· Columns By Date

Search Quinn Columns

Go to
Managing Your Money

Go to
Business Section

What You Pay for 401(k)s

Part one of two parts

NEW YORK -- Is your 401(k) plan picking your pocket? Over the years you participate, the high fees that some plans charge -- especially small plans -- could cost you an amazing $100,000 to $200,000 more than you'd pay in a low-fee plan.

That's $100,000 or $200,000 less for your personal retirement fund. Yet you'll probably never know how much extra you were charged. Small employers may not realize it themselves.

High fees can even cancel out the effect of any employer contribution to your account, says Steve Butler, president of Pension Dynamics in Lafayette, Calif., which designs and administers retirement plans.

The Department of Labor (DOL) held hearings in November, inquiring into the costs you pay. "Plans have a fiduciary responsibility to keep fees reasonable," says Olena Berg, assistant secretary of DOL's Pension and Welfare Benefits Administration.

DOL's next step: an in-depth study of 50 companies, to see how well employers themselves understand the fees. DOL also wants to know what portion of the plan's cost they pass along to employees and how candidly they explain it to you.

That study should be completed this spring. Its findings should help form proposals for new fee-disclosure rules.

Ideally, 401(k) plans should have to disclose all fees annually and in a uniform way, so employers can readily see which plans charge more.

Not surprisingly, many managers of 401(k)s -- especially the high-fee plans -- are fighting disclosure. They argue that the paperwork will make 401(k)s more expensive, causing companies to drop them.

Hogwash. The Vanguard Group in Valley Forge, Pa., one of the nation's largest providers of 401(k) plans, discloses all costs, in a clear and simple format. Yet it offers some of the lowest-cost plans around.

Employers might indeed drop the high-fee plans, but only to switch to plans that are more reasonably priced.

How can you tell what you're paying in 401(k) fees? Some plans disclose all -- especially the plans offered by large employers.

Others disclose only the minimum currently required by law. That merely means describing the transaction fees you pay, such as sales commissions. They don't even have to tell you exactly what those expenses are.

In any case, transaction fees are the least of it. The real money lies in the annual cost of (1) managing the plan's investments and (2) administering the plan and servicing its members.

There's no bright line between high-fee and low-fee plans, because so much depends on the level of service employers want. In general, however, employers shouldn't have to pay more than 1 percent for everything, Butler says, and could pay much less.

If your 401(k) offers retail mutual funds, you can find the money-management fee in the front of the fund's prospectus. It's called the "annual expense ratio." If your company doesn't give you a prospectus, get one from the fund itself.

Many large employers have low-cost, customized funds run by selected money managers. The expense ratio may be disclosed automatically; if not, you'll generally be told if you ask.

The administrative fees are often paid by your employer. Increasingly, however, employers are passing part or all of this cost to you. Some companies tell you what percentage they take from your account. Others don't.

The plan's annual report discloses the total dollar cost of investment management and administration, along with other payouts. But it doesn't express the cost as a percentage of your account. So it's useless to investors who are trying to discover what they actually pay.

Many smaller employers don't know themselves what their plan really costs. They may have been sold a plan with a "low administrative fee" or "free recordkeeping," by an insurance agent or stock broker. So they think it's cheap.

But the managers of the plan are making big profits by charging high money-management fees. The total cost: often 2 percent to 3 percent a year, Butler says.

Ironically, charging fees to the plan is the costliest way to pay. If the employer pays the plan's expenses, they're tax deductible. If the plan pays, they aren't.

Furthermore, the accounts of all employees -- including that of the boss -- are being robbed of money that could have compounded tax-deferred.

One final point: Employees who want more services from their 401(k), such as the right to change investments daily, should be told how much this service costs. If you knew, you might demand fewer services. You'd then pay lower fees and wind up with a larger retirement fund. NEXT TIME: Fees Are Higher Than You Think.

Jane Bryant Quinn welcomes letters on money issues and problems but cannot offer individual financial advice.