Many vendors, including some of the biggest names in the business, claim that they offer free 401(k) and 403(b) administration to employers. Benefit consultant Mike Kiley will take a sample company’s existing “free” 401(k) program from a national vendor and reveal how the hidden fees and undisclosed expenses associated with the plan are costing every employee hundreds of dollars in hidden fees and costs through a shell game that has plagued the industry. Mike will give attendees a snapshot, with real-world data, to the impact of upcoming IRS regulation 408(b)(2), where transparency will be critical for plan sponsors and their fiduciaries to understand why “free” isn’t really so.

1. Breakdown: How a Vendor Hides
Fees in Their „Free‟ 401(k)
Presented by Michael Kiley, QPA, QKA
www.nyhart.com
Copyright 2011. All Rights Reserved.

2. Mike Kiley
Retirement Plan Consultant
mike.kiley@nyhart.com |(317) 845-3512
Qualifications or certifications:
American Society of Pension Professionals and
Actuaries (ASPPA) qualified pension administrator
(QPA) Qualified 401(k) Administrator (QKA); Series
65 licensed as a registered investment advisor
representative.

3. Today‟s Discussion 1. How do service providers get
paid?
2. Case Study 1 – Group Annuity
Product
3. Case Study 2 – Bundled Service
Provider
4. How this pertains to 408(b)(2)
5. What can you do now?
3

4. There is no
such thing as
“free.”

5. How do
vendors get
paid?
Explicit Fees & Implicit Fees

6. How Do Vendors Get Paid?
Explicit Fees
• Stated fees (“Flat Fees” for service)
• Asset-based fees (As a % of plan assets)
• Transactional fees
– “document fee”
– “distribution fee”
– “loan processing”
6

7. How Do Vendors Get Paid?
Implicit Fees
• Revenue sharing from investments
– Captured 12b-1 fees
– Sub-ta fees
– Shareholder service fees
• Fund management expenses
• Contract charges/wrap fees
• Sub-advisory fees
• Mortality expenses
7

8. How Do Vendors Get Paid?
Other Charges
• Surrender charges
• Market Value Adjustments
8

9. A Midwest-based electronics
manufacturer‟s 401(k) Plan
Plan highlights:
CASE STUDY
• ~ 100 employees
• ~ $5,000,000 in plan assets
• Plan assets are invested in a group annuity
product administered by a national insurance co.
• Standard 401(k) – no „special features‟
• Company pays no explicit/out-of-pocket expenses
9

10. Investment Options & Associated
Fees
Expense Ratio
Market (may include Contract Broker/Agent Administration
Investment Name
Value SUB-TA and Charge Fee Charge
12B-1 Fees)
American Funds Growth Fund of America $750,000 0.68% 0.15% 0.25% 0.50%
American Funds Washington Mutual $300,000 0.66% 0.15% 0.25% 0.50%
Blackrock Mid-Cap Equity Growth $250,000 1.40% 0.05% 0.25% 0.50%
Fidelity Mid Cap $500,000 0.66% 0.55% 0.25% 0.50%
CASE STUDY
SSgA Russell Small Cap Growth Index $100,000 0.06% 0.50% 0.25% 0.50%
Delaware Small Cap Value $150,000 0.83% 0.30% 0.25% 0.50%
American Funds Capital World Growth & Income $550,000 0.81% 0.15% 0.25% 0.50%
Delaware Emerging Markets $400,000 1.40% 0.30% 0.25% 0.50%
Delaware Limited-Term Diversified Inc $450,000 0.62% 0.15% 0.25% 0.50%
Pimco Total Return $300,000 0.71% 0.25% 0.25% 0.50%
American Balanced $250,000 0.65% 0.15% 0.25% 0.50%
Galliard Stable Value Fund $1,000,000 0.50% 0.25% 0.25% 0.50%
10

