Beware of the Inflated Daily 401(k) Custody Fee

As a kid growing up in the late 1970’s and the 1980’s, I remember that almost every TV Guide and many magazines had an insert for one of the two major record clubs. Prior to digital downloading, buying through a record club for records, tapes, and eventually CDs might be a good deal if you consistently bought albums. One of the things that I always remember is how onerous the shipping and handling charges were and I was always sure was that is how they made their money, by inflating those charges.

With the implementation of fee disclosure, third party administration (TPA) firms and other plan providers will have to fully disclose their fees. For the few TPAs that pocketed revenue sharing fees instead of using it to offset administrative fees, fee disclosure is a problem. Since they will lose that hidden stream of revenue, these type of TPAs will have to discover another source of revenue to support their deceptive practices.

Two TPAs have found an ingenious way of replacing that lost source of revenue. They are now starting to charge a custodial fee or a daily platform custodial maintenance of about 25 basis points. The problem? Most daily no-transaction fee unbundled 401(k) platform such as Schwab, Fidelity, and Matrix typically only charge 5-10 basis points to custody a 401(k) plan’s assets. So by padding the custody fee 15-20 basis points, the TPA can recover some of the revenue lost by disclosing revenue sharing. Let’s face it, the only way a client would find out is by shopping that plan to other unbundled providers.

Pretty sneaky, sis. But like with three card monty, most 401(k) plan sponsors will discover the scam. The sad part is that this scam will be legal, as long as the custody fee is fully disclosed. Don’t be had by a chad or by an inflated 401(k) daily platform custody fee. If you are paying more than 10 basis points for a custody fee, I’d watch out.