401k Providers can charge a variety of direct and/or indirect fees when delivering administrative services such as asset custody, professional investment advice, and Third-Party Administration(TPA). Fees for these services can be paid for through deductions from participant accounts, or paid for by the plan sponsor. Business owners should plan to avoid direct fees for two important reasons:
- They lack the transparency of direct fees, making unnecessary fees much harder to avoid.
- They may limit access to top tier 401k investments, which typically pay no indirect fees.
Here are the best ways to identify these hidden fees and maximize your 401k with a Certified Financial Planner.
Revenue sharing involves adding fees not related to investment to the operating expenses of a mutual fund. This increases the cost of your 401k investments and lowers participant returns. These fees come in two forms:
- 12b- 1 Fees- These are paid to brokers and/or insurance agents
- Sub- Transfer Agency Fees- These are paid to the 401k record keeper
You are able to find the formula for your 401k’s revenue sharing in your providers 408b-2 fee disclosure.
Variable Annuity “Wrap” Fees
If your 401k is provided by an insurance company, the chances are your plan investments are variable annuities. This is essentially a mutual fund that is owned by the insurance company and “wrapped” in by an annuity contract.
This gives the insurance company an opportunity to add a wrap fee to any mutual fund. This fee can include charges for administration, sales commission, and surrender charges. Make sure to hire a Fee-only Financial Planner to avoid many of these commission fees.
Similar to Revenue Sharing fees, you are able to find the fee formula on your providers 408b-2 fee disclosure, but not the amount.
Analyzing share classes is a critical way to lower your fees. All share classes hold the same underlying securities, but can pay drastically different indirect fees. There are two basic types of sales load fees whose amounts are based on share classes: front-end and back-end loads. A front end load is paid to the salesperson when shares are purchased, while a back end load is paid when the shares are sold. A back end load may also be known as a contingent deferred sales charge. Furthermore, there are three common types of share classes, and they are paid in the following ways:
- A shares- Front-end load applies, no Back-end load
- B shares- No Front-end load, Back-end load applies
- C shares- No Front end load, small Back-end load applies, annual 12b-1 fee applies
Lower Your 401k Fees with Transparency
Our experience shows that 401k providers with the least transparency charge the highest fees. In order to minimize your fees, make sure that you only pay direct fees on your 401k investments so that you don’t get overcharged. Couple this technique with a Fee only Fiduciary, and you will be well on your way to maximizing your financial freedom