Investment Choice Fees

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

There are two types of fees that may be charged to your retirement plan that are different from administrative fees.  These fees are usually in connection with investment choices that are made available to participants.

One type of fee is known as the sales charges.  You may also hear these sales charges referred to as loads or commissions.  These are the transaction fees that are charged to the investment that originate from cost of buying and selling shares of the investment.  Depending on the product you are investing in – these fees will be computed in different ways.

The second type of fee is the management fee.  You may also hear this fee called the investment advisory fee or account maintenance fee.  These are the fees that are charged for the management of the assets that are included in the investment fund.  Something you should be aware of with these particular fees is that the more management, research and monitoring an investment must have, the higher the fee, however, this does not necessarily mean the specific investment will perform better than other investments.  These fees often vary widely depending on who the investment manager is and what the investment product is that is being offered.

The two fees above are usually charged to all investment packages in your retirement plan.  In addition to those above, there are several fees that may occur due to a specific type of investment that is being offered.  You will see that most investments that are offered by smaller plans are pooling money from a large number of investors.  This makes it possible for the smaller plans to diversify their investments and benefit from the economies of scale with a lower transaction cost.  The pooled funds can be invested in stocks, bonds, real estate, etc. These pooled accounts are usually offered by financial institutions such as banks, insurance companies, or mutual funds and fees related to the investments are charged as a percentage of assets invested and they are paid by the participants or the plan depending on how the plan fiduciary sets up the retirement plan with the institution.

Mutual funds pool the money of many investors and invest in a specific fund.  The investments are managed by an investment advisor following a specific investment plan and fees are typically investment management fees as well as administration fees.  Additionally, you may find that with some mutual funds you will be charged sales charges (see above).  The sales charges for investing in mutual funds may be charged up front which will lower the amount of your investment in the fund or on the back end which will be charged when you sell the investment.  The back end charges are also known as back-end load, deferred sales charge, or redemption fees). They are generally determined on how long you keep the investment and some even decrease and eventually disappear over time. Another type of fee you may see with mutual funds are known as 12b-1 fees which are ongoing and paid out of fund assets. These fees could be used to pay commissions to brokers, pay advertising fees for promoting the fund to investors, and to pay other service providers.

Collective investment funds are trust funds that are managed by banks or a trust company that will take all of the investments and pool them.  Each investor has a proportionate interest in the assets depending on how much your particular investment is when compared to the total amount of the assets held in the collective investment fund.  There are no front end or back end charges as you see in mutual funds however, you will be paying investment management and administration expenses.

Insurance companies will offer a range of investment alternatives for a retirement plan through something known as a group variable annuity contract which is between the insurance company and the employer on behalf of the plan. These contracts will incorporate insurance options that are not seen when investing in other investment options.  Some of the insurance options most commonly seen in these contracts include annuity features, interest and expense guarantees, and any death benefit provided during the term of the contract. These contracts “wrap” around investment alternatives which are often a selection of mutual funds from which the participants will select and will see returns to their individual accounts based on their choices of investments.  You will see additional fees with this type of investment in addition to the investment management and administration fees that include insurance-related charges and surrender and transfer charges.  Insurance-related charges include items such as sales expenses, mortality risk charges, and cost of issuing and administering the contracts (basically anything related to the insurance component of the contract).  Surrender and transfer charges are fees that may be charged when employees terminate a contract (withdraws from the plan’s investments). These charges are often incurred if the event happens prior to a specific date that is set within the contract and will eventually disappear over time.

Pooled guaranteed investment contract (GIC) funds are a common fixed income investment option which generally includes a number of contracts issued by an insurance company or bank paying an interest rate that is blending fixed interest rates from many various GICs into a pool. Generally, there are only investment fees and administrative fees associated with pooled GIC funds.

As you can see, there are many fees that are included with various types of investments.  The above investment listing is not an all-inclusive list and you may be offered other investment options when looking into ways to offer investments in your retirement plan.  Hopefully this has helped give you some insight into what fees may be charged with various plan investments you offer your participants.  For more information, talk to the third party administrator of your plans and educate yourself of the fees being charged to your participants and the plan itself.

Shelby Williams