These days, 401(k) plans offer lots of bells and whistles–from daily trading and toll-free numbers to a wide choice of investments.
Do you know what that’s costing you? You should. Because increasingly, costs of 401(k) plans are being shifted to workers, reducing their retirement accounts.
“A large number of participants don’t know, don’t understand a lot of the fees. There are a lot of employers that don’t know what’s being paid out, either,” said Steve Merritt, president of the National Association of 401(k) Investors, a Florida non-profit providing 401(k) information to individuals.
Some pension experts say workers haven’t paid much attention to fees because of the spectacular returns in recent years in the stock market. If you’ve been earning 20 percent or 30 percent annually on stocks, whether you pay 1 percent or 2 percent each year in fees may not seem such a big deal.
But it is when those fees are compounded over many years.
For instance, say you salt away $3,000 a year at a 10 percent annual return. If you pay 1 percent annually in fees, your nest egg would grow to $409,000 over 30 years. Pay 2 percent in fees, and the balance shrinks by $69,000.
“It’s like having an account with a hole in it,” said Ted Benna, president of the 401(k) Association in Pennsylvania and creator of the first 401(k) plan.
Concern about fees prompted the U.S. Department of Labor to hold a hearing in November to find out if more disclosure is needed and if employers are doing enough to protect workers from excessive fees.
The Labor Department also is working on a consumer guide on fees for workers and employers that will be available this year.
Employers have a fiduciary duty to make sure workers aren’t paying exorbitant fees, pension experts say.
“Employers who don’t do their homework about fees clearly will be vulnerable to lawsuits down the road,” said David Wray, president of Profit Sharing/401(k) Council of America, a Chicago-based trade group for employers.
But employees also bear a responsibility to know what fees they pay, experts say.
Basically, there are three types of fees: investment management, trustee and administrative.
The investment management fee, the bulk of 401(k) costs, is what you pay a professional to manage the money in the plan.
The fees usually are a percentage of assets under management. They can range from as little as .05 percent to as high as 3 percent, said Jon Cook, a senior consultant with Arthur Andersen in Atlanta.
The type of investment affects the fee. For instance, a large 401(k) plan can get an index fund with a .05 percent management fee, Cook said. International funds, which require more research, cost more.
Generally, employees pay investment fees, much as they would if they owned a mutual fund outside the plan.
Trustee fees are usually nominal and half the time employers pick up the tab, Cook said. The duties of the trustee, typically a bank, include holding the plan’s securities and paying out expenses and benefits.
Administrative costs cover such things as recordkeeping, compliance and communications.
Most companies pick up the costs for administration, but more are shifting the expense to workers.
“Companies are looking for a way to reduce their out-of-pocket expenses,” said Jeff Close, director of marketing for Access Research Division of Spectrem Group.
In 1995, 73 percent of companies absorbed all 401(k) administrative costs. Two years later, the figure dropped to 64 percent, according to Connecticut-based Access.
Annual administrative fees can be as high as $40 per participant, Cook said. Some plan providers will waive administrative fees to large plans as long as the provider is also collecting investment fees from them, where most of the money is made, he said.
Large companies with lots of 401(k) assets in general have lower fees overall because they can negotiate better deals with plan providers. Smaller companies have less clout.
Also, smaller employers may not be any savvier about investments than their employees, and may not know if the cost of the plan is fair or steep, experts say.
Are your fees too high?
As a rule of thumb, if you pay more than 1.5 percent of your account balance in fees, you should question the cost, Benna said.
But finding out what you’re paying may not be easy.
“Even when you know what you’re looking for, it can be hard,” said Cook, who helps employers design plans and choose service providers. “They can be found, but not without a large degree of detective work.”
Quarterly statements usually report workers’ returns minus expenses.
Sometimes when banks or insurance companies run plans, they bundle all the fees together, making it difficult for participants to uncover costs, Benna said. And these institutions don’t have the same disclosure requirements as mutual funds do, he said.
To find out what you pay, call your human resources department, experts say.
If you can’t get all your answers there, do some legwork.
Investment fees charged by a mutual fund are available in the prospectus. Your employer should have a copy or a toll-free number where you can get one, Cook said.
Administrative and trustee fees are disclosed in the summary annual report, which all 401(k) participants receive each year. The report will list the total amount of fees that the employer and the plan, meaning the employees, pay.
A more detailed breakout of fees can be found in the Form 5500, which employers are required to show to workers upon request. This form reveals exactly how much was paid and to whom, Cook said.
These details, however, aren’t required to be reported for expenses of less than $5,000 or for smaller plans with fewer than 100 participants, Cook said.
When weighing fees, consider whether the investment options and services are worth the price you pay.
“People don’t understand, or totally appreciate, how much they are paying for all these bells and whistles,” said Olena Berg, assistant secretary of the Pension and Welfare Benefits Administration. “Maybe if people knew what it was costing them, they would be willing to have fewer services.”
If you think your fees are too high, talk to your employer. Workers have been successful in lobbying employers for lower fees, experts say. After all, top executives are in the plan, too, and they don’t want to overpay any more than you do.
And, experts say, the more employees and employers demand reasonable fees, the more the competitive 401(k) industry will respond.
