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A guide to answering the top five most commonly asked questions about 401(k) administration fees

As part of the Department of Labor’s (DOL) participant fee disclosure initiative, participants are now receiving information about investment and plan administrative fees that they may be paying through their 401(k) plan. Below is a list of questions and suggested answers to help participants understand the administrative fees and individual expenses that may be charged to their 401(k) plan account.

 

 

1. Why are plan administration fees being charged to my account?

Most 401(k) plan sponsors hire companies to provide recordkeeping services to help operate the plan properly and ensure that it qualifies for the federal tax benefits you receive, such as making pre-tax salary deferrals and deferring tax on your investment earnings until you take a distribution. These services are not free and, in most plans, the 401(k) plan participants pay at least a portion of these fees.

Recordkeeping fees typically cover the costs of

• maintaining detailed records of each dollar you defer into the plan as well as each dollar contributed by your employer on your behalf (such as matching contributions),

• processing and tracking your investment elections to ensure that all of the dollars you contribute are invested according to your instructions, and

• operating a website or a call center so you can change investment elections or request transactions or plan information.

In addition to the administrative fees that cover services common to all participants in the plan, there are other fees – sometimes referred to as “individual fees” – that might be charged specifically to your 401(k) account, rather than allocated across all plan participants’ accounts. These fees relate to optional services that you select or specific transactions that you initiate. Common examples include fees for taking a loan or a distribution, using investment advice services, submitting a qualified domestic relations order, or accessing a brokerage window. The plan may also incur fees for legal, accounting, and trustee services.

 

2. Who pays administration fees?

Fees that you incur for individual services, like processing a loan, will typically be charged just to your account. Fees for general plan administration services may be paid in a variety of ways including

• paid by your employer,

• deducted from the accounts of all participants in the plan, (including beneficiaries of deceased participants), or

• paid through fund compensation arrangements.

In most 401(k) plans, at least a portion of the general administration fees will be deducted from the accounts of the participants in the plan.

 

3. What is “fund compensation” and how does it affect administrative fees?

Sometimes the investment funds available in your plan will pay a portion of the administrative expenses. Mutual fund companies include fund administrative costs in the investment fees that are charged to each investor. A portion of these administrative costs (referred to as “sub-transfer agent fees” or “sub-TA fees”) cover expenses related to shareholder services such as tracking how many shares an individual holds, tracking all the buys and sells of that individual, and mailing prospectuses. When the investor is a participant in a retirement plan, the mutual fund company does not have to do this work because the participant-level tracking is done by the plan’s recordkeeper. Many mutual fund companies pass the compensation they have collected for this administrative service along to the recordkeeper. This practice is referred to as “fund compensation.”1

 

4. Who monitors fund compensation arrangements?

Your plan sponsor (your employer) is responsible for monitoring fund compensation arrangements. Under the ERISA 408(b)(2) service provider disclosure rules, if a service provider receives compensation for plan services from someone other than the plan or the plan sponsor, the service provider must disclose those payments, referred to as “indirect compensation,” to the plan sponsor. The plan sponsor has a fiduciary responsibility to analyze the fee information and ensure the service provider’s total compensation for its services, including fund compensation, is reasonable. For example, if your record keeper receives fund compensation, your plan sponsor should confirm that the fund compensation is being used to offset or reduce the amount that would otherwise be charged to the plan sponsor or plan participants.

If fund compensation applies to your plan, the participant fee disclosure provided by your employer will state that a portion of administrative fees is covered by fund compensation or is being paid by a third party. Your quarterly account statement will not list the precise amount of fees paid through fund compensation because the amount will fluctuate depending upon a number of circumstances such as the amount of plan assets invested in each fund that provides fund compensation. Different funds may pay different rates of fund compensation.

 

5. How often will I receive information about administrative fees?

Each year, your employer will provide you with general information about administrative fees, and each of your quarterly statements will list any specific charges deducted from your account. 


For more information call your financial advisor or the Victory Capital Investment Professionals line at 1-800-991-8191.

1Fund compensation is also referred to as "revenue sharing" or "payments to financial intermediaries." See the fund's prospectus for more information. 

 

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