A call to tell workers about hidden 401(k) fees

Your Money

December 17, 2006|By Walter Hamilton | Walter Hamilton,Los Angles Times

Federal regulators need to boost their oversight of 401(k) retirement plans and adopt a series of changes to ensure full disclosure of hidden costs that can cut into the savings of millions of American workers, a government report recommends.

With companies abandoning traditional pensions, 401(k) plans have become a cornerstone of retirement security for an estimated 47 million people. Yet regulation and oversight have not kept pace, the recent report by the Government Accountability Office concluded.

The Labor Department is responsible for ensuring that 401(k) fees are reasonable, but it "lacks the information it needs to provide effective oversight" and is "unable to identify fees that may be questionable," the report said.

The GAO stopped short of a direct attack on the Labor Department, focusing on changes it could make so employees have a clearer picture of 401(k) fees and could shop for low-cost options.

But others said the report is an indictment of the department, which they claim has done little to shield workers.

"The problems the report describes have been open secrets for at least the last decade," said David Brown, chief of New York Attorney General Eliot Spitzer's investment-protection bureau. "The [U.S. Labor Department] is primarily responsible for policing these matters, and its continuing failure to act is disappointing to say the least."

Bradford Campbell, an acting assistant labor secretary, said in a statement that his agency plans to propose rules in the spring that would "vastly improve" fee disclosure.

The department also plans to require better disclosure of relationships among the companies that administer and invest 401(k) funds to shed light on potential conflicts of interest.

Many Americans are unaware of how much they pay in overhead costs and investment fees for their 401(k) plans, which hold an estimated $2 trillion. The GAO report noted an outside study showing that more than 80 percent of participants don't know how much they're paying in fees.

Fees include the investment charges assessed by mutual funds, overhead costs charged by outside administrators and commissions taken by brokers who manage plans.

Employers once paid most administrative charges but steadily have shifted them to workers.

Outdated disclosure rules make it difficult for workers to know how much they are paying, the GAO said. Employers and the outside companies that often administer these plans aren't required to give investors easily understandable information. Instead, workers must gather and wade through numerous documents to decipher the complete picture.

In an example in the report, a worker who invests $20,000 in a 401(k) plan can expect to see it swell to $70,500 after 20 years, assuming annual investment returns of 6.5 percent and annual fees of 0.5 percent.

But the same worker would have only $58,400 if he or she paid 1.5 percent in annual fees. Fees of that amount are not uncommon, benefits experts said, especially at smaller companies.

"It's not unusual to find an extra 1 percent in fees and commissions loaded into a 401(k) plan, and over time that can reduce a participant's retirement savings by 20 percent to 30 percent," said Bud Green, a principal at Fortress Wealth Management Inc., a 401(k) consulting firm in Santa Monica, Calif.

The GAO, which is the investigative arm of Congress, said the Labor Department loosely tracks 401(k) fees and rarely investigates whether employees are being overcharged.

The report recommended a variety of changes, including calling on Congress to require better fee disclosure from employers and to force 401(k) providers to divulge potential conflicts of interest in business dealings that could affect the availability or pricing of 401(k) plans.

It said the Labor Department should require employers that sponsor 401(k) plans to report a summary of all fees that are paid out of plan assets or paid by participants.

Edward Siedle, president of Benchmark Financial Services, an Ocean Ridge, Fla., company that investigates retirement plan abuses, said change is long overdue. The Labor Department "has certainly been advised time and again over the years that these problems existed," Siedle said.

Walter Hamilton writes for the Los Angeles Times.

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