The Prudent Fiduciary

Scott Pritchard | Principal

A look at the major issues that are shaping fiduciary best practices today.

Are Fund Fees "Real" Fees?

July 2008

Why is it so difficult for many sponsors of 401(k) plans to actually understand how much their plans cost?  The answer is that many plan providers don’t want the plan sponsor to know how much they are making because they know you would be appalled.

How do they do it?  Revenue-sharing.

The retirement-plan industry created revenue sharing as a means of compensating the various parties (fund company, advisor, TPA, etc.) that are involved in the operation of a 401(k) plan through the internal fees that the mutual funds charged. The practice evolved to the point where many large plans were subsidized entirely by fund fees, with the plan sponsor paying no "hard dollar" costs out of pocket. Returns were reported net of fees and plan sponsors never asked any questions. Many plan sponsors thus saw their plans as “free”.  The rationale seemed to be “Hey, if I didn’t cut a check for it, it wasn’t a real expense.”  A fund that earned an 8% rate of return would have earned, for example, 9.50% before fees, but that didn't bother the plan sponsor.

The problem is that the 1.50% reduction in returns is a real expense; it’s real money that went into the coffers of the fund providers, and it’s real money the plan participants would have had in their account balances if the fees had been lower. Just because you aren’t writing a check for it doesn’t mean it isn’t “real”.

Until plan sponsors wake up and realize that fund fees are real fees, we will continue to have more and more lawsuits claiming that plan sponsors have failed their fiduciary responsibility to understand and control expenses.

Email A Friend Print This Article