The Hidden 401(k) Fee Trick

I was speaking to a financial advisor friend of mine and we discussed some of the tricks and sleight of hand performed by old third party administration (TPA) firm in its capacity as both TPA and RIA on plans, Apparently, my friend also had worked at a TPA/RIA where they performed the very same trick.

Even with full fee disclosure in July, it won’t stop creative fees that will be disclosed to plan sponsor, but will actually be deceptive. So what’s the hidden fee trick for these TPAs?  One thing that has never been discussed about 401(k) fees at great length are plan custodian fees.  For daily valued 401(k) plans, there are trading platforms where plans trade mutual funds on a daily basis.  While the trades lf no load funds are done on a no transaction fee basis, the plan custodians like Fidelity and Schwab do levy a charge for the plan custodial services. The fees range from 5 to 10 basis points, which are levied against plan assets. What are these TPAs doing? They are levying a plan custody fee on their client’s plans at 25 basis points +. Why are they doing this? With fee disclosure coming in 2011, it will be nearly impossible to hide fees like the pocketing of revenue sharing, so it will be easier to inflate certain fees to compensate for the fees lost through fee disclosure.

So if you are a financial advisor or a plan sponsor look for the sleight of hand in fees that don’t make a whole lot of sense like inflated plan custodial fees. Just because a fee will be disclosed still does not make the fee legitimate.

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