Understanding Asset-based Fees

Every retirement savings plan comes with certain fees and expenses.

Some are associated with the cost of managing the plan itself, while others are connected to the specific investment options you choose. In this second installment of our ongoing series about retirement plan fees, we’ll explore asset-based fees, sometimes know as fund fees.

Just what are asset-based fees? In general, you pay these fees based on the assets you have invested in a fund. Asset-based fees generally take the form of investment management fees, operating expenses, or sales charges; certain investments also carry other charges.

Management fees and operating expenses

Management fees and operating expenses typically are the largest component of the fees associated with a retirement plan. You pay these fees indirectly because they are deducted from a fund’s assets before returns are calculated. For mutual funds, these fees are standardized and expressed as an “expense ratio” and are shown as the annual percentage of a fund’s total net assets (e.g., 0.27%). For non-mutual funds (such as collective investments and guaranteed investment contracts, among others), the fee and expense percentages may be calculated using different methodologies.

So, what does the expense ratio cover? Typically, it pays for three kinds of expenses.

  • Investment management fees. These fees reflect the portfolio manager’s time, investment research, or other activities that support the investment management organization as well as other expenses related to deciding which securities the fund buys or sells.
  • Operating expenses. A fund’s operating expenses are typically overhead and include the cost of registering the fund, custody, recordkeeping, accounting, audits, and other administrative expenses; providing phone and online services; and printing and mailing costs associated with fund communications.
  • Other expenses. Finally, the expense ratio may cover a number of other expenses, such as for marketing and advertising, including printing and mailing prospectuses to new investors, printing and mailing sales literature, and expenses paid to brokers in exchange for selling shares of the fund. Other examples are shareholder servicing, sub-transfer agency fees, and commissions.

Sales charges

Some mutual funds charge a sales fee when you buy or sell the fund. There are various kinds of sales fees, also known as “loads.” Some charges are deducted up front when you buy the investment—these are called front-end loads. Others are deducted when you sell the investment—these are called back-end loads.

When you invest in funds available in the UC Retirement Savings Plans (UC RSP), you will not pay any type of sales commissions or “loads” as you buy or sell shares. Investing through Fidelity BrokerageLink® may incur these fees. 

Other charges

  • Insurance-related charges. Insurance companies often provide investment options for retirement plans through a group variable annuity contract. The contract is between the insurance company and the retirement plan sponsor; participants in the plan choose from among the investment options. Like many other funds, variable annuity contracts can include fees to cover investment management and operating expenses, participant services, and commissions paid to the selling agent or broker. Variable annuity contracts also may include sales expenses for the cost of administering the contract or an insurance charge if the fund or plan provides an annuity feature, interest, expense guarantees, or a death benefit. Finally, variable annuity contracts may contain a back-end surrender charge if the investment is withdrawn before the contract expires.
  • Short-term trading fees. Some funds carry a short-term trading fee, which applies if shares of a fund are sold prior to a stated holding period.

Finding your fund’s fees and expenses

You will typically find fund expenses and other fee information reported whenever a fund’s returns are shown. Look for this information in the Performance and Research page on NetBenefits.com.

In general, you can multiply a fund’s expense ratio by your balance in the fund to estimate the annual expenses associated with your holdings.

 

Sources:
“A Look at 401(k) Plan Fees,” U.S. Department of Labor, Employee Benefits Security Administration, August 2013. Reviewed as of March 2016.
“A Guide to Retirement Plan Fees and Expenses,” Brian A. Montanez, AIF®, CPC Multnomah Group, 2014

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