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Fees can pile up with 401(k) plans(Omaha World-Herald (NE) (KRT) Via Thomson Dialog NewsEdge) Oct. 28--Annual fees make a big difference in the amount of money people accumulate in their 401(k) accounts, but many investors don't know how much they pay in fees. As more companies switch from traditional, defined-benefit pension plans to defined-contribution plans like the 401(k), the issue of fees becomes increasingly important. According to the Investment Company Institute, a trade group for the mutual fund industry, about 50 million workers were enrolled in 401(k) plans last year. The plans held about $2.7 trillion, or about 17 percent of all retirement assets. David Loeper, chief executive of Financeware Inc., an investment advice, capital markets research and technology firm in Richmond, Va., used this scenario to illustrate the impact that fees can have: A 35-year-old man with $150,000 in his 401(k) wants to withdraw about $28,800 a year at age 65. If he pays 1.25 percent in annual fees instead of, say, 0.75 percent, he will have reduced the value of his portfolio by at least $43,000 by age 65. At the higher fees, he will have to delay his retirement by four years, reduce his retirement income by $4,700 a year or increase by 38 percent the risk of outliving his resources. The financial-services industry often does not fully report its fees, Loeper said, or it scatters information about them across written materials, making it difficult for the investor to know what he or she is paying. Loeper said Congress may need to change the law to make disclosures more transparent. "As long as the fees are hidden and as long as the employer thinks everybody is happy, nothing is going to change," he said. The Investment Company Institute, however, says a change in federal law is unnecessary, though it is willing to work with Congress on the issue. Current law requires employers to find the best products, and 401(k) plans are highly competitive, which guarantees that providers have reasonable fees, the trade group says. The U.S. Department of Labor has the authority and expertise to change disclosure rules, and the emphasis should be on simplicity and efficiency, not complex and costly actions that don't help consumers, the group has said. Mike Hadley, assistant counsel for pension regulation at the institute, said mutual funds publish frequent and clear reports on fees and expenses. "To the extent there are other charges that might sit on top of the mutual fund expense ratio, we think those should be disclosed," Hadley said. Compiling the information can be difficult and expensive, however, in part because of the many investment products available in each 401(k) plan and the individual investment decisions made by each participant, Hadley said. For example, participants might choose more expensive plans in hopes of higher returns. Those plans could carry higher fees because the people running them have more expertise or because the plans are in challenging markets that require more monitoring, Hadley said. Other groups also have urged delaying legislative action as industry groups work with the Department of Labor on disclosure rules. Those groups include the U.S. Chamber of Commerce, National Association of Manufacturers, Profit Sharing/401(k) Council of America and Society for Human Resources Management. Providers of 401(k) plans and federal officials increasingly have focused on ways to communicate fees accurately and meaningfully, and those efforts will continue, Hadley said. But one thing is clear: Lots of people don't know what they are paying for their 401(k) plans. A survey released by AARP in August showed that 83 percent of plan participants did not know how much they pay in fees and expenses. A report from the U.S. Government Accountability Office last November urged more complete fee disclosures. Said the GAO: "The information on fees that 401(k) plan sponsors are required by law to disclose is limited and does not provide an easy comparison among investment options." It is difficult to be certain, but Americans generally pay about 1 percent to 2 percent of their 401(k) account balance in annual fees, with some plans costing more and some less, Loeper said. Most plans could be managed for 0.75 percent in fees or lower, he said. Fees in 401(k) plans can be broken down into the costs of managing the investments; administering the plans with record keeping, accounting and legal services; and helping people with their individual needs, such as obtaining loans. Many plans do not tell each participant the annual cost of managing his or her particular portfolio, and other administrative costs often are reported in several documents but not added up. Workers can calculate most of their costs if they ask the right questions of their human resources departments and do the math, Loeper said. Loeper and the AARP said they support legislation proposed by Rep. George Miller, D-Calif., that would require employers to disclose in clear language all fees charged to 401(k) participants. Loeper, who has served on the investment advisory committee of the Virginia Retirement System, said his experience finding a lower-cost 401(k) vendor for his own company prompted him to write a recently published book titled "Stop the 401(k) Ripoff!" People need to ask their employers what their fees are, and if they are too high, seek changes in their plans, Loeper said. When employers provided pension programs, companies paid the management fees, Loeper said. The shift to defined-contribution plans places that responsibility on employees. Providers of the plans, such as banks and mutual funds, have little reason to compete on fees if no one notices and complains about costs that are too high, Loeper said. The Investment Company Institute said much of the money invested in 401(k) plans already qualifies for some of the lowest fees. About 55 percent of 401(k) plan assets were held in mutual funds in 2006, according to research done by the institute. The asset-weighted expense ratios for stock mutual funds in those plans fell to 0.74 percent in 2006, compared with 0.76 percent the year before, the trade group said. That figure compares favorably with the overall average expense ratio for stock funds -- and 401(k) plans as a whole -- of 1.5 percent, the institute said. Higher fees might be justified based on a number of factors, according to the institute and the U.S. Department of Labor. For example, large 401(k) plans might cost less per participant than plans serving fewer people simply because of the volume of business. Services provided by plans also can be extensive, going far beyond record-keeping and legal services to include investment advice and educational seminars, Internet access to plan information, retirement planning software and telephone voice response systems. "There is no single 'reasonable' fee and service arrangement for a 401(k) plan," the institute's senior counsel for pension regulation, Mary Podesta, told a government panel last month. To see more of the Omaha World-Herald, or to subscribe to the newspaper, go to http://www.omaha.com. Copyright (c) 2007, Omaha World-Herald, Neb. Distributed by McClatchy-Tribune Information Services. For reprints, email [email protected], call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA. |