Marketing Fees---Including Revenue-Sharing and 12B-1 Fees--- Take Big Bites Out of 401k Participants' Mutual Fund Savings

The following four examples illustrate the very destructive impact 'marketing fees' ---including revenue-sharing fees, agent and broker commissions, and 12B-1 fees--- have on 401k investors' savings. These examples assume a marketing fee of 1.0 percent annually* deducted unnecessarily from 401k participants' mutual fund assets. These examples assume a typical 401k participant, who earns an average annual return of 7 percent on his or her 401k mutual fund investments, and retires at age 65:

  • A 30 year old person who saves $250 a month in his or her 401k, and has a current balance of $20,000 will pay out approximately $107,000 in unnecessary revenue-sharing, marketing commissions, and 12B-1 fees. This 401k participant would have saved approximately $488,000 had the fees not been charged against the 401k participant's assets.
  • A 30 year old person who saves $500 a month in his or her 401k, and has a current balance of $30,000 will pay out approximately $192,000 in unnecessary revenue-sharing, marketing commissions and 12B-1 fees. This 401k participant would have saved approximately $900,000 had the fees not been charged against the 401k participant's assets.
  • A 45 year old person who saves $400 a month in his or her 401k, and has a current balance of $50,000 will pay out approximately $46,000 in unnecessary revenue-sharing, marketing commissions and 12B-1 fees. This 401k participant would have saved approximately $292,000 had the fees not been charged against the 401k participant's assets.
  • A 45 year old person who saves $800 a month in his or her 401k, and has a current balance of $80,000 will pay out approximately $80,000 in unnecessary revenue-sharing, marketing commissions and 12B-1 fees. This 401k participant would have saved approximately $610,000 had the fees not been charged against the 401k participant's assets.

The vast majority of 401k participants are charged unnecessary "marketing fees" which are extracted from their 401k mutual fund assets, often without their knowledge or understanding. According to a recent study of 401k fees by AARP (AARP.org) "When plan participants were asked whether they pay any fees for their 401(k) plan, eight in ten (83%) reported that they did not pay any fees."

All mutual fund fees are allocated into three separate categories: [I] Marketing Fees, [II] Administration Fees, and [III] Asset Management Fees:

*MARKETING FEES:
401k Easy-provided plans being a clear exception, most 401k plans are larded with various "marketing fees" that 401k participants unknowingly pay. These unnecessary marketing fees include revenue-sharing fees, agent and broker commissions, and rebates to third-party administrators for pre-packaging mutual funds into the 401k plans. Demos (demos.org) a well-known national non-profit research organization, published "The Retirement Savings Drain-The Hidden & Excessive Cost of 401ks" and in this study calculated these unnecessary, non-essential marketing fees range from 1.0 percent to 1.5 percent annually.

ADMINISTRATIVE FEES:
All 401K participants pay their funds' routine expenses, including postage, printing, office operations, processing transactions and statements, statements, and customer support services. Administrative fees are essential, and range from 0.2 percent to 0.4 percent annually.

ASSET MANAGEMENT FEES:
401k participants pay the salaries of their funds' portfolio managers, investment researchers, and support personnel. Asset Management fees are essential, and range from 0.5 percent to 1.0 percent annually.

The aggregate total of these three categories of fees is called the EXPENSE RATIO, and is reported in the funds' prospectus. According to the Investment Company Institute (ICI.org), the trade association of the mutual funds industry, the average expense ratio for all funds is 1.27 percent. The ICI estimates the average expense ratio for small 401k plans ($100,000 in assets and 10 participants) is higher, at 1.4 percent annually. As confirmation, banking trade industry website Bankrate.com calculates the average expense ratio for all funds to be approximately 1.5 percent annually.