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A 401(k) Fee Secret Revealed

Participants in 401(k) retirement accounts are starting to receive the new fee-disclosure forms the Department of Labor has mandated. I recently got mine — and I like what I see.

Gerry Boughan /

According to the statement I received in the mail in late July, I pay a mere 0.08% for the investments I hold in the 401(k) plan of my former employer, the McGraw-Hill Companies. When I joined the plan, I knew I was getting a good deal. As a large employer, McGraw-Hill is able to offer a menu of funds with very low expense ratios, ranging from 0.07% to 0.97% of assets. Because these fees are low, I decided when I left McGraw-Hill to leave my money in its plan, rather than roll it over to an IRA or to my current employer’s 401(k) plan.

Still, I always wondered whether the expense ratio I pay really covers all of my 401(k) plan expenses. Now, I have the peace of mind of knowing that it does.

Just as I was congratulating myself, I got a call from Joe Masterson, chief sales and marketing officer at Diversified, which is a record-keeper for 2,500 defined-contribution plans with $70 billion in assets and 2 million participants.

Masterson points out something that the new disclosures make clear to me: Investors in index funds, like myself, frequently get a free ride when it comes to plan administrative fees. The reason: Most index funds don’t pay the 12b-1 and sub-transfer agent fees that defray the administrative costs of 401(k) plans. Instead, these fees are paid by investors in actively managed funds.

“The active fund investors are often paying for the record-keeping costs of the passive fund investors, which isn’t fair,” Masterson says. “You are getting a free ride off of your colleagues.”

Because the system is working for me, I’m not about to complain. Diversified is betting that investors in actively managed funds will wake up to this reality, prompting employers to do something about it. The company recently introduced a program that’s designed to ensure that all 401(k) investors pay the same administrative fees, whether they are in active or passive funds.

Still, there is a chance that employees won’t notice this disparity. The reason: In many plans, the administrative fees are rolled into the expense ratios of actively managed funds. So, unless employees take the time to look in their funds’ prospectuses, they may never realize the expense ratios they are paying contain the 12b-1 and sub-transfer agent fees that, effectively, subsidize plan-related administrative costs for index fund investors.


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    • Mutual funds are an affordable way for an ufomnirned investor to diversify their investments to minimize risk. They are good in the respect that it allows you to probably not lose all your money if one or two companies go bad.On the other hand, they often have many charges incurred along with them for upkeep or maintenance and things like that. And often, the funds that have the highest amount of charges because they have the most active management often don’t show any better performance than a fund with little charges/activity.In the end though, mutual funds often don’t even beat the market performance, and returns can be harder to figure out on a daily basis. If you want to be able to see how you’re doing easily and up to the minute, consider an index fund which contains weighted pieces of a number of large stocks (like a NASDAQ or DOW index fund).On the plus side though, you can get money mutual funds from which you can write checks or even make interact payments, so basically operate like a bank account with higher interest.

    • Thank you Nicholas for sharing this thgouht. I agree, after watching my grandparents lose 1/3 of their retirement (over $500,000) during the past couple years, I know that investing my money in myself and my business is the best option. Mary in Kaysville 0Was this answer helpful?

    • Check out this calculator that allows people to compute just how much high 401k fees might be costing them, based upon their unique circumstances. Enter your current balance, annual savings, etc., and then find out how much, in dollars, high fees are costing you. It’s an eye opener.

      You can find the calculator at

    • there is no reason why anyone should be paying 12b-1 marketing fees — this is a cost that should be born by the asset management company not the owners of the fund. this type of fee is just a way for firms to goose their bottom line.

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  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.