by Michael Tarsala
Did you know that a small number of 401k participants may be getting stuck with the bulk of the expenses for running the plan?
As it turns out, a 401k’s administrative costs are not distributed based on a flat fee for all account participants or even the net worth of each account. They are paid through revenue-sharing dollars embedded in funds.
The way that works works in practice is that you end up paying for more of the plan’s administration costs if you have actively managed funds in your account, such as a mutual fund run by a manager, says RIABiz.com. And you pay relatively less if you choose passive funds, such as one tied to a market index.
Perhaps the most unfair example of this pricing structure, though, is that company stock in a 401k typically has no revenue-sharing fees at all. What that means is that high-level employees with significant company stock in their 401ks can wind up paying very little in plan expenses.
Matt Pierce at Island Light Capital, who runs the Balanced Portfolio and two others at Covestor, argues that the issue of fairness is a difficult one, though. Charging a flat fee, for example, might saddle lower-level employees with even more of the costs.
“If I’m a member of a labor union making $30 an hour, should I be paying the same amount as a highly paid executive with a larger balance? I don’t think so,” Pierce says.
Check out the latest at RIABiz.com for a deeper dive into the issue.
