Many Americans struggle with find and calculating their Principal 401(k) Fees. This is expected because it requires a full knowledge of how 401(K) works and all the fees involved.
If you have questions about the principal’s 401(k) rate, how it works, how much the average cost or how to find and calculate it for the plan, then you are in the right place.
In this guide, we will show you how to use the amount required by DOL to calculate the total cost of a Principal 401(k) plan.
At the end of this guide, our goal is to give you a comprehensive understanding of how the principal’s price works, what you have to pay, and how to increase it.
Let’s dive in and explore 401K.
Table of Contents
What is the Principal Fees of 401(k)?
In our recent 401(k) small business rate study, we found that principal plans spend an average of 1.23% of plan assets per year for small businesses, and their management fees are approximately $455.94 per participant.
| Average Principal 401(k) Fees | |
| Avg. Plan Assets | $2,194,007.59 |
| Avg. Plan Participants | 36 |
| Per-Capita Admin Fees | $455.94 |
| All-In Fees | 1.23% |
Although the per capita administrative fee is higher than the research average of US$422.30, this figure may increase a lot due to the way these fees are collected.
According to our experience, approximately 85% of the administrative fees charged by the principal are paid through shared income or variable annuities-401(k) “hidden” fees will reduce the return on investment of plan participants.
The sponsors or participants of the plan not only often do not know that they are getting paid, but they always charge a fee as a percentage of the plan’s assets.
This means that program participants will automatically pay higher and higher management fees to the Principal as their accounts grow, to obtain the same level of service. This is not fair!
If you consider compound interest, this rising interest rate will greatly affect your retirement savings. Therefore, you want to make every effort to avoid paying for it.
If you are currently using Principal as a 401(k), the first step to avoiding these fees is to determine whether you are paying. We will show you how to do this below.
How to Find and Calculate the most Principal 401(k) rate
To understand how much, you paid for the Principal plan, I recommend adding your investment and management costs to a single “all-inclusive” rate.
Expressing this as a percentage of plan assets and dollars per participant will make it easier for you to compare the cost of the Principal plan with competing 401(k) providers and/or industry averages.
To make it easier for you, we created a spreadsheet that you can use with all the columns and formulas you need. All you have to do is find the plan information and copy it into a spreadsheet.
To make it easier for you, we created a spreadsheet that you can use with all the columns and formulas you need. All you have to do is find the plan information and copy it into a spreadsheet.
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This may be tricky for the Principal, but rest assured, we will show you all you need to do in 4 simple steps.
Step 1: Put together all necessary documents
To calculate the principal 401(k) rate, you only need 1 document:
• Summary of fees for retirement plans: According to the regulations of the Department of Labor, Principal must disclose 408(b)(2) fees to the employer.
This document contains the principal’s pricing model and plan-level information on the asset-based fees they charge directly.
This information is intended to help employers determine the “reasonability” of 401(k) rates. This document can be found on the employer’s main website.
After collecting 408(b)(2), you can proceed to step 2.
Step 2: Find the Principal’s direct 401(k) rate
401(k) administrative fees can be “direct” or “indirect” in nature. “Direct” fees can be deducted from participants’ accounts or paid from company bank accounts, while indirect expenses can be paid from mutual fund fees, thereby reducing their annual income.
The direct rate is the most transparent and may be the rate you are most familiar with.
The direct head fee is shown in U.S. dollars on page 3 of your document “Summary of Retirement Plan Fees”:
Direct fees are usually only a small part of the 401(k) management fees charged by the principal. Most of the company’s money is obtained through “indirect fees.” This is how to find it.
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Step 3: Discover hidden 401(k) fees from the Principal
In the plan we studied, Principal collected most of the commission (85%) through indirect commissions hidden in fund expenditures. They use two types of overhead to do this:
1. Revenue sharing fee: Revenue sharing is a practice of adding non-investment costs to the operating expenses of a mutual fund, which will reduce the return on investment of plan participants.
These additional costs will be repaid to the service provider of the plan. There are two common methods:
Fee 12b-1 Fees: usually reimbursement of the broker or insurance agent.
2. Sub-TA (sub-TA) Fees: usually reimbursed to the recordkeeper.
2. Wrap Fees: Insurance companies usually use variable annuities instead of mutual funds as 401(k) investments. A variable annuity basically wraps the mutual fund in a thin layer of insurance, with additional fees and repayment restrictions.
Additional fees usually include “adjustment fees”, which can significantly increase the share of the underlying fund. Sometimes more than 1%!
In the disclosure of the principal interest rate, neither the income share nor the closing exchange rate is disclosed in dollar amounts, which is indeed easily overlooked. Instead, post them in different sections of 408(b)(2) “Summary of Retirement Plan Fees”.
The Principal income participation rate is the “Investment Options” section of your 408(b)(2):
You can find the Principal wrap fees in the “annual fee as a percentage of plan assets” section of 408(b)(2):
In step 4, you multiply the percentage of revenue sharing and wrap fee by the appropriate fund balance to calculate the indirect fees charged on the principal.
Step 4: Calculate your total amount 401(k)
In this step, we will enter the information found in the spreadsheet to calculate the total cost or “all-in” fees (administrative fee + investment cost) of your plan.
First enter the fund information of the Principal 408(b)(2) document in the spreadsheet. The formula will automatically calculate its direct fees.
Next, we need to add your direct fees.
Simply enter the Principal’s direct fee in the “direct fee” line item at the bottom of the spreadsheet.
At that time, all your administrative fees and investment expense (after deducting direct fee) should be suspended and added together to provide you with the all-in fees of Principal plan’s total rate. In our example it is 9,001.74 USD.
To make it easier to compare fees with other plans, we recommend that you express this number as a percentage of plan assets. In our example, the number is 1.35% ($9,001.74 / $429,180.00).
Assess your per capita administrative fee
After calculating the all-in fees, we recommend that you quickly investigate the Principal per capita administrative fee (ie count).
…and here is the reason why?
If only the investment cost is used to fully evaluate, then the excessive administrative fee-basically more than the cost of 401(k) provider service level-may not be obvious. This is especially true if your plan has many assets.
To demonstrate the value of this assessment, consider a 401(k) plan with a plan of $1,625,825.48, which has only 7 participants in the 2018 401(k) small business tuition.
Your total amount of US$25,611.64 (1.58% of plan assets) is slightly higher than the research average of 1.40%, and the per capita administrative fee of US$2,521.81 (US$17,652.64/7 participants) is approximately six times the average.
To calculate the per capita administrative fee, divide the total administrative fee by the number of plan participants. For our sample of 18 participants, this is $456.81, which greatly exceeds the fees paid by participants to cheap 401(k) providers.
Avoid 401(k) Principal’ fees getting out of Hand
One critical mistakes people make is allowing their principal fees get out of control. You must now fully explain your Principal 401(k) fees and how they are charged.
Even if your current asset price is lower than average, as the asset grows, the share of the principal and the closing rate will quickly make it too high. Therefore, it is important to check farm rates regularly.
Are there many questions? We have a solution.
Just call the 401(k) provider, and if possible, the provider will charge based on the number of employees rather than assets. This fee structure will make it easier for you to track 401(k) rates as your plan grows. You can save money by doing this.
Content credit: employeefiduciary.com
