In the 401k world a practice that was known as “revenue sharing” has come under scrutiny. The concept: A mutual fund or insurance company offers multiple share classes, often associated with a letter. The various share classes own the same securities; the only difference in these share classes is the cost. The lowest cost share class is typically referred to as “institutional” and represents only the real cost of managing the fund. The difference between that cost and the total expense of these other share classes is used by the provider to make opaque and indirect payments to other vendors.
It’s a way of trying to hide fees and only makes things more complicated and gives the industry a bad reputation. I prefer an arrangement that is more transparent – utilizing only institutional share classes while the fees to other providers are separate – either billed directly to the plan sponsor or disclosed as direct line item debenture on the participants statements. No need to hide or cover it up
But if you are going that route, you still need to make to obtain institutional share, or you will be paying twice – and that’s not always so easy. In a recent project for a 401k plan sponsor, I was commissioned to find the institutional share class (or lowest cost if they call it something else) version for a bunch of funds. In doing the research here are the share classes I found for one of the funds:
Allianz NFJ Mid-Cap Value
Class A PQNAX 1.26
Class B PQNBX 2.01
Class C PQNCX 2.01
Class D PREDX 1.26
Class Inst PRNIX .91
Class Other ANRPX 1.01
Class Other PRAAX 1.16
Class Retirement PRNRX 1.51
This insane confusion of share class choices was typical for most of the funds we researched.
More plan sponsors are choosing to pay the 401k fees outside of the fund expense ratios (which I recommend). But make sure you have the right people finding the right share class!