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 3 of 3
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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