In February 2012 The Department of Labor published guidelines for ERISA retirement plan to disclose expenses and fees under 408(b)(2). This was an eye opener for everyone involved in the sale of mutual funds and ETFs in qualified plans. But most advisers were not awake at the wheel when the regulation went operational. It was curious to me to discover qualified plan administration and custodial care charging on average were around 25 to 29 basis points depending upon the assets under management. That seemed reasonable to me. But the biggest revelation came from the disclosures of the cost of funds themselves. For most security licensed representatives and RIAs, the fund’s prospectus was the only discussion point for internal expense loads addressed with a potential buyer. The average fund expense load cited in the prospectus is generally around 90 basis points and most RIAs were charging an additional 100 basis point. Resulting in a traditional talking point that funds and management cost to consumer are little less than 2%. But then an economic epiphany occurred when some (not all) qualified plan administrators included the transaction costs listed in the fund’s statement of additional information. For whatever reason the document is not required as a delivery item to the fund owner by the adviser. In fact, most advisers are unaware of these extra charges. The average cost cited in the statement of additional information (SAI) is around 144 basis points. The SAI costs are comprised of brokerage commissions, market impact costs and the transaction spread cost. I was floored! But the bloodletting didn’t stop there. An additional expense called cash drag, money held in cash equivalents for liquidity costs around 83 basis points. So, on qualified fund costs with the adviser fee could be around 4.46% annually. Non-qualified funds around 4.17%. This doesn’t include non-qualified funds subject to taxation on gains, which averages around 100 basis points, increasing the non-qualified costs to 5.17%. I only mention this because of the tax deferral and the exclusions ratio of deferred and lifetime annuities.
Lindahl has authored two books available on Amazon.com The Pros and Cons of Indexed Annuities and Retirement Reality Check.
Portions of this press release contain content from Lightbulb Press with permission.