Plan Managers Profit at Workers’ Expense
The company that manages your 401(k) plan could be making a huge profit at your expense. Employers often are not aware that some firms that manage large 401(k) plans earn up to 500% over their administration costs, according to Brent Glading, a Montclair, N.J., retirement plan consultant.
If an employer uses a broker to help it pick a company to manage its 401(k) plan, then the broker usually gets a cut of the profit, too – as much as 0.25% to 0.50% a year. A plan with $100 million in assets could pay $250,000 a year to a broker who may do little or nothing on an ongoing basis, Glading says:
401(k) Participants Feel Pinch
Revenue sharing can take a bite out of 401(k) plan assets. Big plans are especially vulnerable. In this scenario, the profit margin is 400% for the broker and the company that manages this 20,000-worker plan:
401(k) plan assets: $2 billion
Revenue received by plan provider and broker who helped employer select the provider (equal to about 0.5% of plan assets): $10 million a year*
Cost of operating the plan: $2 million a year
Profit: $8 million a year *
The revenue share is paid for by participants. It is invisible because it comes out of mutual fund assets in the form of the fund’s operating expenses, such as asset management fees and 12b-1 marketing fees. Source: The Glading Group
Though many industry experts say there is nothing inherently wrong in the payments, there is a risk that workers will end up with high-cost, second-rate mutual funds that pay the broker a bigger fee.
It’s a bit of a conflict of interest,” says Glading, whose firm helps employers get concessions from providers that are making big profits on their plans.
The revenue-sharing fees come directly out of worker savings. They may not notice the payment. It’s not itemized. But it slowly whittles away retirement nest eggs.
Broker commissions are higher if the plan has more of its assets in actively managed stock funds. When you understand how the system works, you begin to see why lower-costindex funds are not often offered by retirement plans, says Ted Siedle, president of Benchmark Financial Services, which advises money managers and retirement plans.
“The preponderance of actively managed funds is because that’s where the most money is for broker commissions and revenue sharing,” Siedle says. “There are hidden financial incentives in every decision made that you aren’t aware of.”
There has been little criticism of the revenue-sharing fees, in large part, because they are typically not fully disclosed.
But in one case, a group of small retirement plans sued Nationwide Financial Services in Connecticut in 2001. They alleged that Nationwide illegally skimmed money from retirement plans by contracting to receive payments from mutual funds that came out of plan assets.
Nationwide didn’t include those payments in its contract with the plans, and so it wasn’t entitled to receive them, claims Roger Mandel, a lawyer for the plans.
Nationwide says it believes the lawsuit has no merit. It says the practice is widely accepted, and such payments allow it “to increase the choice and value of those plans for employees.”
Employers have a duty to examine fees and make sure they are in the best interest of the plan, says Nevin Adams, editor of Plansponsor.com.
If fees are high, workers should be getting extra services in return. Unfortunately, they aren’t always sure if they’re getting their money’s worth, Adams says. While 76% of employers said they think the fees charged to their 401(k) plans are fair, 16% said they’re not sure, according to a survey of 3,200 plans by Plansponsor.com.
I can get more complete information about what goes into the cost of a $35,000 car than if I had a $10 million retirement plan,” says Ward Harris, managing director of the McHenry Group a financial services consulting firm in Emeryville, Calif.