Retirement plan fees receive increased scrutiny

During the exploratory phase, Loeper was pitched by vendors who said that they could bury the fees for expensive funds so that the participants – the employees – pay all the costs. "They were telling me that I could rip off my employees," he says.

Conflicts of interest on the part of the service providers were brought up in Rep. Miller's bill and in Loeper's book. For example, service providers would offer higher commissions on expensive plans, and so understandably sales people would want to sell them to plan sponsors – the employer offering the 401(k).

Employees who want to know all of the costs inside their 401(k) must ask their benefits department for a copy of the Summary Annual Report for their plan, says Loeper. "If you divide the total plan expense you see on this [report] by the total plan value, you'll get the annual percentage being charged against your 401(k) balances...." To figure out your costs down to the last penny, take that percentage and multiply it by your total account balance.

One fund Loeper's company now offers employees in its 401(k) is Fidelity's Spartan 500 Index Fund, which has an expense ratio of 0.07 percent. "You have to look within the fund behemoths to find lower-cost funds. Fidelity recommends its target funds that look to have very low expense ratios, but because they buy their own funds, [these target funds] actually have fees incurred within the funds."

Loeper says an ex­­pense ratio of 0.75 percent a year or less is fair. ICI research backs that up: The average total expense ratio incurred by 401(k) investors in stock funds was 0.74 percent in 2006, about half of the 1.5 percent simple average for all stock funds and lower than the industry­-wide asset-weighted average of 0.88 percent.

A flat fee for administrative costs for employers of $1,500 to $2,500 per year, with an additional fee of $5 to $15 per participant, is reasonable, according to Bill DeShurko, author of "The Naked Truth About Your Money" and president of 401 Advisor in Centerville, Ohio. When weighing plans and fees, he says, consider whether you're receiving advice that helps you make the most of your investments. "For your 1-to-2 percent in fees, you should receive advice, that's the issue."

He says that he's seen plans in which each employee account was debited $35 a month for administrative costs. "There's no reason to have to pay such a high fee," Mr. DeShurko says.

But he suggests that stock funds with high expenses can be worthwhile. "If you have a cheap fund that doesn't perform, what good is it? If you have an expensive plan but it's beating the socks off the Vanguard S&P 500 Index fund, which I use as a benchmark for my clients, then it's worth it."

There's a price for complacency. Your employer's role is of "prudent fiduciary" so employers should be shopping for a better deal for you, Loeper contends.

An employee stuck in a 401(k) with high fees may find it's not easy to switch plans. Some 401(k) service providers impose surrender charges on companies that don't hold onto a plan for at least five years. "If you cash out, there's a 2-to-3 percent penalty for each participant – the employees," says DeShurko.

To keep fees down, watch transaction costs. Most mutual fund companies won't charge a transaction fee if you buy or sell a mutual fund inside a retirement account, but they will charge a 1-or-2 percent fee if you change your holdings within a 30- or as much as 90-day period, he adds. Some plans restrict how many trades you can make in a certain period.

"I have a problem with that. Suppose you're in an emerging-markets fund and a bomb or some headline made you feel it was too risky. You should be able to get out without incurring a 1-to-2 percent penalty," DeShurko says.

The bottom line is that employers need full disclosure, says Hewitt's Ms. Hess. Employees should talk with their plan's administrator about all fees inside their retirement plan. "If the plan sponsor or employer is not assessing fees, they aren't doing due diligence," she says. "Without this info, how would you know if you're getting a good deal?"

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