High fees can rob your 401(k) of a small fortune over time

Staying Ahead

January 19, 1998|By Jane Bryant Quinn | Jane Bryant Quinn,Washington Post Writers Group

IS YOUR 401(k) plan picking your pocket? Over the years, the high fees that some plans charge could cost you $100,000 to $200,000 more than you'd pay in a low-fee plan. And you would probably never know how much extra you were charged.

High fees can even cancel out the effect of any employer contribution to your account, says Steve Butler, president of Pension Dynamics in Lafayette, Calif.

The Department of Labor (DOL) held hearings in November, inquiring into the costs you pay. "Plans have a fiduciary responsibility to keep fees reasonable," says Olena Berg, assistant secretary of DOL's Pension and Welfare Benefits Administration.

DOL's next step: an in-depth study of 50 companies, to see how well employers themselves understand the fees. DOL also wants to know what portion of the plan's cost they pass along to employees and how candidly they explain it to you.

That study should be completed this spring. Its findings should help form proposals for new fee-disclosure rules.

Ideally, 401(k) plans should have to disclose all fees annually and in a uniform way, so employers can readily see which plans charge more. Not surprisingly, many managers of 401(k)s -- especially the high-fee plans -- are fighting disclosure. They argue that the paperwork will make 401(k)s more expensive, causing companies to drop them.

Hogwash. The Vanguard Group in Valley Forge, Pa., one of the nation's largest providers of 401(k) plans, discloses all costs, in a clear and simple format. Yet it offers some of the lowest-cost plans around.

Employers might, indeed, drop the high-fee plans, but only to switch to plans that are more reasonably priced.

How can you tell what you're paying in 401(k) fees? Some plans disclose all -- especially the plans offered by large employers. Others disclose only the minimum required by law. That merely means describing the transaction fees you pay, such as sales commissions. They don't even have to tell you exactly what those expenses are.

In any case, transaction fees are the least of it. The real money lies in the annual cost of managing the plan's investments and administering the plan and servicing its members.

There's no bright line between high-fee and low-fee plans, because so much depends on the level of service employers want. In general, however, employers shouldn't have to pay more than 1 percent for everything, Butler says, and could pay much less.

If your 401(k) offers retail mutual funds, you can find the money-management fee in the front of the fund's prospectus. It's called the "annual expense ratio."

Many large employers have low-cost, customized funds run by selected money managers. The expense ratio may be disclosed automatically; if not, you'll generally be told if you ask.

The administrative fees are often paid by your employer. Increasingly, however, employers are passing part or all of this cost to you. Some companies tell you what percentage they take from your account. Others don't.

The plan's annual report discloses the total dollar cost of investment management and administration, along with other payouts. But it doesn't express the cost as a percentage of your account. So it's useless to investors who are trying to discover what they actually pay.

Many smaller employers don't know themselves what their plan really costs. They may have been sold a plan with a "low administrative fee" or "free record keeping," by an agent or broker. So they think it's cheap.

But the managers of the plan are making big profits by charging high money-management fees. The total cost: often 2 percent to 3 percent a year, Butler says.

Ironically, charging fees to the plan is the costliest way to pay. If the employer pays the plan's expenses, they're tax deductible. If the plan pays, they aren't.

Furthermore, the accounts of all employees -- including that of the boss -- are being robbed of money that could have compounded tax-deferred.

Pub Date: 1/19/98

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