Is Your CEO Getting Kickbacks Off Your 401k Fees?

Author David Loeper over in the WiseBread forums explains how your CEO could be getting a kickback from excessive fees on your company’s 401k. The “administration fees” on some company’s 401ks are sometimes 20 times as much as what it actually costs to run the fund. Part of these fees go back to the 401k admin via “revenue sharing.” Usually the admin keeps it but sometimes they’re so big that they go back to the employee’s accounts. But instead of being credited back equally…

…they go back proportional to the account balance. So whoever has the biggest account balance, gets the most money back. David says:

The net result here is if your CEO with a large balance uses an index fund with no kickbacks for his 401k, and other participants use expensive funds, they are in essence making a contribution to their CEO’s 401k because his higher account balance gets the brunt of the revenue share “kickback.”

Wisebread asks, “If your boss is getting a kickback from those fees, do you think he will work diligently to help you find a 401(k) with reasonable fees?”

For more about the dirty secrets in 401ks, check out our post, “How Your 401(k) Is Ripping You Off.”

(Photo: Getty)

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  1. Angryrider says:

    That’s just low. And it’s kinda legal if you put it in those terms. AARGH!

  2. beavis88 says:

    Too many people are under the misconception that the finance and retirement industries are there to help them build wealth and retire. They are not – in fact, they exist primarily to make money for whomever is running the show. Making you money is just a secondary objective. Bear this in mind and slimy arrangements like this won’t come as such a surprise…

  3. johnva says:

    Personally, I think 401(k) regulations could use some reform. If the government and corporations all want to move people to these things and away from pensions then they shouldn’t be allowed to use them as an opportunity to further screw their employees.

    Maybe the government should just simplify them and fix this sort of conflict of interest by decoupling them from employers entirely. They could just raise the IRA contributions to approach the level of what’s available with a 401(k), and then create a procedure whereby people could easily sign up for automatic paycheck investment into their IRA. I don’t see why (for example) people who don’t work for a business that offers 401(k) plans should get lower tax-deferred contribution limits. Then you could manage the money in your account however you want (as opposed to how your employer wants), and they could still allow your employer to match contributions, etc. There would no longer be the problem of employers screwing their employees by picking a bad or ripoff 401(k) plan.

    Is the concern just that people wouldn’t participate in saving if they have to set it up themselves? I could see ways around that, if so. Or that they need the paternalistic hand of the employer telling them what to invest in? I’m sure that’s true for some people, but again, they could have some sort of “default” options.

    But I admit I don’t fully understand the intricacies of the tax code and the reasons why it is the way it is. So please correct me if I’m wrong.

  4. fredmertz says:

    But if the admin fees are taken proportionally to your balance (and most fees of that type are), they should be put back into the account proportionally.

  5. fredmertz says:

    @fredmertz: Or I could be wrong.

  6. lukeroberts says:

    The problem with that theory is that most CEOs cannot give the same as you and me to a 401K due to the HCE (highly compensated employee) rules of 401Ks. Thusly the CEO shouldn’t have that much more (if at all) in a 401K than the rank and file employee.

    Furthermore, the relatively low ~15K limit/year normalizes the 401K plan values in a given company, such that all members that max the plan will have similar holding values.

  7. stubblyhead says:

    Or you could just use an index fund as well…

  8. UnnamedUser says:

    I have had the good fortune to have worked in an industry and for companies where the competition for employees was such that all my employers had to eat *ALL* the costs of 401(k) administration as a means to compete for employees.

    Wow! I didn’t realize this shit happened.

  9. Notsewfast says:

    @beavis88:
    You know, I have by and large stopped commenting here because I really think the quality of the discussions here have taken a nosedive, but I have to say that your argument is idiotic. What (for profit) company is in business to do anything but make money? Do you think McDonald’s executives care what you do with their food after you pay for it? NO!

    The same goes for banks and brokerage houses. I’m not saying that everything that is going on is always ethical, but it is a system that is (mostly) mutually beneficial. If it were not, customers would not use the offending firms and the market would adjust.

    I’m not sure why there is a feeling that companies should be prioritizing anything over revenues and profits. If there are goals and objectives beyond this that management and owners feel are important then those should implemented in such a way that they can be achieved while maintaining the bottom line.

    If you want a charity, talk to the salvation army. If you want high quality goods/services/management (not that all are well-managed) you are going to pay for it.

  10. b01000100 says:

    @Secret Agent Man: did you read his comment? I think you may have misunderstood it…I think you just said he was dumb and then restated what he said in more words. I could be wrong though…

  11. backbroken says:

    @Secret Agent Man: I’m not sure beavis88 was complaining so much as stating fact for those who may otherwise have a misconception. The same fact which you then reiterated.

  12. backbroken says:

    @b01000100: You sir/madam, are a genius.

  13. Kat@Work says:

    @b01000100: You’re not wrong.

  14. Notsewfast says:

    @backbroken: @b01000100:

    My problem is that it was stated as if things should be different and that companies were somehow in the wrong for wanting to seek profits. However, if that not what was meant, I’ll chalk it up to having to read something vs. hearing it, in which case we’re in agreement and we can just pretend this never happened…

  15. chrisdag says:

    I own 25% of the company that employs me and one of my “founder” duties is wearing the “benefits administrator” hat so this is something I pay attention to. I switched the company over from a SIMPLE IRA setup to a better 401K and profit sharing plan in 2007.

    From the “small company” perspective I personally have not seen this as a huge problem. When I was looking at 401K providers not a single one offered or even talked about “revenue sharing”.

    Our 401K company takes it’s management fee and they have some compensation plan for the third party benefits consultant that helped sell us on the plan. Other than that there is no other revenue sharing — I’m a plan participant just like everyone else.

    The only other fees (and the company pays this 100%) are the annual fee that I pay to a third party benefits administrator. Every single person in our company meets the “highly compensated individual” test which means that we are “top heavy” in 401K terms and need to run our plan under the Safe Harbor rules. The paperwork and legal testing is complicated enough that it makes me far more comfortable having an outside expert firm in charge of this for us.

    Anyway, just my $.02 – as the 401K admin for my (admittedly small) company we have never been offered or even seen a proposal that included “revenue sharing” in it — and we shopped around quite a bit.

  16. I am confused.

    YOU read the prospectus of your funds, diligently, like a good consumer.
    YOU select funds with high average running costs, which YOU know erodes your investment, but YOU invested in them anyway.

    Your CEO read the same prospectuses, made the choice of an index fund (the only real choice anyway), and gets a proportional kickback on his investment when the fees wind up being less than charged.

    Again, there was NOTHING that made YOU pick a high expense funding setup or do a lot of interfund trades to blow money on the high fees. But YOU, the one who, with eyes wide open (or at least the opportunity to have your eyes wide open) purchased high fee funds are mad because someone else is getting some of your fees for making better investments?

    On a scale from white to black, this one is maybe the 10% black form of gray. Be smarter. It will make you happier in the long run.

  17. @PotKettleBlack: same deal as people wailing about their shitty mortgages, I guess, but I just went in and reallocated everything to the “Guaranteed interest option” with an expense ratio of zero. sure it’s only 3% but with the markets the way they are I’m more concerned about keeping what I have for the near future than growth which you simply can’t do in a bear market with a 401k as there’s no short funds.