"Follow the money" is sound advice. It worked for Woodward and Bernstein (for those of us old enough to remember!) and it will work for you. The thing is, sometimes money's hard to find, even harder to follow. "Sub-transfer agent" fees, known as "Sub-TAs," fall into this group.

What is a 'Sub-TA Fee'? Think about it this way: Investment companies like mutual funds handle pools of money. They mix, or commingle, what they manage in a single pool. However, someone has to keep track of what money belongs to whom; someone has to keep the books, issue shares, transfer shares, redeem shares, do all sorts of things with and about shares. Someone has to issue reports, cut checks, reconcile records; on and on it goes. In the 401(k) world, mutual fund companies pay a fee, usually in the form of "basis points," or a percentage of the value of the transactions that are handled, to whoever does that work and it's called a "Sub-TA" or "sub-transfer agent" fee¹.

Now, let's start out agreeing there's nothing wrong with Sub-TAs. We like fees for service. It's what business is about. The problem isn't they're there; it's that they're not readily and clearly disclosed. YOU CAN'T FIND THEM ANYWHERE!² That's why I call Sub-TAs "the dirty little secret" of the 401(k) business! It's not being talked about. As a plan sponsor you have to make your vendors come clean on what and whom they pay!

Since Sub-TA fees, and all of the other kinds of revenue sharing arrangements, are a form of cost to mutual fund shareowners and, therefore, your Plan's participants, they are a drag on the returns your participants earn. I recently conducted a review of an $80 million 401(k) to determine what other qualified providers would charge, all costs considered, for servicing this plan. What did we discover? Although their current provider was, overall, charging them a fair 0.91% (91 basis points) for investment management, recordkeeping, trustee services, education and so forth, two-thirds of the respondents came in 20 or more basis points LOWER! One of the strongest came in at 0.62% while eliminating almost $100,000 in hard-dollar charges that the plan sponsor had been paying through the application of sub-TA and other forms of revenue sharing. What are 29 basis points, 0.29%, on $80 million? Nearly $240,000 in savings, no direct billable AND no loss at all where investment performance, participant service and communication or any other factor was in any way concerned! That's what I call improvement.

The 401(k) business really is what's called a "zero-sum" game. That is, every good that accrues to one party, say more money to a vendor, is a negative (or "bad") for another, say in the form of lower return on a participant's investment account. That's why the Department of Labor insists you, as a plan sponsor, know what you're paying to whom for what, down to niggling details like sub-TA and 12(b)(1) fees! In the tug-of-war between vendor profit and participant return, sponsors (like you) and consultants (like me) have to come down on the side of…balance between reasonable compensation to vendors and the best chance we can give participants to optimize returns. How do we do that? That's what the second and the third steps in our three-step process for uncovering fees is all about: Now that we can find them, how do we "control" and "apportion" hidden fees?