11. What These Fees = in Real $
Total Actual Total Expense
Investment Name Market Value Expense Additional
Fund Expense ($)
American Funds Growth Fund of America $750,000 0.68% 0.90% 1.58% $11,850.00
American Funds Washington Mutual $300,000 0.66% 0.90% 1.56% $4,680.00
Blackrock Mid-Cap Equity Growth $250,000 1.40% 0.80% 2.20% $5,500.00
Fidelity Mid Cap $500,000 0.66% 1.30% 1.96% $9,800.00
SSgA Russell Small Cap Growth Index $100,000 0.06% 1.25% 1.31% $1,310.00
CASE STUDY
Delaware Small Cap Value $150,000 0.83% 1.05% 1.88% $2,820.00
American Funds Capital World Growth & Income $550,000 0.81% 0.90% 1.71% $9,405.00
Delaware Emerging Markets $400,000 1.40% 1.05% 2.45% $9,800.00
Delaware Limited-Term Diversified Inc $450,000 0.62% 0.90% 1.52% $6,840.00
Pimco Total Return $300,000 0.71% 1.00% 1.71% $5,130.00
American Balanced $250,000 0.65% 0.90% 1.55% $3,875.00
Galliard Stable Value Fund $1,000,000 0.50% 1.00% 1.50% $15,000.00
$36,785 + $49,225 =$86,010
11

12. Let‟s Break Out the Fees!
Total Expense
Investment Name Market Value Expense
($)
American Funds Growth Fund of America $750,000 0.68% $11,850.00
American Funds Washington Mutual $300,000 0.66% $4,680.00
Blackrock Mid-Cap Equity Growth $250,000 1.40% $5,500.00
Fidelity Mid Cap $500,000 0.66% $9,800.00
SSgA Russell Small Cap Growth Index $100,000 0.06% $1,310.00
CASE STUDY
Delaware Small Cap Value $150,000 0.83% $2,820.00
American Funds Capital World Growth & Income $550,000 0.81% $9,405.00
Delaware Emerging Markets $400,000 1.40% $9,800.00
Delaware Limited-Term Diversified Inc $450,000 0.62% $6,840.00
Pimco Total Return $300,000 0.71% $5,130.00
American Balanced $250,000 0.65% $3,875.00
Galliard Stable Value Fund $1,000,000 0.50% $15,000.00
Management Expense= $36,785
12

13. Let‟s Break Out the Fees!
• Total Fund Expense:$36,785.00
• Recordkeeping Fees:
Base Fee: $3,000.00
Per Participant Fee: $50.00 ($5,000 total)
• Total Recordkeeping Fees:$8,000.00
• Custodial Fees:$2,500.00 (assume .05% of assets)
CASE STUDY
• RIA Fees:$12,500.00(assume .25% of assets)
• Less: Revenue Sharing Offset: ($10,000.00)
Total Net Fees:$49,785.00
13

14. Let‟s Break Out the Fees!
What are the explicit fees:
• $8,000 recordkeeping fee
• $2,500 custodial fee
CASE STUDY
• $12,500 RIA fee
Often these explicit fees are compared to
‘free’!
14

15. Let‟s Break Out the Fees!
What is the true apples-to-apples
comparison:
$86,010
CASE STUDY
vs.
$49,785
15

16. Annual Savings
$36,225 Annually
OR
$362.25 per Participant Annually!!
CASE STUDY
16

17. A West Coast-based print
shop‟s 401(k) Plan
Plan highlights:
CASE STUDY
• ~ 150 participants,
• ~ $8 million in plan assets, standard 401(k) plan
• XYZ Mutual Fund Company provides bundled
services
• At least half of the investment options are
required to be proprietary XYZ mutual funds
• Client pays no explicit/out-of-pocket expenses
17

18. Investment Options & Fee
Levels
Fund
Investment Name Market Value Management 12b-1 Fee Sub-ta Fee
Expense
XYZ Large Cap Growth $1,000,000 0.32% 0.50% 0.15%
XYZ Large Cap Value $300,000 0.32% 0.50% 0.15%
ABC Mid-Cap Growth $800,000 0.64% 0.25% 0.23%
DEF Mid Cap Blend $500,000 0.26% 0.25% 0.03%
GHI Small Cap Growth $600,000 0.77% 0.25% 0.23%
JKL Small Cap Value $750,000 0.91% 0.00% 0.13%
CASE STUDY
XYZ International Large Cap Blend $825,000 0.45% 0.50% 0.15%
XYZ International Mid Cap Growth $400,000 0.79% 0.50% 0.15%
MNO Short Term Bond $350,000 0.39% 0.25% 0.13%
PQR Inter Term Bond $205,000 0.25% 0.00% 0.03%
XYZ Balanced $370,000 0.29% 0.50% 0.15%
XYZ Target Date Series $1,000,000 0.14% 0.50% 0.15%
Stable Value Fund $900,000 0.60% 0.00% 0.25%
$8,000,000
18

