Hidden 401(k) Fees Are Stealing Your Nest Egg

For newly cost-conscious 401(k) participants, one small problem remains: With the exception of low-cost service providers, no one is giving a straight answer about how much you are paying. It costs too much in time and money to personalize the cost structure of each plan, firms say -- even though the General Accounting Office found it would cost about $1.35 per fund account to personalize the cost structure. However, there is another reason why sponsors, consultants and fund firms may make it hard for you to know what you pay: Individuals would storm the barricades if they knew everything they paid for.

If your 401(k) plan has more than $150,000, would you mind picking up the fees for the 20-something or the job-hopper whose $5,000 balance doesn't pay for itself? Your employer may have already decided that you don't mind. Would you be willing to pay, say, 1% to 2% to a consulting firm that helps you pick your funds -- even though the consultant may be making much more money in its relationships with the funds it's selling to you? You might be. Would you be willing to have your money pay for a fund firm's computers, executive-education programs, telephone bills and dues at an exclusive Chicago club? You might be.

"People have a right to understand what they're paying for," said Gerard Mullvane, director of institutional sales at Vanguard, one of the lowest-cost and best-disclosed 401(k) plan providers available. "Sadly, many investors don't know."

It's important to realize that these various players aren't by definition interlopers -- they all serve a legitimate role, but some compensate themselves excessively out of your pocket. Let's take a closer look at the players at the table in the 401(k) game, see if the deck is stacked against you -- and examine how participants can turn the tables.

The Sponsor

In most uses of the word, a sponsor is someone who assumes financial responsibility for another, but that isn't always the case with employers who sponsor 401(k) plans.

Traditionally, the costs of administering defined-contribution plans such as 401(k)s were handled "in house" -- employers would cut a check to handle record-keeping, statements and the like. Increasingly, employers who sponsor these plans farm out the administration responsibilities of the plans to service providers, who range from independent administrators and insurance companies to brokers and fund firms. Of course, these consultants don't pay for the plans -- they add it to the participant's bill. Studies have shown that between 24% and 38% of employers now bill participants for administrative costs, up from 7% in 1995.

"Bigger companies have clearly moved more of their fees into the system than smaller companies," said David Wray, president of the 401(k)/Profit Sharing Council of America, a trade association of corporate-plan sponsors. "The reason is partially the economies of scale at work there. Small companies are reluctant to put fees in the plan," in part because owners typically have sizable stakes in the plan.

Administrative costs don't eat up a enormous chunk of the cost of 401(k) plans -- investment fees on average constitute 90% of total expenses in plans with 100 participants and 94% of plans with 2,000 participants, according to the 401(k) Provider Directory Averages. Of course, 401(k) critics would say the tiny administrative fees are actually turning up in the high investment fees, especially if an investment firm handles the administration. Part of the problem is that many sponsors simply don't know where the money goes.

Individuals should ask sponsors if they are footing the bill for their retirement plan, how much it is costing them and who actually collects the dough. Since increasingly you are the one paying for the service, make sure you are getting what you paid for.