Asset-based fees cost more than any other expense associated with the management of a retirement plan, according to the Multnomah Group, a retirement plan consulting group. Investment management companies and individual money managers assess these fees as a percentage of the total or partial assets under management in the plan. The fees make up 75 to 95 percent of the total fees charged to the plans.
Retirement plans use investment products, such as mutual funds, to grow the investments in the plan. Mutual funds charge asset-based fees as an expense ratio. This ratio, consisting of investment management fees, administrative expenses, and revenue-sharing fees, ranges from 0.2 to 2 percent of the invested assets. The investment management fee compensates the portfolio manager and ranges from 0.25 to 1 percent of the assets. The administrative fee encompasses tasks such as providing customer service, registering the mutual fund, and mailings and notifications to shareholders. This fee ranges from 0.05 to 0.40 percent.
Revenue-sharing fees include 12b-1 fees, shareholder servicing fees, sub-transfer agency fees, and commissions. The 12b-1 fees offset the expense of marketing and distributing the fund. These fees typically go to the broker who puts his client's assets in the fund, but can also go to a third-party administrator for providing administrative services and keeping records. The fee runs from 0.25 to 1 percent of the assets. In contrast, shareholder servicing fees, charged by no-load or no-commission mutual fund, can only be paid to third-party administrators. To comply with regulations, the funds must charge 0.25 percent or less of the value of the invested assets. Sub-transfer agency fees pay third-party administrators or record keepers who maintain an omnibus account that eliminates the costs for the fund company to administer individual participant accounts. These funds charge plan participants from 0.10 to 0.35 percent of account assets for this service. The fund company also pays commissions to brokers for servicing the retirement plan account. These fees range from 0.25 to 1 percent of assets. All or a mix of these fees add up to the overall 0.20 to 2 percent of the expense ratio.
Retirement plans that utilize variable annuities may charge a "variable asset charge" on the amount of the invested assets. Variable annuities usually include mutual funds inside the annuity framework, and this charge is applied to all the assets under management to pay for administrative services, recordkeeping, participant service, and commissions to sales agents. In addition, annuities assess mortality and expense fees, insurance-related charges, and surrender and transfer fees. Mortality and expense fees pay for the cost of the insurance features in the annuity contract, including death benefits and guaranteed income payments, while money accumulates in the account. Insurance-related charges go towards the cost of sales expenses, and overseeing and delivering the contract. Surrender and transfer fees only come into play if the employer ends the contract. All these variable annuity fees, excluding the surrender charge, range from 0.4 to 1.5 percent of assets invested in the annuity.
Some brokers charge a wrap fee. The broker usually assesses this fee if he doesn't get revenue-sharing fees or sell an insurance contract. (Ref. 1) As the name implies, these fees "wrap-around" all the assets in the plan and are in addition to any investment management or itemized fees charged by the investment product. For example, a participant who pays a 1.0 percent wrap fee on a $100,000 retirement account invested in mutual funds would spend $1,000 for the wrap fee and the 0.20 to 2.0 percent the mutual fund charges.
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