Look at fees under new pension law


Your Money


Ignorance is bliss.

But if you care about your money, be careful not to take it too far.

During the next few months, a newly passed federal pension law will allow your employer to take money out of your paycheck and invest it for you in a 401(k) or 403(b) retirement savings plan.

Some employers will do this, and some won't. The new law simply gives employers the green light to do it. Hewitt Associates estimates that about a third of employers may exercise this new authority while allowing employees to opt out of the plans.

With passage of the new law, employers are busy making changes in 401(k) plans. With potentially $1 trillion of new business in the making, brokers, insurance salesmen, financial planners, independent money managers and mutual fund companies all are pitching packages of 401(k) investment options to employers.

Some changes will include investment education for employees and mutual funds that put employees automatically into mixtures of stocks and bonds appropriate for their age. But with some of these plans, fees could be excessive.

Fees are so significant that a young investor could give up close to a half-million dollars, or more, over a lifetime of investing - simply by overpaying 401(k) expenses, said Chicago financial planner Chris Long.

He notes that some 401(k) plans charge close to 3 percent a year, while others charge just over 0.25 percent. While those seem like small numbers, Long calculates that a person earning $50,000 could end 30 years of investing with about $870,000 in an expensive 401(k) plan and $1.3 million in an inexpensive plan.

For the calculation he assumed the person would save 10 percent of pay at first; then increase saving 1 percent with each annual raise. Once their contribution hits the per-year ceiling of $15,000, that contribution total would stay constant in subsequent years. The investments in the account would average a 9 percent average annual return,

With the Department of Labor urging employers to insulate employees from excessive fees, more employers have been asking questions, says Pamela Hess, a Hewitt consultant.

The effort remains difficult, Hess says, because there are layers of fees, some interwoven. They include administrative fees related to paperwork and record-keeping, investment management fees for the investments, and trustee fees.

As a rule of thumb, Hess suggests that employees should pay no more than a 1 percent fee. She said employees should ask their employee benefits staff: "What are our total fees?" and "How much am I paying?"

Since the employer has a legal responsibility to handle 401(k) and 403(b) money wisely, the staff will be bound to take the questions seriously.

Long says employees should be aware of two numbers: "the expense ratio," which usually incorporates all fees - but might not - and a potential extra charge called a "wrap fee."

The wrap fee might apply when a broker or some other adviser is providing investment advice. Hess says so-called "separately managed accounts" can be expensive. With these, an investment consultant may custom-make investment solutions for particular employees - adding a fee of about 0.30 percent on top of the expenses charged for mutual funds.

Some funds are pricey from the start - charging over 1 percent. And some employers add 0.50 percent "wrap fees" on top of that - stripping savers of a potential 1.5 percent, or more, of their earnings.

Hess says employers are debating how to communicate with employees about fees. "They don't want to inflame them."

So if you care, ask questions now.


Gail MarksJarvis can also be contacted at 312-222-4264.

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