Breakdown: How a Vendor Hides    Fees in Their „Free‟ 401(k)   Presented by Michael Kiley, QPA, QKA                       ...
Mike KileyRetirement Plan Consultantmike.kiley@nyhart.com |(317) 845-3512Qualifications or certifications:American Society...
Today‟s Discussion   1. How do service providers get                        paid?                     2. Case Study 1 – Gr...
There is nosuch thing as   “free.”
How do  vendors get     paid?Explicit Fees & Implicit Fees
How Do Vendors Get Paid?Explicit Fees• Stated fees (“Flat Fees” for service)• Asset-based fees (As a % of plan assets)• Tr...
How Do Vendors Get Paid?Implicit Fees• Revenue sharing from investments   – Captured 12b-1 fees   – Sub-ta fees   – Shareh...
How Do Vendors Get Paid?Other Charges• Surrender charges• Market Value Adjustments                                 8
A Midwest-based electronics             manufacturer‟s 401(k) Plan               Plan highlights:CASE STUDY               ...
Investment Options & Associated                                      Fees                                                 ...
What These Fees = in Real $                                                                                               ...
Let‟s Break Out the Fees!                                                                                     Total Expens...
Let‟s Break Out the Fees!             • Total Fund Expense:$36,785.00             • Recordkeeping Fees:                Bas...
Let‟s Break Out the Fees!             What are the explicit fees:             • $8,000 recordkeeping fee             • $2,...
Let‟s Break Out the Fees!               What is the true apples-to-apples                         comparison:             ...
Annual Savings                     $36,225 Annually                            OR             $362.25 per Participant Annu...
A West Coast-based print                shop‟s 401(k) Plan              Plan highlights:CASE STUDY              •   ~ 150 ...
Investment Options & Fee                             Levels                                                               ...
What Are The Real Costs in $                                                                Total Investment   Total 12b-1...
Cost Comparison             • Recordkeeping Fees:                Base Fee: $3,000.00                Per Participant Fee: $...
Annual Savings                   $23,554 Annually                          ORCASE STUDY             $157 Per Participant A...
The Impact of Section 408(b)(2)• Understanding all plan fees can be complicated• Excessive fees can erode away at your ret...
What Should You Do Now?• Request disclosure of all fees from your vendor• Benchmark your fees against other plans of simil...
This concludes our discussionANY QUESTIONS?
So Where is the Peak?        Sign up for       more webinars Register for upcoming educational events onpensions, 401(k), ...
ACTUARY   &EMPLOYEE BENEFITS                               Established in 1943, Nyhart is an ESOP with                    ...
ACTUARY   &EMPLOYEE BENEFITS                               16 Actuaries Consulting In 48 States.                          ...
How Vendors Hide Their Fees In A "Free" 401(k)
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How Vendors Hide Their Fees In A "Free" 401(k)

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Many vendors, including some of the biggest names in the business, claim that they offer free 401(k) and 403(b) administration to employers. Benefit consultant Mike Kiley will take a sample company’s existing “free” 401(k) program from a national vendor and reveal how the hidden fees and undisclosed expenses associated with the plan are costing every employee hundreds of dollars in hidden fees and costs through a shell game that has plagued the industry. Mike will give attendees a snapshot, with real-world data, to the impact of upcoming IRS regulation 408(b)(2), where transparency will be critical for plan sponsors and their fiduciaries to understand why “free” isn’t really so.

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  • Investment expense is a common fee that is often excluded
  • OFFER THE REVIEW OF THE PLAN. BENCHAMARKING SERVICES OFFER
  • Areas of Expertise Include: Cash Balance Plan Defined Benefit & Pension Defined Contribution & 401(k) Employee Stock Ownership Plan (ESOP) Flexible Spending, HRA & HSA Healthcare Actuarial ConsultingLearn more at www.nyhart.com
  • Areas of Expertise Include: Cash Balance Plan Defined Benefit & Pension Defined Contribution & 401(k) Employee Stock Ownership Plan (ESOP) Flexible Spending, HRA & HSA Healthcare Actuarial ConsultingLearn more at www.nyhart.com
  • Transcript of "How Vendors Hide Their Fees In A "Free" 401(k)"

    1. 1. Breakdown: How a Vendor Hides Fees in Their „Free‟ 401(k) Presented by Michael Kiley, QPA, QKA www.nyhart.comCopyright 2011. All Rights Reserved.
