Understanding the components of Retirement Plan Expenses
- Wherever there is value, there is always expense. -
It’s a Friday night. You’re sitting on your couch watching TV after a long day and a retirement plan company’s commercial comes across your screen.
All investment companies have fees for the services that they provide. Unfortunately, most people do not know this because they haven’t been given complete and accurate fee disclosure information. When Participants are asked about their 401(k) or 403(b), most respond "none" or "it’s free.” Really? Free? Unfortunately, many retirement plan providers bury their fees into the investment product’s operating expense in such a manner that the fees become difficult to identify.
At Envoy Financial, we embrace complete fee disclosure and want you to be “in the know” about the fees you’re paying in order to have a good retirement plan account. What does “being in the know” look like? Are the fees reasonable? What are the services associated with the fees? How do you know?
Regulations now mandate that the fees associated with most retirement plans need to be fully disclosed to plan Participants and to Plan Sponsors. Similar legislation is expected for IRAs in the near future. While church plans are not required to disclose fees, at Envoy we disclose them to everyone. We clearly see fee disclosure as best practice and include all fees on all of the Participants’ statements, independent of the plan type or account type.
How are fees expressed? They are frequently expressed by a unit called a “basis point”. 100 basis points equals 1%, so 1 basis point is 1/100th of one percent (0.0001). In the detail provided below, we’ll identify the fee category, explain the services being provided for that fee category, and the basis point fee or fixed dollar amount fee often charged for that category of service.
So what are the different services and their costs?
A Recordkeeper is a company that maintains all of the records associated with a retirement plan account. Envoy TPA and Recordkeeping, Inc. is your plan’s Recordkeeper.
The Recordkeeper tracks and reports on the investment selections, contribution amounts, contribution sources, account balances, loan balances and other important items for the account. The Recordkeeper also produces the quarterly Participant statements and maintains the Participant website.
Another significant aspect of recordkeeping services is the safekeeping and trading of the plan’s investments. Employer sponsored retirement plans are required by law to be held in Custodial Accounts or Trusts. In other words, Envoy Financial does not handle the plan’s cash. Nor do they hold the Participant’s mutual fund shares that are purchased with the cash. Instead, your employer contracts with an independent institutional custodian for these services. MG Trust Company is your plan’s Custodian.
Some recordkeeping costs are incurred for each plan Participant, whether they have an account balance of $1,000 or $100,000. Other costs are attributable to the size of the account balances. This cost is generally referred to as an “asset-based” cost and is expressed as basis points. Remember, a basis point represents 1/100th of one percent.
Expense of Recordkeeping Services
So recordkeeping expenses include two components – a fixed dollar cost and an asset-based cost. We refer to the fixed cost component as “administration” and the asset-based cost as simply “recordkeeping”.
As we indicated, the administration expenses are typically expressed as a fixed dollar amount on an annualized basis, for example, $35 per year. This fee is then deducted from the Participant’s account on a monthly basis.
The recordkeeping costs are 25 basis points per year, or ¼ of one percent on an annual basis. This expense is deducted from the Participant’s account on a monthly basis at a rate of 2.08 basis points (approximately 2/100ths of one percent) multiplied by the ending account balance for the prior month.
Example: If you have an account balance of $10,000, you could expect to pay an annualized recordkeeping fee of $25.00 per year, or $2.08 per month, if the recordkeeping expense for the plan is 25 basis points. In addition, you could expect to pay an administration fee of $35 per year, which would be deducted from your account at the rate of $2.92 per month.
As you evaluate your account’s recordkeeping fees, keep in mind that your quarterly statement represents a three month period, so the cost for recordkeeping services displayed on your statement will represent your recordkeeping expenses for that three month period.
Employer sponsored retirement plans typically use mutual funds as the investment option. As such, the investment makeup of most plans is reviewed and overseen by a Financial Representative or a Registered Investment Advisor (RIA). Envoy Advisory, Inc. is your retirement plan’s RIA.
Investment advisory services include providing you with online access to the SmartPlan Interactive Guide. This guide assists you in the initial retirement plan enrollments and ongoing account reviews. The RIA also advises your Plan Administrator about annual investment reviews of the mutual funds available.
Expenses of Advisory Services to the Plan and Each Participant
Advisory fees are typically expressed as basis points. Remember, a basis point represents 1/100th of one percent.
