• Save
The Hidden Costs to Participants of High-Fee Funds In Your Portfolio
Upcoming SlideShare
Loading in...5
×
 

The Hidden Costs to Participants of High-Fee Funds In Your Portfolio

on

  • 937 views

Retirement investment educator Eric Roberts will showcase how high-expense funds not only drive unnecessary expense to your participants, but actually slow their ability to retire on time.

Retirement investment educator Eric Roberts will showcase how high-expense funds not only drive unnecessary expense to your participants, but actually slow their ability to retire on time.

Statistics

Views

Total Views
937
Views on SlideShare
937
Embed Views
0

Actions

Likes
0
Downloads
0
Comments
0

0 Embeds 0

No embeds

Accessibility

Upload Details

Uploaded via as Microsoft PowerPoint

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment
  • Amends a prohibited transaction rule under ERISA and the Internal Revenue Code. That rule says that it is a prohibited transaction for a plan to enter into an arrangement with a service provider unless the “arrangement” is reasonable and the compensation being received by the service provider is reasonable. The regulation adds disclosure requirements for the service provider so that plan fiduciaries can determine whether a service provider arrangement is reasonable. What plans are covered? Defined Contribution (i.e. 401(k), ERISA 403(b)) and Defined Benefit Pension plans. Excluded from this definition: IRAs Simplified employee pensions, and Simple retirement accounts.
  • Because rates are averaged over two years, it will take a couple of years for costs to decline Plans will likely see high requirements drop quickly to zero within a few years of rates increasing
  • 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 Consulting Learn 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 Consulting Learn more at www.nyhart.com

The Hidden Costs to Participants of High-Fee Funds In Your Portfolio The Hidden Costs to Participants of High-Fee Funds In Your Portfolio Presentation Transcript