19. What Are The Real Costs in $
Total Investment Total 12b-1 Total Sub-ta Total Revenue
Investment Name Market Value
Expense Fee ($) Fee ($) Sharing
XYZ Large Cap Growth $1,000,000 $9,700 $5,000 $1,500 $6,500
XYZ Large Cap Value $300,000 $2,910 $1,500 $450 $1,950
ABC Mid-Cap Growth $800,000 $8,960 $2,000 $1,840 $3,840
DEF Mid Cap Blend $500,000 $2,700 $1,250 $150 $1,400
GHI Small Cap Growth $600,000 $7,500 $1,500 $1,380 $2,880
JKL Small Cap Value $750,000 $7,800 $0 $975 $975
CASE STUDY
XYZ International Large Cap Blend $825,000 $9,075 $4,125 $1,238 $5,363
XYZ International Mid Cap Growth $400,000 $5,760 $2,000 $600 $2,600
MNO Short Term Bond $350,000 $2,695 $875 $455 $1,330
PQR Inter Term Bond $205,000 $574 $0 $62 $62
XYZ Balanced $370,000 $3,478 $1,850 $555 $2,405
XYZ Target Date Series $1,000,000 $7,900 $5,000 $1,500 $6,500
Stable Value Fund $900,000 $7,650 $0 $2,250 $2,250
$76,702 $25,100 $12,954 $38,054
Used to pay for admin
expenses
19

20. Cost Comparison
• Recordkeeping Fees:
Base Fee: $3,000.00
Per Participant Fee: $50.00 ($7,500 total)
• Total Recordkeeping Fees:$10,500.00
CASE STUDY
• Custodial Fees:$4,000.00 (assume .05% of assets)
• Less: Revenue Sharing Offset: ($38,054.00)
Excess Revenue to Offset Other Plan
Expenses:$23,554.00
20

21. Annual Savings
$23,554 Annually
OR
CASE STUDY
$157 Per Participant Annually!!
21

22. The Impact of Section 408(b)(2)
• Understanding all plan fees can be complicated
• Excessive fees can erode away at your retirement
savings!
• Plan Sponsors have a fiduciary obligation to know all
fees and ensure fees are reasonable!
• Deadline for compliance with Section 408(b)(2) fee
disclosure regulations is April 1, 2012 22

23. What Should You Do Now?
• Request disclosure of all fees from your vendor
• Benchmark your fees against other plans of similar
size for reasonableness
• Request an independent review of your plan‟s fees
and services
23

24. This concludes our discussion
ANY QUESTIONS?

25. So Where is the Peak?
Sign up for
more webinars
Register for upcoming educational events on
pensions, 401(k), healthcare and other actuarial
and employee benefits topics at:
www.nyhart.com/events

26. ACTUARY &EMPLOYEE BENEFITS
Established in 1943, Nyhart is an ESOP with
84 employees and offices in
Indianapolis, Chicago, Atlanta and Kansas
City.
Areas of Expertise Include:
• Cash Balance Plan
• Defined Benefit & Pension
• Defined Contribution & 401(k)
• Employee Stock Ownership Plan
• Flexible Spending, HRA & HSA
• Healthcare Actuarial Consulting
Learn more at www.nyhart.com

27. ACTUARY &EMPLOYEE BENEFITS
16 Actuaries Consulting In 48 States.
Nyhart is one of the nation’s largest
independent actuarial and employee
benefit firms, consulting to and
administering the plans for clients with
more than $14 billion in assets.
Our team of benefit advisers deliver
personalized analysis and
recommendations, translating complex
calculations and issues into common
language that enables corporations,
associations, churches and governments to
effectively manage their retirement and
health care benefits.