Have you ever noticed that number code on the back of a book? Ever wonder what it really is? It’s called the ISBN. I have seen it on the back of books thousands of times, but never questioned its purpose.
Turns out, ISBN stands for International Standard Book Number and it operates as a unique commercial book identifier. The ISBN 13-digit code (10 digit codes for older books) breaks down to identify the book’s country, publisher, book title and an error deduction digit.
Think of the ISBN like the secret decoder pin we saw in “A Christmas Story”. Ralphie used his decoder pin to unscramble a secret message: “Be Sure to Drink Your Ovaltine”. Not a very exciting message to say the least. However, some decoded messages are critical especially when it comes to your business, your money, and your financial future/stability.
There is a secret message that business owners and employees have to decode in their financial life that relates to mutual fund fees. Like Ralphie in “A Christmas Story”, retirement plan participants and the business owners who offer those plans need their own secret decoder pin to understand the hidden messages (fees) in their 401(k) plan. These fees need to be “decoded” so you know where money is going when making contributions to your retirement plan or if you’re offering the plan to your employees.
This decoder is important for both business owners and employees. As a business owner you have a fiduciary duty to your employees to offer a plan that has reasonable fees, is diversified, and fits multiple investment risk profiles. The Dept. of Labor is holding business owners more and more accountable. Plan participants (employees and owner) must understand fees being paid in their retirement plan because this money is directly deducted from their growing retirement nest egg.
“DECODING” the Most Common Fees
The list below is a collection of fees you may see in your 401(k) plan along with a brief description of what the fee is designed to do:
Front End Load – Charges you pay when you invest in a mutual fund. The load is deducted up front and reduces the amount that goes towards your actual investment. This charge, like the Back End Load, discussed below is not required. It is at the mutual fund’s discretion to charge this fee.
Back End Load – Fee you pay when the shares are sold. Some back end load charges decrease the longer you own the fund, and some eventually disappear over time. Back End Load Fees may also be called deferred sales charges, an exit fee, a contingent deferred sales charge, or a redemption fee. This fee can be titled many different ways for the mutual fund company to charge you upon the sale of your funds.
Management Fee – Each mutual fund comes with a management fee. This is what you pay to the mutual fund company that pays for the people making the decision on the investment choices in a fund. These are the people who study, investigate, buy and sell shares of companies with each fund.
Administration Costs – Think of this as office costs. Your administration fee goes towards customer service, record keeping, postage and other operational costs that go into running the mutual fund you have invested in.
Sub-TA Fee – Mutual funds pays a transfer agent to keep individual records of its investors. These agents receive a fee for their recordkeeping, monthly investment statements along with ensuring that investors receive interest payments and dividends when they are due.
12b-1 Fee – Marketing! You pay a fee for the marketing of your fund to the public. Their logic behind this fee is to create awareness for your mutual fund. If people are aware of the fund, they will invest in it, leading to more buying power within the fund, and hopefully better research, better investments, and better returns.
Individual Service Fees – These fees are not directly related to an investment you make, rather these fees are triggered when you take certain action within your plan. For example, if you take a loan from your 401(k) you will probably experience a loan origination fee and potentially ongoing fees. Taking hardship distributions triggers a fee when you take a distribution from your account. Remember, these fees only affect the person using these services. We have also seen annual fees in retirement plans that charge mutual fund owners an annual fee simply because they made an investment in that particular fund.
Hopefully, this “decoder pin” list will help you understand certain fees and make investment selections that are not overinflated in fees, thus taking money away from your retirement account. Use this list as your guidebook to review current investment choices in your own 401(k) plan and while you cannot completely opt out of fees, there is something you can do as a business owner to protect yourself from the increasing amount of Dept. of Labor audits.
Why 401(k) Benchmarks Are Critical
In the last few years 401(k) plans are increasingly scrutinized when it comes to investment fees within retirement plans. Well intentioned business owners offering these plans now have a huge legal target on their backs and many are unaware this even exists. As the fiduciary, business owners are responsible to their employees to ensure investments available in the retirement plan are appropriate and the fees being charged are within industry standards. In essence business owners are expected to act as a financial advisor when offering a retirement plan. It can leave a business owner exposed and the number of lawsuits filed by employees over excessive fees is going up.
One increasingly powerful way to protect both the business owner and your employees against inappropriate fees is to get an annual company retirement plan benchmark. These benchmarks should be conducted by an independent firm who provides the business owner with an in-depth snapshot of the diversification and costs associated with their current plan.
Armed with this benchmark, you as a business owner can now either keep your existing plan or make proactive modifications to save all your employees from paying certain unnecessary or overinflated fees. Remember, it is your responsibility as a business owner to ensure that the plan you offer is to the advantage of your employees. It is not the mutual fund company’s responsibility and the Dept. of Labor is holding business owners accountable.
Business owners must act quickly because more and more companies are being audited by the Department of Labor, the IRS, and in some cases facing legal action. If your company is in need of a 401(k) fee benchmark send me an email, and I will be happy to decode your current fees and identify any red flags in your current plan. I can also assure you the decoded message will not ask you to drink more Ovaltine.