Higher Fees Pay Off Sometimes

Fees can hurt savings and retirement accounts. But it makes sense to pay more in certain circumstances.
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BOSTON (TheStreet) -- Savings and retirement plans are sapped by fees.

That's the conventional thinking. There are retirement plans and mutual funds that charge unreasonable fees, taking advantage of a lack of transparency or investor scrutiny to line their pockets.

But too much focus on fees can obscure important considerations. Can you still manage to "get what you pay for" and reap superior returns and service in exchange for above-average expenses?

In a report released this week by

Spectrem Group

, U.S. retirement assets, which include defined-contribution and defined-benefit plans, rose 18% to $9.3 trillion in 2009. By themselves, 401(k)'s, which account for 71% of defined-contribution assets, rose 20% to $2.3 trillion.

With assets up after the recession, there's fresh demand for professional guidance.

"The number of plan participants seeking advice on how to invest their retirement funds has more than doubled since 2008

58% in 2009 from 26% the prior year, suggesting some lingering uncertainty," says Gerald O'Connor, a director at Spectrem Group.

Given that insecurity, is it possible that investors -- now savvy enough since the crash to know what they didn't know -- will grow accustomed to having such advice at their beck and call? Would they, in turn, eventually find themselves willing to add in a bit extra in fees provided they feel they are getting a worthwhile service?

This week, analysts for the alternative-asset consultancy Preqin released a study it conducted of 900 funds and funds of funds.

It found two interesting developments when it comes to hedge funds. In response to customer demands, single-manager funds have reduced management fees to an average of 1.65% on average. But performance fees have remained stable throughout the industry, averaging 18.89%, evidence that expert guidance is indeed viewed as a valuable commodity.

In retirement plans, where every dollar counts, fees are a more daunting prospect. Statistics from the U.S. Department of Labor illustrate the issue. The department uses the example of an employee with 35 years to go until retirement and a current 401(k) account balance of $25,000. If returns on investments average 7% and fees and expenses reduce average returns by 0.5%, the account balance will grow to $227,000 at retirement, even if there are no further contributions. If fees and expenses are 1.5%, that same account balance will grow to only $163,000, a 28% reduction.

Tom Kmak, CEO of

Fiduciary Benchmarks

, a company that provides benchmarking services for 401(k) plans, worries that the focus on fees may be distracting attention from more important issues, chief among them participation rates.

"If your fees are low but nobody can retire, can you really win?" he asks. "Did you really get the job done? Thirty percent of Americans are not saving. They are not in a 401(k) plan. How do lower fees help those 30%?"

-- Reported by Joe Mont in Boston.