How Many Fees Are Being Paid From Our 401k Plan?

In the US, we have been living through increasing concerns regarding our 401k plans. While the debates and issues continue over the excessive and hidden fees that come along with the 401k plan, it is certain that this plan is loaded with unnecessary services, which carry unnecessary fees, which are also hidden from the participant.

There are a lot of different categories of fees; such as investment management costs and plan level costs. Now to evaluate the 401k plan fees, we have to start at the beginning. In a conventional 401k plan, 14 different parties are charging their fees to the plan. Here’s who they are:

1. The brokerage firm takes hidden commission for clearing the trades of the fund.

2. The fund company takes rebates from the brokerage firm commission, for providing the shareholders with research services.

3. The fund company charges for managing the funds.

4. 401k plans which are being managed by insurance companies may have extra costs.

5. The clearing agent.

6. The custodian who holds the account for the benefit of the trust and provides data for record feeders and administrators.

7. The record keeper is also paid to take aggregate accounts at custodian level and tracks them at a participant level.

8. Sales people are paid commission for bringing new business to the above mentioned parties.

9. Fiduciary investment advisors are invoicing the plan trustee, so they get paid from the assets.

10. The many consultants who provide their services such as checking compliance.

11. Communications specialists share commissions with brokers

12. The annual accounting services

13. The plan’s legal council

14. Insurance premiums that indemnify fiduciaries.

These parties all stand to gain from the 401k plan’s assets, and this entire hidden fee problem is a result of a bad approach to the management of the plan. As long as the retirement plan industry continues defending the 401k plan and the way it works, litigation will continue and no changes will be made. What should be done is for the industry to seek an independent advice to fix the whole system, thus gaining again the trust of all future retirees.

Reference: http://www.401khelpcenter.com/pdf/mdh_understanding_fees_v4.pdf