On a plan with limited assets, the Advisory fees may start at a rate of 65 basis points per year, or 65/100ths of one percent multiplied by the amount of assets in the plan on an annual basis. This fee is deducted from the Participant’s account on a monthly basis at the rate of 5.42 basis points (65 basis points per year divided by 12 months in the year) or 54/100ths of one percent. The advisory fee is assessed at this rate multiplied by your account balance as of the final day of the prior month.
As the amount of assets in the plan grows, the advisory fee rate will go down. For example, a plan with $2.5M in assets might pay an advisory fee of 53 basis points instead of 65 basis points.
Example: If you have an account balance of $10,000, you could expect to pay about $65.00 per year, or $5.42 per month, if the Advisory Fee for the plan is 65 basis points. It may be less than that depending on plan size.
As you evaluate your account’s cost for Advisory services, keep in mind that your quarterly statement represents a three month period, so the Advisory cost displayed on your statement will represent your advisory fee for that three month period.
All 403(b) and 401(k) retirement plans have compliance costs. The services delivered are typically provided by a Third Party Administrator (TPA), who is specially trained on all matters relative to the legal governance of qualified retirement plans. Envoy TPA and Recordkeeping, Inc. is your retirement plan’s Third Party Administrator.
Compliance services include maintaining and servicing the plan on a day-to-day basis. These compliance services also include assuring that the plan operates in accordance with the Internal Revenue Service and Department of Labor regulations as well as the plan’s legal and governing Plan Document.
Expenses of TPA/Compliance Services for Your Plan
The compliance fee for an employer sponsored retirement plan is typically expressed as a fixed dollar amount on an annual basis, for example, $500 per year. The fee is then deducted from the plan on a monthly basis. For example, the $500 annualized fee is deducted from the plan at the rate $41.67 per month. All of the plan’s Participants share in the payment of the administration fee on a pro rata basis.
Example: If your account balance represents 1% of the overall plan’s balance, you could expect to pay 1% of the $41.67 monthly administration fee amount, or $0.42 for that month.
As you evaluate your account’s compliance cost, keep in mind that your Envoy Choice quarterly statement represents a three month quarter, so the cost displayed on your statement will represent your pro rata share of the plan’s administration cost for a three month period.
Professionally Managed Accounts
(a participant choice)
Your quarterly statement will include the costs of having your account professionally managed, if this is your choice. It is a voluntarily elected service.
When a Participant elects to use a Professionally Managed Account (PMA), they authorize a third party institutional money manager to take discretionary authority over their account to determine the investment mix within the account based on the Participant’s personal risk tolerance.
Expenses of Accounts that are Managed by Outside Professionals
(a participants choice)
PMA fees are typically expressed as basis points. Remember, a basis point represents 1/100th of one percent.
Most PMA fees are 60 basis points per year, or 6/10ths one percent on an annual basis. This fee is deducted from the Participant’s account on a monthly basis at a rate of 5 basis points (approximately 5/100ths of one percent) multiplied by the ending account balance for the prior month.
Example: If you have an account balance of $10,000 in a Professionally Managed Account, you could expect to pay an annualized professionally managed account fee of $60.00 per year, or $5.00 per month, if the professionally managed account service expense is 60 basis points.
As you evaluate your account’s professionally managed account fee, keep in mind that your quarterly statement represents a three month period, so the professionally managed account fee displayed on your statement will represent your Professionally Managed account cost for that three month period.
Mutual Fund Investment and Other Expenses
Your quarterly statement does not include the investment expenses of the mutual funds that you have selected as your investment election. These expenses are for services that include selection and management of the mutual fund’s underlying holdings, shareholder transaction costs and marketing and distribution expenses. These expenses only apply to you for funds in which you are invested.
These mutual fund investment expenses are fully disclosed on the fund’s prospectus which is made available to you via the Envoy Choice Web Portal. The investment expenses are also fully disclosed in the Annual Fee Disclosure that is distributed to you as a plan Participant by your employer.
If you choose other administration services such as a loan or distribution, additional fees may apply.
There you have it – a package that is less costly than the industry norms and gives you Trusted Advice Along the Way!
As always, if you have any questions about your retirement plan expenses, we’d be happy to talk to you so you can understand it in more detail.