Insights


What Every Plan Sponsor Who Utilizes Low-Cost Index Funds Should Do (as soon as possible!)

If you have low-cost index funds in your retirement plan (funds from Fidelity and Vanguard are examples), you may be missing out on a fee reduction for your participants, simply because you didn't ask!

I know what you’re thinking, “Mike is joking, isn't he? I cannot imagine that there is a cost reduction that is so simple to obtain.” Well, believe it or not, for some (but not all) plan sponsors who utilize low-cost index mutual funds, the answer is YES!

The issue is simple - mutual funds often have multiple share classes, some of which are less expensive than others. The larger the amount of investment in the fund, the cheaper the share class that can be obtained. Since these funds generally do not share revenue with recordkeepers, there is no hidden cost or catch-22 where the revenue sharing amount would change. For those of you who are unfamiliar with revenue sharing and other indirect expenses, you can read this article from our archives for details. Thus, if your plan qualifies for a less expensive share class of the fund, the direct result is lower fees for the plan participants who invest in that fund.

Okay, so why do you need to ASK for the share class with the lower fees? In our experience, it is not a given that your plan recordkeeper will simply obtain the lower-fee share class for you once you reach the asset minimum. In fact, we have encountered several instances where plan assets remained invested in the higher-fee share class for some time, even though they qualified for the less expensive share class.

So don’t let this happen to you! As part of your due diligence process, if your plan utilizes low-cost index funds, you should follow up as soon as possible with your plan recordkeeper to confirm that your plan assets are indeed invested in the least expensive share classes of these funds, based on minimum asset requirements.

The difference in fees for implementing the proper share classes can amount to tens or hundreds of thousands of dollars for mid-size plan sponsors, and even millions for the largest plan sponsors. If this tip results in cost savings for your plan, you can thank us by letting people know where you obtained this valuable information!


Michael A. Webb is a Vice President at Cammack Retirement Group. He resides in the woods of New Jersey (yes, you read this correctly) with his wife, son and the newest addition to the family, an orange cat.

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

Investment products available through Cammack LaRhette Brokerage, Inc.
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