Mutual Funds and 401(K) Pension Plan Fees, Services, and Performance

Abstract

Mutual funds are the primary providers of investment management services to 401(k) pension plans. These plans are complex to operate and administer and subject to multiple regulators. Third-party revenue sharing is used to pay some portion of plan service provider costs, other than employer/plan sponsor costs. Sub-transfer agency fees are one type of revenue sharing payments. In providing investment management services to pension plans, mutual fund advisers pay sub-transfer agency fees directly to the plan administrator and service provider. Fund advisers are self-reimbursed by including these payments as management fees in the fund expense ratio charged to plan participant accounts. Employer/plan sponsors create pension plans, select service providers, and determine the investment objectives of plan investments. Plan service provider fees and services include: (1) employer/plan sponsor fees, (2) plan participant account fees, (3) investment management service provider fees, (4) plan administrator and service provider costs, and (5) investment management services provider. The general types of services provided include (1) administrative services, (2) participant services, and (3) regulatory and compliance services. The scenarios under which 401(k) pension plan fees are lower are discussed and specified. Finally, empirical findings concerning how the actions of plan administrators and plan participants affect selection and performance of pension funds and participant mutual fund allocations.