Loads on 401K Funds

We are looking at doing a 401K with ADP using their R share program. ADP
is claiming that the funds in this group have a 1.3% load, with no front end
or back end load. Are there any hidden costs I should be aware of?
The A share plan they offer is a 1.05% load, which confuses me since I have
read elsewhere that A share mutual funds are typically 5% front or back end
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there's a way for you to instantiate a 401k without doing so too. Does Vanguard offer 401k plan administration? In this economy, I can't see an educated employee wanting to pay those loads...
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True, but then the poor employees need to organize better and demand that management put some no-load funds in the retirement plan.
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I have been thinking about this further and am wondering if companies ever receive kickbacks from mutual funds or their representatives for putting loaded funds into retirement plans. If that is true, it could explain some (many? all?) inappropriate loaded funds being in various company-administered plans.
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I went to a presentation by several plan providers a few months ago, and when you look at this as a customer you have more sympathy for employers. The issue really seems to be that unless they are single-participant, 401k plans have significant overhead to them -- most significantly the regulatory one, compliance with tax and DOL rules, both in the plan design and its administration. Add in an 800 number where a plan participant with $600 in the plan could spend an hour talking about who knows what...well, all this has to be paid for somehow. So there seems to be a trade-off, at least until the plan has enough scale to access the good/low-cost investments. The market seems geared towards plans with many millions in them.
Open question though: is it better for the company to have lower match, and low-cost investments, and pay plan costs; or higher match, with plan expenses covered via costs borne by participants? I can see arguments for doing it either way. If you are a high-rate contributor, it probably works out better to get higher match rates despite higher-cost investments.
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Tad Borek
I doubt actual kickbacks are common. However, small to mid-size companies often need to pay significant plan administration fees and even separate record-keeper fees. What seems likely to me is that such fees might be lower from providers of loaded-funds.
-- Rich
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"I doubt actual kickbacks are common. However, small to mid-size companies often need to pay significant plan administration fees and even separate record-keeper fees. What seems likely to me is that such fees might be lower from providers of loaded-funds."
Interesting. A standard justification often made for a load is that the person selling the fund provides "advice"to the buyer. Certainly a company employee does not receive any "advice" from the organization or individual providing a loaded fund to a company retirement plan. So, does the sales person provide "advice" to the company officers administering the plan? I should think any large company would have responsible people in charge of the retirement plan who did not need advice on how to invest.
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It seems to me that who pays the various costs associated with a retirement plan is something that should be determined at the time the plan is first put in place, possibly by some negotiation between management and the union or whatever group represents the participants in the plan. At the same time, it should be made clear and above borard that the nature of the investments of the plan will be decided by what is good in the long run for the retirees benefiting from the plan, not by temporary financial advantages that favor the company balance sheet.
Since the long-term superiority of mutual funds without loads and with low annual fees are well known, I would be very surprised if any inclusion of load funds in a retirement plan would ever benefit the employees. And, come to think of it, the emphasis on mutual funds with relatively low annual management expenses could be just as important or more important than the question of loads. Since retirement plans are essentially "long-term," it seems to me that focus on "low cost investments" is a very temporary and misleading benefit. It would not be comparable to the size of the match in importance over the working years.
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People choose to invest in mutual fund investments as they convert quickly and easily to IRA rollover accounts held at the fund company. The investor can keep the same investments and pursue the same investment strategy as with the 401k even after terminating employment, and is free to later change the investments.
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Technically, the adviser could give absolutely no advice and they are still entitled to that commission (legally, not ethically IMO). By the same token, if you walk onto a car lot and simply state, "I want that car", the salesman isn't going to waive his commission for not having advised you. I'm not advocating the purchasing of loaded funds, I'm just stating reality.
As for the 401(k) aspect... it's, unfortunately, not that simple. Almost every plan (large or small) has an adviser associated with it. And the reason has little to do with investment knowledge. Employer retirement plans are frought with fiduciary responsibilities. Unless a very specifc set of hurdles are cleared, hoops jumped through, and boxes checked, there can be some major civil liabilities. By bringing in an adviser, the employer passes some of that liability on to another party.
Nevermind the fact that it's illegal to make specific investment recommendations without proper licensing and registration. A corporate big-wig choosing the plan's investments MIGHT be considered to be breaching that regulation.
And, for the record, almost all 401(k) plans these days are "self directed". That means that each employee is responsible for picking their own investments (from a limited yet diversified list, that is). Advisers and corporate big-wigs are technically BARRED from giving advice to employees. Again, it's a liability issue. You can't sue your employer for YOUR bad investment decisions. And so long as they gave you sufficient choices, they're in the clear.
Lastly, like fraud and murder, I'm sure kickbacks occassionally occur. However, it is illegal. The real reason loaded funds exist in 401(k) plans is because 401(k) plans use a different compensation structure than your mom-and-pop mutual funds. Simply put, the expenses are different. That A share mutual fund in a 401k doesn't always pay a 5% commission like it's non-401k counterpart does. And often times loads are waived on retirement plans completely. But all that aside... that no load fund in your 401(k) isn't really "no load" anyway. The adviser is paid a management fee (pre-negotiated with your employer) that is heaped on top of the expense ratio. Yahoo won't reflect that fee (it's plan specific). That VFINX fund with the 0.18% expense ratio might actually be costing you 1.18% in your 401k.
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