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Recently, John Oliver lambasted the 401(k) industry and his own 401(k) plan with John Hancock on his HBO show Last Week Tonight. If you haven’t seen this show segment, you should check it out now - it was educational as well as hilarious. John Oliver’s main beef with his company’s John Hancock 401k plan was its annual fees - 1.69% of plan assets + $24/participant – which he considered excessive.
In a letter, John Hancock disputed John Oliver’s claim it charges excessive 401(k) fees. They said “The production company sponsoring the plan chose to absorb all of the plan expenses except the direct investment fees related to the investment options referenced above. In doing so the company will be billed for an estimated first year cost for recordkeeping, investment, and other services, including compensation paid to the advisor, of approximately $1,100 based on current plan size. The average all-in cost for a participant in this plan is just 20 basis points (consisting of investment expenses and the third party fiduciary expense).”
I have a big problem with the John Hancock letter. The $1,100 fee it cites for 1st year services appears to assume zero plan asset growth. Why is this a problem? Hancock’s 1.69% fee quickly accelerates fees as plan assets increase. If John Oliver’s 401k plan grows to $100,000, John Hancock fees would double to $2,200/year (assuming 25 participating employees). Assuming a $1M plan, John Hancock fees grow to $17,500!
I agree with John Oliver – his 401(k) plan’s John Hancock fees are excessive. Maybe not today, but very soon. That’s the problem with high asset-based fees – even modest asset growth can result in exponential fee growth. And you know what? I’m pretty sure John Oliver’s 401(k) plan is even more costly today than he knows. I would like to unpack all the fees related to a John Hancock small business 401(k) plan here.
What about TPA services?
All 401(k) plans require the same basic 4 services – custody, recordkeeping, Third-Party Administration (TPA), and investment selection. For 401(k) plans under $5M, John Hancock just provides custody and recordkeeping services. They partner with unrelated financial advisors and TPAs to deliver a full-service 401k solution to small businesses.
Under this arrangement, financial advisors are usually fully compensated by John Hancock while TPAs are paid just a small fraction of their annual fees. The remainder of the TPA fees are invoiced and paid by either the employer or through participant account deduction.
I think it’s a safe assumption John Oliver’s 401(k) plan uses an outside TPA given John Hancock’s small business 401(k) service model and the fact that TPA services are not mentioned in the John Hancock letter. I would expect these TPA fees to be (at least) an additional $1,500/year.
My low cost index funds cost how much?
John Hancock often receives 3 types of compensation for its services. Unfortunately, 2 of these fees are not readily transparent to 401(k) plan participants.
- Annuity “wrap” fees – When a small business 401(k) plan uses John Hancock, it doesn’t invest in mutual funds. Instead, it invests in variable annuities. Variable annuities are mutual funds “wrapped” in an annuity contract. John Hancock often adds fees to these wrapped investments, which are then deducted from participant investment returns.
- Revenue sharing – These are payments made to 401(k) service providers by mutual fund companies. This compensation usually consists of 12b-1 fees, shareholder servicing fees, sub-transfer agency fees, and commissions. These fees are deducted from participant investment returns.
- Direct fees – These fees are invoiced and paid by either the employer or participant account deduction.
Examples of all three types of compensation can be found in this John Hancock 408b-2 fee disclosure. The wrap fees and revenue sharing payments can’t be seen by 401(k) participants on their quarterly benefit statements, while direct fees can.
The 1.69% fee cited by John’s Oliver is the annuity wrap fee + revenue sharing payment John Hancock receives annually from each plan investment. Based on the low average investment expenses cited in the John Hancock letter (0.18%), I’m guessing none of the funds used in John Oliver’s 401(k) plan pay revenue sharing. If true, that would make the actual average investment expense 1.87% annually (0.18% + 1.69% wrap fee). So much for “low-cost index fund investments!”
Got to love John Oliver!
I thought John Oliver did a super job simply explaining his frustration with his company’s 401(k) plan with John Hancock. I get it. I talk to small business owners all the time that don’t know how much they pay John Hancock for their 401(k) plan. Fortunately, getting to the bottom of John Hancock 401(k) fees is not hard. The key is understanding their service delivery model and sources of compensation.