    2. 2. Mike KileyRetirement Plan Consultantmike.kiley@nyhart.com |(317) 845-3512Qualifications or certifications:American Society of Pension Professionals andActuaries (ASPPA) qualified pension administrator(QPA) Qualified 401(k) Administrator (QKA); Series65 licensed as a registered investment advisorrepresentative.
    3. 3. Today‟s Discussion 1. How do service providers get paid? 2. Case Study 1 – Group Annuity Product 3. Case Study 2 – Bundled Service Provider 4. How this pertains to 408(b)(2) 5. What can you do now? 3
    4. 4. There is nosuch thing as “free.”
    5. 5. How do vendors get paid?Explicit Fees & Implicit Fees
    6. 6. How Do Vendors Get Paid?Explicit Fees• Stated fees (“Flat Fees” for service)• Asset-based fees (As a % of plan assets)• Transactional fees – “document fee” – “distribution fee” – “loan processing” 6
    7. 7. How Do Vendors Get Paid?Implicit Fees• Revenue sharing from investments – Captured 12b-1 fees – Sub-ta fees – Shareholder service fees• Fund management expenses• Contract charges/wrap fees• Sub-advisory fees• Mortality expenses 7
    8. 8. How Do Vendors Get Paid?Other Charges• Surrender charges• Market Value Adjustments 8
    9. 9. A Midwest-based electronics manufacturer‟s 401(k) Plan Plan highlights:CASE STUDY • ~ 100 employees • ~ $5,000,000 in plan assets • Plan assets are invested in a group annuity product administered by a national insurance co. • Standard 401(k) – no „special features‟ • Company pays no explicit/out-of-pocket expenses 9
    10. 10. Investment Options & Associated Fees Expense Ratio Market (may include Contract Broker/Agent Administration Investment Name Value SUB-TA and Charge Fee Charge 12B-1 Fees) American Funds Growth Fund of America $750,000 0.68% 0.15% 0.25% 0.50% American Funds Washington Mutual $300,000 0.66% 0.15% 0.25% 0.50% Blackrock Mid-Cap Equity Growth $250,000 1.40% 0.05% 0.25% 0.50% Fidelity Mid Cap $500,000 0.66% 0.55% 0.25% 0.50%CASE STUDY SSgA Russell Small Cap Growth Index $100,000 0.06% 0.50% 0.25% 0.50% Delaware Small Cap Value $150,000 0.83% 0.30% 0.25% 0.50% American Funds Capital World Growth & Income $550,000 0.81% 0.15% 0.25% 0.50% Delaware Emerging Markets $400,000 1.40% 0.30% 0.25% 0.50% Delaware Limited-Term Diversified Inc $450,000 0.62% 0.15% 0.25% 0.50% Pimco Total Return $300,000 0.71% 0.25% 0.25% 0.50% American Balanced $250,000 0.65% 0.15% 0.25% 0.50% Galliard Stable Value Fund $1,000,000 0.50% 0.25% 0.25% 0.50% 10
    11. 11. What These Fees = in Real $ Total Actual Total Expense Investment Name Market Value Expense Additional Fund Expense ($) American Funds Growth Fund of America $750,000 0.68% 0.90% 1.58% $11,850.00 American Funds Washington Mutual $300,000 0.66% 0.90% 1.56% $4,680.00 Blackrock Mid-Cap Equity Growth $250,000 1.40% 0.80% 2.20% $5,500.00 Fidelity Mid Cap $500,000 0.66% 1.30% 1.96% $9,800.00 SSgA Russell Small Cap Growth Index $100,000 0.06% 1.25% 1.31% $1,310.00CASE STUDY Delaware Small Cap Value $150,000 0.83% 1.05% 1.88% $2,820.00 American Funds Capital World Growth & Income $550,000 0.81% 0.90% 1.71% $9,405.00 Delaware Emerging Markets $400,000 1.40% 1.05% 2.45% $9,800.00 Delaware Limited-Term Diversified Inc $450,000 0.62% 0.90% 1.52% $6,840.00 Pimco Total Return $300,000 0.71% 1.00% 1.71% $5,130.00 American Balanced $250,000 0.65% 0.90% 1.55% $3,875.00 Galliard Stable Value Fund $1,000,000 0.50% 1.00% 1.50% $15,000.00 $36,785 + $49,225 =$86,010 11
