Are You Paying Too Much for Your 401(k)?

If you weren't already angry about losing money in your 401(k) over the last couple of years, consider this: You may be getting overcharged in investment fees.

Unfortunately, it's not always easy to figure out what you're paying out of pocket. But now that double-digit returns have become a distant memory, it's all the more important that you protect your returns from being consumed by high fees.

"When the stock market was going up, a lot of things that might otherwise have been problems went undetected, like high administrative fees," says Sherwin Kaplan, a benefits attorney at Washington, D.C.-based Thelen Reid & Priest. "People don't really care what fees they're paying if they're getting a net return of 25%. But when they get a net loss of 5%, they start wondering why they're paying all these fees."

Under the law, employers that offer 401(k) plans are supposed to act in the best interests of their workers; they should offer the lowest prices possible on plan investments. But it's possible your employer hasn't shopped around for 401(k) prices since it started its plan 10 years ago or more.

Since then, the average account balance at your company has likely increased. As a result, you should be getting a break on expenses. Because 401(k) providers make so much money from plans with lots of assets, your employer has plenty of negotiating power to whittle down your costs.

"The concern is that employers aren't putting enough effort into evaluating [plan] fees, both because they're complicated -- a lot of payments are hidden -- and also because in most cases they're not coming out of the employer's pocket," says attorney Linda Shore, a tax and benefits lawyer in the Washington, D.C., office of Buchanan Ingersoll. "Employees are really the ones bearing the expense, so the employers don't have as much incentive to make sure they're getting the best deal."

Are You Getting Overcharged?

What you pay depends on what your 401(k) provider -- usually a mutual fund company, insurer or bank -- charges your employer, on the basis of the level of assets in the plan. It also depends on how much of that expense your employer picks up (usually not much).

Your human resources department should be able to give you the costs of investment management, transaction fees and any other expenses charged to your account. A formal document called a 401(k) summary plan description, SPD, may spell out whether you or your employer pays for administrative expenses related to the plan.

You can compare the costs of your plan with the chart below, which lists average costs.

Economies of Scale in 401(k)s Assumes average plan balance of $40,000 per participant
Number of participants	Total annual expenses per employee	Total annual expenses as % of assets	Investment management expenses as % of assets	Record-keeping expenses as % of assets	Trustee expenses as % of assets
100	$560.59	1.40%	1.26%	.13%	0.01%
500	$503.55	1.26	1.17	.08	.01
1000	$470.60	1.18	1.10	.07	.01
Source: 401(k) Provider Directory, 2001 survey of 120 plan vendors.

But be aware that even if you're paying the average price for your 401(k), you're not necessarily getting a great deal.

"[Those averages] are the full retail sticker price," says David Huntley, publisher of the 401(k) Provider Directory. "The 401(k) market's pretty competitive, though. You can usually do better than sticker price. If you're paying at or more than those numbers, you should probably be making a few phone calls and seeing if you can do better."

The bottom line: If you're in a large 401(k) plan, with around 1,000 participants, you should be paying between 70 and 85 basis points total, or 0.75% to 0.85%, in 401(k) costs, says Huntley. For around 500 people, a well-priced plan should cost around 100 basis points. Anything smaller than that, your costs will rise to 125 or 150 basis points.

The above data, by the way, assume a balance of around $40,000 -- about the average size of a 401(k) account. But if your plan has smaller account balances -- say, around $10,000 -- you could end up paying 25% to 50% more.

One more point worth noting: If your plan has enough assets, your company should try to negotiate a break on 401(k) administrative fees, which cover services such as record keeping.

"Any plan with more than about $10 million is making so much money for the mutual fund or insurance companies that provide that plan that there shouldn't be any additional cost of administration. They should be able to cover that cost out of their ongoing operating revenues generated by the annual expense ratios," says Steve Butler, president of Pension Dynamics, a pension consulting and record-keeping firm.

That's important, because some 401(k) plans charge an administrative fee of up to 1% on top of the cost of investment management.

That extra 1% on a $10,000 contribution would cost a participant $12,000 in lost earnings over 10 years, and about $80,000 over 20 years.

Think your 401(k) investment options are lousy? Maybe you've actually lobbied your employer to change them. Drop a line and tell me what happened at [e-mail].