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]