    12. 12. Let‟s Break Out the Fees! Total Expense Investment Name Market Value Expense ($) American Funds Growth Fund of America $750,000 0.68% $11,850.00 American Funds Washington Mutual $300,000 0.66% $4,680.00 Blackrock Mid-Cap Equity Growth $250,000 1.40% $5,500.00 Fidelity Mid Cap $500,000 0.66% $9,800.00 SSgA Russell Small Cap Growth Index $100,000 0.06% $1,310.00CASE STUDY Delaware Small Cap Value $150,000 0.83% $2,820.00 American Funds Capital World Growth & Income $550,000 0.81% $9,405.00 Delaware Emerging Markets $400,000 1.40% $9,800.00 Delaware Limited-Term Diversified Inc $450,000 0.62% $6,840.00 Pimco Total Return $300,000 0.71% $5,130.00 American Balanced $250,000 0.65% $3,875.00 Galliard Stable Value Fund $1,000,000 0.50% $15,000.00 Management Expense= $36,785 12
    13. 13. Let‟s Break Out the Fees! • Total Fund Expense:$36,785.00 • Recordkeeping Fees: Base Fee: $3,000.00 Per Participant Fee: $50.00 ($5,000 total) • Total Recordkeeping Fees:$8,000.00 • Custodial Fees:$2,500.00 (assume .05% of assets)CASE STUDY • RIA Fees:$12,500.00(assume .25% of assets) • Less: Revenue Sharing Offset: ($10,000.00) Total Net Fees:$49,785.00 13
    14. 14. Let‟s Break Out the Fees! What are the explicit fees: • $8,000 recordkeeping fee • $2,500 custodial feeCASE STUDY • $12,500 RIA fee Often these explicit fees are compared to ‘free’! 14
    15. 15. Let‟s Break Out the Fees! What is the true apples-to-apples comparison: $86,010CASE STUDY vs. $49,785 15
    16. 16. Annual Savings $36,225 Annually OR $362.25 per Participant Annually!!CASE STUDY 16
    17. 17. A West Coast-based print shop‟s 401(k) Plan Plan highlights:CASE STUDY • ~ 150 participants, • ~ $8 million in plan assets, standard 401(k) plan • XYZ Mutual Fund Company provides bundled services • At least half of the investment options are required to be proprietary XYZ mutual funds • Client pays no explicit/out-of-pocket expenses 17
    18. 18. Investment Options & Fee Levels Fund Investment Name Market Value Management 12b-1 Fee Sub-ta Fee Expense XYZ Large Cap Growth $1,000,000 0.32% 0.50% 0.15% XYZ Large Cap Value $300,000 0.32% 0.50% 0.15% ABC Mid-Cap Growth $800,000 0.64% 0.25% 0.23% DEF Mid Cap Blend $500,000 0.26% 0.25% 0.03% GHI Small Cap Growth $600,000 0.77% 0.25% 0.23% JKL Small Cap Value $750,000 0.91% 0.00% 0.13%CASE STUDY XYZ International Large Cap Blend $825,000 0.45% 0.50% 0.15% XYZ International Mid Cap Growth $400,000 0.79% 0.50% 0.15% MNO Short Term Bond $350,000 0.39% 0.25% 0.13% PQR Inter Term Bond $205,000 0.25% 0.00% 0.03% XYZ Balanced $370,000 0.29% 0.50% 0.15% XYZ Target Date Series $1,000,000 0.14% 0.50% 0.15% Stable Value Fund $900,000 0.60% 0.00% 0.25% $8,000,000 18
