(b)lines Ask the Experts – Where's the Fees?

(PLANSPONSOR (b)lines ) - A 403(b) plan sponsor says: "I keep hearing about all of these fees investment providers charge, yet I do not pay any fees direct to the investment providers, nor do my participants appear to pay any fees on their statements. So where are the fees coming from?"

Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:

Sounds like you have the type of arrangement where all fees are so-called “indirect” fees. In this arrangement, common to 403(b) plans, no hard dollar fees are charged; instead, all fees are deducted from the return of the individual plan investments, either as a reduction in the interest rate for a fixed annuity investment, or as part of what is called the “expense ratio” of a variable annuity or mutual fund.

Each mutual fund or variable annuity has an expense component, or ratio, expressed as a percentage. For example, if a fund has a 1% expense ratio, that means that 1% of your investment is deducted to pay the expenses of the fund, reducing your corresponding investment return over time.

The components of a fund’s expense ratio include, but are not limited to, the following fees:

  • Management fee – basic fee for the management of the mutual fund/variable annuity. Includes compensation to the money manager and staff, as well as research and support services. This fee component typically ranges between .25%-.45%, and can be as little as zero for certain index funds.
  • 12(b)-1 fee – the most common fee, ranging from .10% to 1%, though most commonly set at .25%. It represents compensation to a person or entity providing services after the sale of the mutual fund. However, the actual person or entity receiving the 12(b)-1 fee for a specific retirement plan is not always obvious.
  • Sub Transfer Agency Fee – payable by a fund company to a recordkeeper to maintain individual accounts for each participant so that the mutual fund need not maintain such records. This fee is typically in the .25-.45% range.
  • Mortality and Expense (M&E) charges – found only in variable annuities, the charges pay for a death benefit and insures that the expenses of the contact won’t be greater than the vendor actually anticipated.  Ranges from a small fraction of a percentage point to 2.5%.
  • Finders Fee – essentially an upfront 12(b)-1 fee  paid by a decreasing number of companies to promote new sales of their funds. Encountered rarely in the current environment, such fees range from .10% -1.25%.   


In addition to the expense ratio, each variable annuity and mutual fund incurs trading costs that also serve to reduce investment return but are NOT part of the fund’s expense ratio. In fact, such fees are often difficult to locate, since they are often contained in what is called a “Statement of Additional Information,” a document that is a supplement to the prospectus of a fund.

The fees relate to expenses, known as commissions, incurred when a fund buys or sells individual securities. For index funds, where there is little buying and selling, trading costs are usually quite low, but for actively managed funds, such expenses can equal or exceed the entire expense ratio of a fund (especially if the fund trades frequently, or, in investment parlance, has what is known as a high “turnover”).    

As you can see, all of these fees can add up! It is important for a plan sponsor to monitor the plan’s expenses to ensure that the services provided by their vendor(s) are proportionate to fees received, and that fees are reasonable when benchmarked against other similarly-designed plans.