Hidden 401(k) Fees Are Stealing Your Nest Egg

The consultants serve an important function, one the other two middlemen are afraid to do because of legal implications: They advise the sponsor and/or the participant about how to invest. Of course, many of these consultants also get paid to advise the other middleman, which raises conflicts of interests.

"It's fair that consultants get paid for providing their services," said William Wechsler, vice president of Greenwich Associates. "The big question is: How does this advisor get paid?" The bad answer, Wechsler says, is that consultants get paid depending on what products go into the 401(k) plan -- i.e., funds with hefty fees that give them a cut. (A forthcoming article will discuss conflicts of interest in the 401(k) industry.)

Aside from conflicts of interest that may jack up your 401(k) fees, the biggest problem with consultants is the great divergence in fees paid by sponsors. According to HR Investment Consultants, for companies with 500 employees in a 401(k) plan, annual fees per employee ranged from $204 to $888 annually, depending on the account size. Considering the average 401(k) balance is $43,215, this suggests a fee range from 0.47% to 2.1%.

Further, the study found larger companies get charged as little as 5 cents per $100 invested in a 401(k) plan, compared with $2 per $100 invested for smaller plans. There are more than 432,000 401(k) plans, and most of them cater to smaller companies. The divergence in costs has a great deal to do with the size of the plan and the average account balance -- smaller plans will pay more, in general. Meanwhile, expenses for 401(k) plans of all sizes are on the rise.

The key to the costs paid to a consultant is: Are you getting what you paid for? The consultant is there to provide advisory services. "If I'm paying 1% rather than 60 basis points with the consultant, I should be getting more for my money," said Valletta.

Ted Siedel, whose Benchmark Companies probes money management abuses for pension clients, said the problem is that there is no "accepted methodology for assessing the reasonableness of fees." His research into consulting fees in defined-benefit plans -- which differ from defined-contribution plans such as 401(k)s because the employer primarily funds them -- unearthed substantial problems in the consulting industry. Consultants negotiating fee payments on behalf of pensions relied on little more than "gut feeling," which resulted in a huge differential in fees. "Some pensions were paying as much as four times the fees as others for the same services and same size accounts," said Siedel, who noted a 12% rise in active management fees over the past 10 years. Siedel said similar cost issues arise in the 401(k) industry, which often involve the same participants. "Whenever you have a gatekeeper with a potential conflict of interest, there's a potential for abuse with fees," Siedel said.