    • High Fee Funds
    • The Hidden Costs To Participants of Your 401(k), 403(b) or 457 Plan
    www.nyhart.com Presented by Eric Roberts, RIA Copyright 2011. All Rights Reserved.
  • Eric Roberts
    • Retirement Educator, RIA
    • eric.roberts@nyhart.com | (317) 845-3511
    • Qualifications or certifications: Accredited Retirement Plan Consultant through The Society of Professional Asset-Managers and Recordkeepers and Series 63 and 65 designations..
    •  
    •  
    • Overview: Fee Transparency and Regulations 408(b)(2) & 404(a)(5)
    • Breakdown: How Funds Generate Income
    • Comparing Funds – What to Look For
    • Example of Participants Investing in High-Cost vs. Low Cost Funds
  • Fee Transparency Is Coming
  • The Fee Transparency Timeline Form 5500 Effective 1/1/09 408(b)(2) Interim Final 7/10/10 404(a)(5) Final Reg 10/20/10 408(b)(2) Takes Affect 4/1/12 404(a)(5) Takes Affect 6/1/12 ERISA §408(b)(2) is designed to increase fee transparency
  • What is 408(b)(2)?
  • What is 404(a)(5)
  • How do funds create revenue? Fees are built into the fund’s structure.
  • SITUATION ANALYSIS
    • COMPANY: XYZ & Son Manufacturing, Inc.
    • LOCATION: Indianapolis, IN
    • EMPLOYEES: 234
    • Plan Assumptions
    • 401(k) with $10 million in assets
    • 200 participants with account balances
    • Company has one location
    • American Balanced Fund is the only investment choice *
    • Plan costs are covered by the Expense Ratio captured by the mutual fund
    • Services Needed Appropriate Fees for Services Rendered
    • Administration: $3,000 or 0.03%
    • Recordkeeping ($50 x 200): $10,000 or 0.10%
    • Custody: $3,000 or 0.03%
    • Investment Related (Adviser): $25,000 or 0.25%
    • Mutual Fund Investment Management: $24,000 or 0.24%
    • Total $65,000 or 0.65%
    • * This is done to simplify the examples in the study.
  • How Funds Generate Revenue Share classes feature varying fee structures Example: American Balanced Fund Share Class Ticker Expense Ratio R-1 RLBAX 1.40% R-2 RLBBX 1.40% R-3 RLBCX 0.94% R-4 RLBEX 0.65% R-5 RLBFX 0.35% R-6 RLBGX 0.30%
  • SITUATION ANALYSIS Current Plan – Share Class Selected American Balanced Fund Included in Expense Ratio Share Class Ticker Expense Ratio Mgmnt Fee 12b-1 Fee Sub-TA Fee R-1 RLBAX 1.40% 0.24% 0.99% 0.10% R-2 RLBBX 1.40% 0.24% 0.75% 0.25% R-3 RLBCX 0.94% 0.24% 0.50% 0.15% R-4 RLBEX 0.65% 0.24% 0.25% 0.10% R-5 RLBFX 0.35% 0.24% none none R-6 RLBGX 0.30% 0.24% none none
  • SITUATION ANALYSIS Actual cost to plan participants American Balanced Fund Included in Expense Ratio Share Class Ticker Expense Ratio Mgmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX 0.94% 0.24% 0.50% 0.15% Costs % of Plan Assets Total $94,000 0.94% Where does the money go? Admin. & Recordkeeping: TPA TAKES A $1K HAIRCUT. ($12,000) (0.12%) Custody: ($3,000) (0.03%) Investment Related ( Broker ): THIS IS NOT AN APPROPRIATE FEE!! ($50,000) (0.50%) Mutual Fund Investment Management: ($24,000) (0.24%) Retained by the mutual fund family: ($5,000) (0.05%) Overage / Shortfall to appropriate fees for services rendered: $29,000
  • SITUATION ANALYSIS Let’s Reveal The Hidden Costs of the Fund American Balanced Fund Total Cost: $94,000 or $470 per participant Included in Expense Ratio Share Class / Target Ticker Expense Ratio Mngmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX 0.94% 0.24% 0.50% 0.15% Share Class Ticker Fund Expense Mngmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX $94,000.00 $24,000.00 $50,000.00 $15,000.00
  • What happens if we change the share class to an option with lower expenses.
  • SITUATION ANALYSIS Revised Plan – Proper Share Class Selected American Balanced Fund Included in Expense Ratio Share Class Ticker Expense Ratio Mgmnt Fee 12b-1 Fee Sub-TA Fee R-1 RLBAX 1.40% 0.24% 0.99% 0.10% R-2 RLBBX 1.40% 0.24% 0.75% 0.25% R-3 RLBCX 0.94% 0.24% 0.50% 0.15% R-4 RLBEX 0.65% 0.24% 0.25% 0.10% R-5 RLBFX 0.35% 0.24% none none R-6 RLBGX 0.30% 0.24% none none
  • SITUATION ANALYSIS Revised cost to plan participants American Balanced Fund Included in Expense Ratio Share Class Ticker Expense Ratio Mgmnt Fee 12b-1 Fee Sub-TA Fee R-4 RLBEX 0.65% 0.24% 0.25% 0.10% Costs % of Plan Assets Total $65,000 0.65% Where does the money go? Administration and Recordkeeping: $6K SHORTFALL. ($7,000) (0.07%) Custody: ($3,000) (0.03%) Investment Related ( Adviser ): ($25,000) (0.25%) Mutual Fund Investment Management: ($24,000) (0.24%) Retained by the mutual fund family: ($6,000) (0.06%) Overage / Shortfall to appropriate fees for services rendered: $6,000
  • SITUATION ANALYSIS Let’s Reveal The Hidden Costs of the Fund American Balanced Fund Total Cost: $71,000 or $355 per participant Included in Expense Ratio Share Class / Target Ticker Expense Ratio Mngmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX 0.94% 0.24% 0.50% 0.15% Share Class Ticker Fund Expense Mngmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX $94,000.00 $24,000.00 $50,000.00 $15,000.00
  • What happens if we change to an INDEX option with even lower expenses.
  • SITUATION ANALYSIS Revised cost to plan participants Vanguard Balanced Index Fund Included in Expense Ratio Share Class Ticker Expense Ratio Mgmnt Fee 12b-1 Fee Sub-TA Fee Admiral Shares VBIAX 0.12% 0.10% 0.00% 0.00% Costs % of Plan Assets Total $12,000 0.12% Where does the money go? Administration and Recordkeeping: $13K SHORTFALL Custody: $3K SHORTFALL Investment Related ( Adviser ): $25K SHORTFALL Mutual Fund Investment Management: ($10,000) (0.10%) Retained by the mutual fund family: ($2,000) (0.02%) Overage / Shortfall to appropriate fees for services rendered: $41,000
  • SITUATION ANALYSIS Let’s Reveal The Hidden Costs of the Fund American Balanced Fund Total Cost: $53,000 or $265 per participant Included in Expense Ratio Share Class / Target Ticker Expense Ratio Mngmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX 0.94% 0.24% 0.50% 0.15% Share Class Ticker Fund Expense Mngmnt Fee 12b-1 Fee Sub-TA Fee R-3 RLBCX $94,000.00 $24,000.00 $50,000.00 $15,000.00
  • What difference does this make for me and my participants?
  • Let’s Take An Average Employee
    • $50,000 Salary at Age 40
    • Initial 401(k) Balance at Age 40: $100,000
    • Annual Pay Growth: 3%
    • Deferral Rate: 6%
    • Employer Match: 3%
    • Assumed Annual Gross Rate of Return: 8%
  • How fees impact overall retirement earnings for a participant.
  • Impact of Fees Time AF Balanced R3 AF Balanced R4 Diff. Vanguard Balanced Diff. 5 $187,569.86 $189,809.42 1.19% $191,578.25 2.14% 10 $298,842.50 $305,104.64 2.10% $310,094.40 3.77% 15 $460,925.18 $474,631.43 2.97% $485,647.47 5.36% 20 $695,360.21 $722,151.61 3.85% $743,869.33 6.98% 25 $1,032,588.09 $1,081,588.96 4.75% $1,121,649.75 8.63% 28 $1,301,482.20 $1,370,333.61 5.29% $1,426,911.41 9.64%
  • American Funds R3 vs. American Funds R4: $68,851.41 or 5.29% American Funds R3 vs. Vanguard: $125,429.21 or 9.64% Lost Retirement Savings:
  • ANY QUESTIONS?
    • This concludes our discussion
  • Eric Roberts
    • Fiduciary Consultant
    • eric.roberts@nyhart.com | (317) 845-3511
    • Qualifications or certifications: Accredited Retirement Plan Consultant through The Society of Professional Asset-Managers and Recordkeepers and Series 63 and 65 designations..
    •  
    •  
  • So Where is the Peak?
    • Register for upcoming educational events on pensions, 401(k), healthcare and other actuarial and employee benefits topics at:
    • www.nyhart.com/events/
    Looking for more benefit presentations?
    • 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.
    • 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
  •