Retirement plan fees receive increased scrutiny
Mutual fund expense ratios don't reveal all of the fees associated with 401(k)s. Here's how to spot the others.
from the October 29, 2007 edition
Page 2 of 3
But Loeper contends that some fees aren't disclosed at all, making it next to impossible to determine if the costs associated with a 401(k) are too high. Among the frequently nondisclosed fees he lists are wrap fees, which include costs for trading and monitoring investments for which the investor could be charged as much as 2.5 to 3 percent a year.
"Charges are often clumped under administration expenses, a most-effective means of hiding extra costs," he says.
Loeper discovered all this when he got fed up with his company's 401(k) plan and switched service providers. "We were paying more than $500 a year per participant; now the administrative costs are down to only $60 a year per participant, and I was personally paying $1,500 a year for my own 401(k) and now pay just $198."
The new plan for his 25-person company costs less than 0.6 percent of assets, he says. Not only did the shift decrease costs, it increased the flexibility and number of investment choices. As a result, his employees can choose from 1,500 no-load funds instead of what had been 10 to 20 choices for no additional cost other than what each fund itself charges. "So, despite the variety available through these self-directed accounts, we can still keep the costs down."
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."
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