500  $ 0
Filing of Form 5500    $ 0  $ 350  $ 0
Loan Processing
Loan origination fee  $ 35  $ 75  $ 95
Loan maintenance fee  $ 20  $ 25  $ 0
Trustee Fees  $ 0  $2,800  $ 500
Investment Fees (% of assets)
Average expense ratio of funds 0.42%  0.92%  0.80%
Other asset fees  0.00%  0.00%   0.90%

The potential impact of diverse provider fee structures can be shown by aggregating the costs that would result from the three sets of fees shown above. Table IV-8 shows the fees that would occur for a plan with 100 participants and $2 million in assets. Non-investment expenses reflect the total of all base charges, per-participant charges, and per-service charges that each provider includes in its fee structure. Distributions charges assume 10 payments per year. Loan charges reflect 10 new loans each year and 30 loans outstanding per year. Investment expenses reflect the application of the expense ratios and asset fees to an asset base of $2 million.

Table IV-8

Illustrative 401k Plan Fee: Total Fees
Plan with 100 Participants, $2 million in Assets


Recordkeeping / Administration  $11,000  $ 5,650  $5,150
Base administrative fee  $ 8,500  $ 2,000  $ 1,500
Participant charges  $ 2,500  $ 2,800  $ 3,300
Distribution charges   $ 0  $ 0  $ 350
Nondiscrimination testing  $ 0  $ 500  $ 0
Filing of Form 5500  $ 0  $ 350  $ 0
Loan Processing  $ 950  $ 1,500  $ 950
Loan origination fees  $ 350  $ 750  $ 950
Loan maintenance fees $ 600  $ 750  $ 0
Trustee Fees  $ 0 $  2,800  $ 500
Investment Fees (% of assets) $8,400 $18,400  $34,000
Cost of expense ratios  $8,400  $18,400  $16,000
Other asset fees  $ 0 $  $18,000
TOTAL FEES  $20,350 $ 28,350 $ 40,600
Total Fees per Participant  $ 204  $ 286  $ 406
Total Fees as % of Assets  1.02%  1.42%  2.03%

The distributions and variations of the component costs suggest some of the uncertainties faced by plan sponsors seeking to obtain plan services at reasonable costs. Provider A's fee structure generates the highest recordkeeping and administration fees. However, those are more than offset by significantly lower investment expenses. Provider C offers the lowest non-investment expenses, but its combination of expense ratios and other asset charges drives up the total cost significantly.

A new plan, with low average asset values, could - at least for a few years - face an exactly opposite total cost equation. Thus, an additional element facing plan sponsors shopping for plan services is how best to gauge the most advantageous fee structure over a forward-looking time horizon. As a given plan matures, and average asset values grow, total costs and the distribution of those costs are constantly shifting. An attractively priced provider at a given point in time may present a much less attractive cost equation within a few years. However, if the growth and shift in costs are largely unseen or unknown, effective decisions may be delayed or not accurately assessed.


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