Hidden 401(k) Fees Are Stealing Your Nest Egg

Some firms, such as Vanguard, American Century and Bridgeway Funds, don't use soft-dollar transactions, but many of those who do have taken a very liberal approach to what can be paid for via soft dollars. The spread between trading commissions is stark: American Century founder Harold Bradley says his firm's average trade commission is 0.85 cents a share; the fund industry's average commission rate is 5.1 to 5.5 cents a share. Those excess costs in between go to soft-dollar deals. In his testimony to the House Financial Services Committee this spring, Bradley provided a stunning list of more than 1,200 "services" that get paid for under soft-dollar deals. Included on the list on items you paid for was research, of course, but also: Dell(DELL Quote) computer, executive education programs at Wharton and membership fees to the "Standard Club of Chicago."

Soft-dollar deals may be executed in a variety of ways. In commission recapture programs, for instance, a penny of every 5 cents spent to execute a trade gets returned to investment managers in a check from brokers. The arrangements are poorly regulated, and go largely unreported and unnoticed by 401(k) plan sponsors and participants.

Fund firms and brokers deserve fair compensation for their services, "but not more so," said Don Trone, director of the Center for Fiduciary Studies, a nonprofit group that offers training for retirement plan sponsors and providers.

Meantime, soft dollars are in the rise. In 2001, the decline in assets under management reduced fee income by 27%; soft-dollar amounts increased by 17%, according to Greenwich Associates.

Soft dollars are supposed to reduce costs because it helps pay for research, "but studies found that funds with higher expense ratios also had higher brokerage commission costs," said GAO's Hillman.

Trading and 'Nontrading' Costs: While a commission of about 6 cents a share may seem unacceptable given the "soft-dollar" deals, it's just the tip of the iceberg when it comes to execution costs, according to Plexus' Wagner.

According to Wagner, the average cost to buy a $30 stock exceeds 45 cents, or 1.5% of the equity. The same thing happens on the selling end, bringing the round-trip tally to 3%. Since most funds turn over 100% of their holdings every 15 months or so, those costs add up enormously -- and you pay them.