Assuming we survive the coming Mayan End of Days, we’ll all eventually retire.
That’s the hope, anyway…
Our personal savings for retirement aren’t growing by themselves. As with any company benefit, there is a cost associated, and we’re now in week two of discovering what those costs are. Last week, we spoke about the legal side of 401(k)s, known as Third Party Administration (TPAs).
Now, we’re here to tackle something new… investments.
If there’s something that actually strikes fear in people and their 401(k)s, it’s the investments piece. It’s a distant cousin to gambling, so it’s never a sure thing that you’re going to see money gains. Then there is your basic savings account. If you’re prudent, you could actually make money, but not that much.
These funds are offered to you through your Recordkeeper and TPA. In many cases, they are very closely associated with your fund provider. The salesperson your company works with to get the 401(k), typically, they’ll get a little kick back from the funds, as does the TPA. After all, how else could they open the 401(k) without them?
The fact is, the actual funds in your 401(k) provide for more than just your growing or shrinking balance.
All 401(k) funds contain asset-based fees
These asset-based fees are varying amounts that pay out a percentage of your 401(k) balance. To whom, you ask? It’s to these people:
- Your Fund Company: The first people who should get paid are the fine people who created the fund for you to invest in. It’s up to them to manage all of your funds and keep them performing. You want them to get paid to maintain your account, like your mechanic does for your car. As always, some are much better at it than others!
- Your TPA: Have you ever gotten an extra “10% off your next purchase” because you referred a friend? It’s a lot like that. Your TPA makes friends with the fund companies. The fund companies say “We’d love to work with you because we’ve got some GREAT analysts working on some AMAZING funds!” The TPA says “That’s awesome! We should share some clients.” Then, the TPA gets a little kick back from the balance of your 401(k) for referring the business.
- Your Advisor: This one’s a tricky one. Usually, the advisor is also friends with the fund company and the TPA. This person is usually someone who meets with everyone in person to educate them on the funds in their 401(k). They’re there to provide advice on your lineup and can even help out with your participants. The trick is that these folks are licensed to sell these funds and get a little kick back too for doing all the foot work to bring the client to the table in the first place. As long as your 401(k) is running, they’re getting a percentage too.
Overall, these percentages can be 1-2% of your 401(k) balance. The more you save, the more you’re paying for these additional services. If you’ve got $25,000 in your 401(k), you’ve already paid $500. For you business owners out there with larger balances, say $250,000, you’ve paid $5,000. And these numbers can build up…
With the new disclosures coming out, you better keep an eye out on how that information is communicated to you. Find a provider that’s not charging as much, and everyone participating in the 401(k) will thank you!