As we all know, administrative and compliance expenses can accumulate, forming a mountain out of a molehill, and are generally paid out of 401(k) plan assets, regardless of whether exchange traded funds (ETFs) or mutual funds are utilized.  But the question at hand is who should pay for these expenses.

David Wray of Ignites points out three ways these costs are covered:

  • A reduction in investment management fees that is rebated as revenue sharing back to the record keeper.
  • A wrap fee based on plan assets, this usually eliminates client-broker conflict of interest.
  • Charge each account a set dollar fee regardless of the amount of assets under management, which is deducted annually from a client’s account.

These are all different methodologies and which ever one is chosen will define if the plan sponsor, the plan participants, or a combination of both, will be responsible for covering the administrative and compliance costs associated with funds.  Remember that these fees will hit any 401(k) that utilizes indexes, whether they be mutual funds or ETFs.  Just for the record, we prefer the wrap fee method.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.