What They're Taking From Your 401(k)

But until new rules are enacted, workers are stuck with the status quo. That means plan participants must dig through dense documents and ask their employers tough questions they may not be used to asking.

For some workers and retirees, that can be frustrating. Ed Rosa, 71, who retired from Lockheed Martin nine years ago and lives in California, said he always assumed the defense giant did its best by him, but in the past few years, he's begun to wonder whether he has gotten enough return on his 401(k) investment.

"You look at the statements, but, oh gosh, it's not real clear," said Rosa, who is not a named plaintiff in the lawsuit against Lockheed. "You'd have to be an accountant to figure out what you're paying, and even then, how'd you know it's correct? Are they managing my money as if it were their own? Could I get the same service for less?"

Crunching the Numbers

Retirement experts say you should not expect to get a hard-and-fast number showing exactly how many pennies you pay for every dollar of investment gain or loss. That said, based on a fund's performance and the disclosed costs, you can get a ballpark idea of how much you're paying and decide whether that's acceptable. Your employer's benefits office can provide written material about the company's 401(k) plan and direct you to information about specific 401(k) investments.

Mutual fund companies manage more than half of the $2.7 trillion now estimated to be invested in 401(k) plans, far more than banks and insurance companies, which also operate these plans. The Investment Company Institute, the mutual fund industry's main lobby group, says most costs are disclosed through what are called expense ratios and turnover rates, which can be found in the fee table in a fund's prospectus. While turnover rates give investors a sense of whether a fund's trading costs have been high or low, some trading costs, namely brokers' commissions, are listed in a separate document called a Statement of Additional Information, which investment companies provide to plan participants upon request.

The expense ratio -- also known as operating fees -- typically ranges from 0.5 percent in a low-cost fund to more than 1.5 percent in a more expensive one. That means an investor is charged from half a penny to 1 1/2 cents for every dollar invested. The expense ratio includes fees for management, marketing and some other costs. It doesn't include most trading costs, which are one of the biggest additional expenses 401(k) investors pay and typically range from half to twice the operating fees, depending on how often a fund trades, according to retirement consultants.

ICI spokesman F. Gregory Ahern said putting the numbers in different documents can be confusing to consumers. Nonetheless, he said, the numbers are public and, if taken together, provide a nearly complete picture of the total costs an investor pays in a 401(k).

He and others say that though trading costs are important, they need to be viewed in the context of a fund's performance -- high trading costs might be worth paying in exchange for a 15 percent return, for example, but not for a bad performance.

Matthew D. Hutcheson, an independent pension consultant affiliated with G Fiduciary near Portland, Ore., challenges the industry's claim that costs are clear and complete. He and others say that in addition to operational costs, a fund company might impose extra charges to be part of a 401(k) plan, including auditing, legal and education fees. These costs can significantly increase the total amount investors pay, sometimes by 1 or more percentage points over and above a fund's basic charges, retirement consultants say.

That's why workers should not be shy about asking employers for information. "I think plan sponsors are getting used to being asked more questions these days," said Robert Liberto, a consultant with Segal Advisors, which specializes in helping companies provide retirement plans.

One question they should ask is whether their employer knows which costs are bundled into a mutual fund's expense ratio, said Stephen J. Butler, founder of Pension Dynamics, a California company that advises companies on selecting and operating 401(k) plans. Listing the costs separately can make it easier to compare them among vendors and weed out unnecessary services.

And as more companies begin to offer investment advice through their 401(k) plans -- as the pension act passed last summer now allows -- workers should ask employers to make advisers disclose business relationships connected to the plan so potential conflicts of interest can be addressed. A worker will want to know, say, if an adviser gets a commission for steering someone to a certain investment.

Dallas Salisbury, head of the Employee Benefit Research Institute, a nonprofit group that focuses on retirement and economic security issues, says he worries publicity surrounding 401(k) fees might discourage some workers from participating in plans by making them sound as if they are riddled with problems, when, he says, "they are not."

"Would people be better off if they read all the stuff, looked at everything on the Web sites and fully informed themselves? Yes," he said, even though he thinks few workers would use additional pricing information. "But the important thing is that people join the 401(k) in the first place as soon as possible."