    19. 19. What Are The Real Costs in $ Total Investment Total 12b-1 Total Sub-ta Total Revenue Investment Name Market Value Expense Fee ($) Fee ($) Sharing XYZ Large Cap Growth $1,000,000 $9,700 $5,000 $1,500 $6,500 XYZ Large Cap Value $300,000 $2,910 $1,500 $450 $1,950 ABC Mid-Cap Growth $800,000 $8,960 $2,000 $1,840 $3,840 DEF Mid Cap Blend $500,000 $2,700 $1,250 $150 $1,400 GHI Small Cap Growth $600,000 $7,500 $1,500 $1,380 $2,880 JKL Small Cap Value $750,000 $7,800 $0 $975 $975CASE STUDY XYZ International Large Cap Blend $825,000 $9,075 $4,125 $1,238 $5,363 XYZ International Mid Cap Growth $400,000 $5,760 $2,000 $600 $2,600 MNO Short Term Bond $350,000 $2,695 $875 $455 $1,330 PQR Inter Term Bond $205,000 $574 $0 $62 $62 XYZ Balanced $370,000 $3,478 $1,850 $555 $2,405 XYZ Target Date Series $1,000,000 $7,900 $5,000 $1,500 $6,500 Stable Value Fund $900,000 $7,650 $0 $2,250 $2,250 $76,702 $25,100 $12,954 $38,054 Used to pay for admin expenses 19
    20. 20. Cost Comparison • Recordkeeping Fees: Base Fee: $3,000.00 Per Participant Fee: $50.00 ($7,500 total) • Total Recordkeeping Fees:$10,500.00CASE STUDY • Custodial Fees:$4,000.00 (assume .05% of assets) • Less: Revenue Sharing Offset: ($38,054.00) Excess Revenue to Offset Other Plan Expenses:$23,554.00 20
    21. 21. Annual Savings $23,554 Annually ORCASE STUDY $157 Per Participant Annually!! 21
    22. 22. The Impact of Section 408(b)(2)• Understanding all plan fees can be complicated• Excessive fees can erode away at your retirement savings!• Plan Sponsors have a fiduciary obligation to know all fees and ensure fees are reasonable!• Deadline for compliance with Section 408(b)(2) fee disclosure regulations is April 1, 2012 22
    23. 23. What Should You Do Now?• Request disclosure of all fees from your vendor• Benchmark your fees against other plans of similar size for reasonableness• Request an independent review of your plan‟s fees and services 23
    24. 24. This concludes our discussionANY QUESTIONS?
    25. 25. So Where is the Peak? Sign up for more webinars Register for upcoming educational events onpensions, 401(k), healthcare and other actuarial and employee benefits topics at: www.nyhart.com/events
    26. 26. ACTUARY &EMPLOYEE BENEFITS Established in 1943, Nyhart is an ESOP with 84 employees and offices in Indianapolis, Chicago, Atlanta and Kansas City. Areas of Expertise Include: • Cash Balance Plan • Defined Benefit & Pension • Defined Contribution & 401(k) • Employee Stock Ownership Plan • Flexible Spending, HRA & HSA • Healthcare Actuarial Consulting Learn more at www.nyhart.com
    27. 27. ACTUARY &EMPLOYEE BENEFITS 16 Actuaries Consulting In 48 States. Nyhart is one of the nation’s largest independent actuarial and employee benefit firms, consulting to and administering the plans for clients with more than $14 billion in assets. Our team of benefit advisers deliver personalized analysis and recommendations, translating complex calculations and issues into common language that enables corporations, associations, churches and governments to effectively manage their retirement and health care benefits.

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