401k Questions To Ask

Expenses in 401(k) plans have grown so complex that even plan sponsors often do not understand what they are and how much they add up to. Here are some steps to guide you.

Go to your human resources department or the adviser responsible for the plan. Bring your records to the meeting.

Ask first about loads or commissions and other exit and transfer fees between funds. Funds in 401(k) plans should not carry a commission, but some in small plans do. These charges are clearly unacceptable, and you should protest.

Ask about a 12b-1 fee for marketing and distribution costs. It might range from 25 basis points to 100 basis points or 1 percent. Many funds have added 12b-1 fees to become more competitive in the 401(k) market.

Determine how the other plan expenses are paid. Are they paid by the company? Are they paid by participants? Are they shared? Are there specific dollar fees charged to the 401(k) trust or to individual participant accounts? Who pays for communications materials? Record keeping? Administration? Loans? Discrimination testing? Trustee expenses?

Find out the expense ratio. It is expressed as a percent of assets, which is subtracted from the fund each year to pay investment management and other administrative expenses. It is typically measured in basis points. One basis point is 1/100 of 1 percent. So an expense ratio of 75 basis points means that three-fourths of 1 percent of assets are skimmed from the fund each year to pay expenses. Rogers-Casey’s Adele Langie Heller estimates that investment management fees alone represent two-thirds to three-quarters of the cost of the plan. She suggests these benchmarks for the fund’s expense ratio:

• Large-cap equity: 85 basis points;
• Mid-cap equity: 100 basis points;
• Small-cap equity: 120 basis points;
• International equity: 125 basis points;
• Bond fund: 75 basis points.

Is there a “wrap fee,”a fee that wraps around all the assets in the plan?

What is the total cost per participant for the entire package? Someone at your company should know whether the cost of your plan is reasonable for what you’re getting. Ask to be shown that the cost is equitable for a plan of its size, demographics, and complexity.