Fees Are Devouring Your 401(k)s

By Walid L. Petiri

NEW YORK (AdviceIQ) -- Saving money in 401(k)s comes with a few strings attached -- fees. The fees in retirement accounts are probably the biggest obstacles to saving successfully for retirement, and many of these fees are undetectable to the untrained eye.

The good news is that new regulations mandate that the fees be better disclosed. Pay attention to the information. If you are an employer, the rules impose new requirements on you.

Let's look at how fees nibble away at your returns and how the new disclosures can help:

How high are these fees? Typically, 401(k) fees run from 0.25% to 1.5% annually. The fees come right out of the savings in your account, and there is no requirement to notify you about them. In the past, when you got your quarterly 401(k) statement in the mail, you didn't see a line-item expense labeled "fees." That changes this year with the regulations.

The bulk of these fees are for investment services. Most 401(k)s contain mutual funds, and investors have to pay fees to the fund managers. Some plans also charge fees for legal, administrative, record-keeping and even advertising costs.

What it costs you. On PBS's recent Frontline program, The Retirement Gamble, Vanguard Funds founder John Bogle provides a chilling example of the harm fees do. He demonstrates that if the annual fees are 2% and the investment's gross returns are 7% annually, then after 50 years, your net return of 5%, also means you lost 61% of your potential returns because of high fees. Just a single percentage point difference in fees and expenses leaves you with significantly less money for retirement.

Multiple studies show these fees blindside investors. In 2007, the Government Accountability Office reported that about 80% of 401(k) plan participants didn't know how much in fees they pay. A 2011 AARP survey also found that 62% of investors didn't understand the fees that they paid for 401(k)s.

Regulatory changes. To make the 401(k)s more transparent, the Department of Labor is implementing new regulations this year. They intend to make indirect plan costs visible and leave plan participants better informed.

Beginning April 1, the DOL requires 401(k) plan sponsors to disclose fees and expenses to all plan participants. Specifically, the expense ratios of the funds within the plan must be disclosed, along with the amount per $1,000 that it costs participants to invest in a particular fund.

Business owners' responsibilities. If you are a retirement plan sponsor, the new regulations affect you in three ways:
  • You have to assume greater degrees of vigilance and diligence.
  • You have a new obligation to gauge the acceptability of the plan vendor's fees and costs.
  • It is in your best business interest to review your 401(k) plan regularly and test it periodically to check that your employees get the best available offerings from the plan vendors.

As a plan fiduciary, you have three ongoing duties required by the new regulation:
  • Check whether the plan vendor sends you suitable fee and expense disclosures. This should be routine.
  • Review these disclosures to make sure they are sufficiently transparent to conform to federal law.
  • Audit the plan with the input of an independent consultant to see if the fees are appropriate. See whether the existing service arrangement is reasonable or if your employees are getting gouged.

Failing to do this could constitute a breach of your fiduciary responsibility.

How can you step up and meet these new responsibilities? Employers have to look at their 401(k)s from a holistic perspective. It could be illuminating or dismaying, as some businesses may learn that a trusted plan vendor has been less than forthcoming about certain fees and other costs.

Whether you are an individual investor or a business owner, it doesn't hurt to ask for help evaluating your retirement plans. A good investment adviser will seek to make sure fiduciary responsibilities are met as you implement the necessary steps to cover all the bases and get the maximum benefit from every fee that you pay. The experienced retirement plan consultant can help employers with an annual audit of the 401(k) fees and expenses, and contribute insights to help meet these challenges and obligations with accountability, knowledge, and confidence.

-- By Walid L. Petiri, chief strategist at Financial Management Strategies in Baltimore, Md..

AdviceIQ is a network of financial advisors that writes insightful articles for the public about investing and wealth management. All articles are edited by AdviceIQ's editor in chief, Larry Light. AdviceIQ certifies that all its advisors have no regulatory infractions.

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AdviceIQ is a network of financial advisors that writes insightful articles for the public about investing and wealth management. All articles are edited by AdviceIQ's editor in chief, Larry Light. AdviceIQ certifies that all its advisors have no regulatory infractions.

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