401k Plan: From Bundled Fee To Explicit Fee

bundle of fairies

I received a notice from my employer about our 401k plan. The plan will soon start charging an administrative fee to employees’ accounts, estimated to be about $20 per quarter.

Until now our plan didn’t charge any administrative fee explicitly. I was able to confirm that on my 401k plan statement. See previous post Find Out How Much You Paid Admin Fees In Your 401k Or 403b.

Does charging an administrative fee mean that the employer will now transfer the cost to the employees? No. Employees have always paid the fee. The fee was bundled in the investment options.

Our 401k plan has hundreds of millions in assets, but some investment options are still the retail mutual fund shares that any investor can buy with $1,000. The 401k plan could buy institutional shares at a lower cost but it’s getting part of the difference in cost rebated back from the mutual fund company as revenue sharing to pay for administrative costs.

For example the expense ratio on the retail share class of one fund is 0.85%. The expense ratio on the institutional share class of the same fund is 0.50%. The plan was getting a part or all of the difference — 0.35% — back from the mutual fund company. That money pays for the administrative cost.

With this change, the plan will switch to the institutional share class and save 0.35% for the participants. The administrative cost will be allocated as a flat fee to every participant.

That’s the way it should be. As the plan grows in assets, the administrative cost doesn’t grow proportionately. A large part of the administrative cost should be relatively fixed. The rest has more to do with the number of accounts than the dollars in those accounts. Paying an explicit fee is much better than having a percentage deducted from the investments. Allocating the cost per head is fair.

[Photo credit: Flickr user Patrick Q]

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Comments

  1. Leigh says

    My plan did something similar recently. We went from a bundled fee (investor shares of Vanguard funds) to a fee for people leaving their 401(k)s with us after leaving the company. I think that’s not a bad tradeoff. It does mean though that I will be stuck paying the fee if my next 401(k) plan isn’t as good and I want to keep doing the Backdoor Roth IRA, which is why I’m doing that as much as possible now and waiting until the end of the year to do it when I’m confident with my employment status for the year.

  2. Bucky says

    This is definitely the better way to go because the fees are more transparent, and like you said a fixed cost rather than % of assets.

  3. Peter Krieger says

    Great point that you are going to pay for administrative expenses directly, rather than through higher expense ratios.
    One thing: is the dollar amount taken from your paycheck as a post-tax line item, or is it deducted from your 401K balance?
    If it is deducted from the 401K balance, then the fee is reducing the amount you have put away for retirement.
    If the fee is deducted from your pay on a post-tax basis, without touching your contributions, then you will have less money available for other non-retirement expenses, but your assets will face fewer impediments.

    • Harry says

      It’s deducted from the 401K balance, same as when it was bundled into the mutual fund expense. The fee for the recent quarter was $14. At this level, I’m not worried.

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