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Your Employer's 401(k) Plan Might Be Taking Away Your Savings In Fees

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By JOHN F. WASIK, Bloomberg News

Published: November 6, 2007

It's time for employers to spin off their 401(k) plans.

Employees can benefit from having 401(k)-style plans cleft from their employers, because the programs would cease to be a black box of excessive middlemen and management expenses.

As confirmed in three recent rounds of congressional hearings and several government reports, employers have failed to fully disclose and reduce costs in the retirement plans.

The U.S. Labor Department gave an unintended nudge Oct. 24 to de-linking when it issued rules on default investments for 401(k) plans.

Ideally, giving employees more control over their 401(k) also will give them the chance to find the best providers of the most diversified funds. Unless employers absorbs most of the fees - many don't - they have no economic incentive to do this now.

Employers contract with middlemen to set up their plans to invest almost $3 trillion for 50 million U.S. workers. Far too many of the additional expenses are passed along and gouge retirement savings. These total expenses are mostly hidden and not required to be disclosed.

It's little wonder that when the AARP surveyed Americans on how much they were paying in 401(k) fees, 83 percent said they didn't know.

Americans are realizing they can't rely exclusively on their homes for their retirement kitty. For many, home equity was the only savings they had.

Enter the 401(k). Now plan fees loom large - like golf- ball-sized hailstones in a thunderstorm. The Government Accountability Office found that paying an additional 1 percent in 401(k) fees will reduce your retirement fund total by 17 percent after 20 years and 30 percent over 30 years.

"Many participants are not aware that they pay any fees," according to an Oct. 30 GAO report, "and those who are may not know how much they are paying."

Taking 401(k) plans out of employers' hands would create a competitive national market. Similar to what happened with private Medicare supplement insurance policies, a government-mandated template would drive down costs. Middlemen would get the boot and employees could improve their total returns.

Here's What You Should Know

Because the history of 401(k) legislation has a troubled past - most of it has never left congressional committees intact because of industry lobbying - employees can take up the charge and ask employers these questions:

•How much are 401(k) account expenses reducing total return in terms of dollars? Simply stating percentages doesn't clearly show the losses over time.

•What are middlemen charging for commissions, administration, Web sites, transfers and other fees? Are there 12(b)1, shelf space, wrap or finder's fees? If so, how much are they reducing the total return?

•What's the total cost to manage mutual funds within the plan? That would include transaction expenses to trade securities within portfolios, which aren't clearly disclosed in any U.S. mutual fund.

•Conflicts of interest. If a broker is involved, does he also include funds in the plan managed by his company? If so, they are "double-dipping," deducting one set of fees for commissions and administrative expenses and another for money management. Their greed is costing you dearly.

•How does the fund compare? Employees should be able to benchmark their 401(k) funds. How much do the plan's total expenses compare with an industry average? How much do returns compare with gauges, such as the Standard and Poor's 500 Index? If there are laggards or costly funds, employees have the right to request that employers seek lower-cost, higher-returning funds. After all, it's your money.

•Every 401(k) plan should offer a standard suite of low-cost index funds that provide coverage of international stock, bond, real-estate and commodity markets. The opposite has happened, though, according to a recent study published by the National Bureau of Economic Research.

"The vast majority of the new funds added to 401(k)s are high-cost, actively managed equity funds, as opposed to lower-cost equity-index funds," the study said. That means lower returns for you and bigger profits for fund vendors and middlemen.

'They Are Stealing Money'

Dave Loeper, who was incensed that his company's 401(k) vendor was overcharging employees, said new legislation should go one step further and penalize 401(k) vendors if they don't provide full disclosure or if they provide "materially misleading information."

"The industry has taken a loophole and driven a truck through it," said Loeper of disclosure gaps. He is author of "Stop the 401(k) Ripoff" and chief executive of Financeware, a software company in Richmond, Va. "They are stealing money out of people's retirement funds."

Now that wealth building has shifted back to financial assets and 401(k)s, it's time employees had the freedom to shop for the lowest-cost provider.

What's stopping this transition? For years, American employers were seen as paternalistic. In exchange for decades of employees' labor, they provided salaries, a pension, health insurance and other perks. Pressured by a global economy, they are offering fewer and fewer benefits.

Employees might as well have the ability to choose their own plan, because they already are charged with picking individual 401(k) funds and allocations. Welcome once again to the ownership society.

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