Don't ignore little fees: They're costly Thousands of dollars over the years

Mutual funds

July 26, 1998|By Bill Barnhart | Bill Barnhart,CHICAGO TRIBUNE

Mutual fund investors paying fees to money management companies should realize that these charges, compounded over many years, can significantly reduce investment returns and should be fully understood and justified.

Employees investing in mutual funds through 401(k) retirement programs often pay these fees plus additional charges levied by an employer or outside 401(k) administrator that handles the program for an employer.

The variance in 401(k) fees for essentially the same service can be a full percentage point or more. Expressed as a percentage of retirement dollars in an account, fees may seem trivial, but they compound over time to big bucks.

For example, $25,000 held for retirement over 35 years, with a 7 percent average annual investment return, will yield $227,000 or $163,000, depending on whether the annual fee is 0.5 percent or 1.5 percent -- a literal $64,000 question that employees should be asking.

Responding to assertions that some employers and their 401(k) plan providers levy excessive and unjustifiable fees on workers, the Labor Department held hearings last fall and commissioned a study on the subject.

One of the findings was that workers at smaller companies are more likely to face higher 401(k) plan costs, but workers everywhere are vulnerable to administrative expenses being gradually dumped on investors. Moreover, 78 percent of employers surveyed in 1992 acknowledged that even they did not understand the costs imposed by 401(k) vendors.

"Many plan sponsors will select a higher-cost 401(k) provider than would be selected with detailed cost information," the Labor Department report found. In many cases, employers award 401(k) administration contracts to favored banks or other financial-services firms that have other business relationships with the employer having nothing to do with building and safeguarding employees' retirement nest eggs.

The department found evidence of a "greater likelihood that fees and expenses, for both investment management and administrative expenses, are charged in most cases to participants' accounts," said Meredith Miller, deputy assistant secretary in the department's Pension and Welfare Benefits Administration.

These findings "underscore the need for workers to know the level of fees that are being charged to their account and what type of services are being associated with it," she said. Yet there are no rules for uniform, plain-English disclosure.

Workers suspecting a rip-off have some recourse. "If the worker is not satisfied with the administration of the plan and the choices the plan sponsor has made, and they believe there is a fiduciary violation, they can bring this to the attention of the Department of Labor and we can pursue this," Miller said.

"We do have an investigative project under way. We're looking at 60 cases of plan sponsors, whether they are living up to their fiduciary responsibilities with respect to the selection and monitoring of the 401(k) service providers."

But employees can't depend on government oversight to guard against inept or corrupt decisions by an employer. In many cases, employee-participants in 401(k) plans simply are paying for what they seem to want in a retirement program.

For example, brand-name "retail" mutual funds, with net asset values quoted daily in the newspaper, usually are more costly than no-name institutional funds or bare-bones separate accounts designed by investment companies for a specific employer -- even though the retirement dollars often are managed by the same individuals who make investment decisions for retail mutual funds.

Again, large employers have an advantage over small companies in obtaining institutional accounts with high minimums, but often employees in both types of companies prefer brand-name funds that may charge marketing fees year after year.

In addition, many employees like convenient services that enable them to switch money among investment alternatives, get daily account updates over the phone, borrow from their accounts and participate in educational programs about investing. These services have merit and may be an important inducement to sign up for a 401(k) plan, but they impose costs that might better be spent in allowing retirement dollars to compound.

Pub Date: 7/26/98

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