`Invisible' fees erode 401(k) retirement savings

Investing

April 23, 2006|By WALTER HAMILTON, KATHY M. KRISTOF AND JOSH FRIEDMAN | WALTER HAMILTON, KATHY M. KRISTOF AND JOSH FRIEDMAN,LOS ANGELES TIMES

John Fuchs was checking his 401(k) account online one afternoon when he saw something that seemed amiss. Listed along with his regular contributions was a $48 charge, in red.

After a flurry of phone calls and e-mail messages, Fuchs learned that the $48 deduction was no mistake. The money was paid to an outside firm that enrolls employees in his company's 401(k) plan, mails quarterly statements and handles other administrative tasks. Fuchs knew the mutual funds he'd chosen charged fees for investing his money. He didn't know that overhead costs were also being taken out of his account. They now cost him about $500 a year.

Because the administrative fee is a percentage of his balance, he will pay more as his savings grow. Fuchs figures that by the time he retires, it will have cost him more than $316,000 in direct charges and lost investment returns.

"I think a lot of people out there pay this fee but don't know it," said Fuchs, 38, an information technology manager for an engineering firm in Exton, Pa.

"To the average employee, it's totally invisible," he said.

About 44 million workers have more than $2 trillion invested in 401(k) accounts. Mutual fund management fees are the biggest expense. They are prominently disclosed, have attracted wide publicity and have been declining as fund providers compete for customers. Administrative fees are another matter.

The fees usually don't show up on quarterly or annual statements. Employees have to work hard to find out how much they're paying - for instance, by scouring their plan's Web site for activity in their accounts.

Plan consultants and providers collect their cut in varied ways. Some take a percentage of each employee's account balance. Others collect a commission from insurance companies that run 401(k) plans.

When mutual fund companies manage 401(k)s, they often absorb overhead costs in return for the chance to give most of the "shelf space" to their own funds.

What's more, fund providers frequently offer 401(k) participants the same retail mutual funds they sell to the public, not the low-fee alternatives designed for big groups of customers.

"It's very difficult for the average participant to determine what the total expenses are, how those expenses measure up, and who exactly is getting paid and how much," said Bud Green, a principal at Fortress Wealth Management Inc., a 401(k) consulting firm in Santa Monica, Calif.

Little or no voice

The peculiar structure of 401(k)s leaves employees with little or no voice. Employers sponsor the plans and hire the providers and administrators. Employees can raise a stink about the charges - if they happen to learn about them. But they can't take their business elsewhere; they're stuck with whatever plan their company offers.

Fuchs works for Groundwater & Environmental Services, which cleans up contaminated groundwater at gas stations and other sites. His company, which has 600 employees, selected Benefits Sources & Solutions, a consulting firm in Bound Brook, N.J., to run its 401(k).

The consultant advises Groundwater on which mutual funds to include, processes payroll deductions and holds educational workshops, among other tasks. Benefits Sources does not bill Groundwater for these services. Instead, it collects a percentage of employees' total savings every three months.

In 2004, this fee averaged 0.51% - $51 on a $10,000 account. Overall, the company took in $48,185 from Groundwater employees that year, the most recent for which figures are available.

The payments do not appear as a line item on employees' quarterly statements. Rather, Benefits Sources takes a cut of the mutual fund shares in each account. That makes the fee all but invisible.

Most employees focus on their dollar balance, not the number of shares. The share balance changes constantly as contributions are added and dividends are reinvested.

"I think it's pretty sneaky," Fuchs said. "The fees should be reported in a forthright manner, but they're not. All these companies do it. A lot of human resources people don't even know what's taken out of their own funds."

Fuchs said he learned about the administrative fee by chance: He happened to check his balance online the day the $48 was withdrawn. "The `pending transaction' in red got my attention," he said.

Fuchs said his employer wouldn't reveal details of Benefits Sources' fee. From Internet research, he learned that he could ask Groundwater for a copy of its Form 5500, which employers must file with the Labor Department, listing certain expenses paid from retirement savings plans. With the document in hand, Fuchs was able to calculate the fee and how much he was being charged: about $500 a year.

Over time the effect of such charges can be huge. In addition to the direct cost, workers lose out on the interest, dividends and other returns that would have accumulated.

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