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Walter Hopgood, 32, has two simple questions. First, why
does his 401(k) plan charge him $13.50 a share for the same mutual fund he could buy in
the open market for $10.50 a share? Second, why didn't anyone warn him about it?
"It's a total rip-off. Every person in this company is
losing money hand over fist," a computer systems analyst at a Silocon Valley company.
He's asked the plan administrator at his company and his
human resources department, and even went to the 401(k) plan recordkeeper. "They gave
me a song and dance. No one could really explain it," he said.
Even worse, he says, is that he didn't know he was going to
have to pay this much until his first statement arrived in the mail.
Hopgood's case is extreme, but it's not unusual for 401(k)
plan participants to be in the dark about the fees they pay for their plan's services.
Sometimes it's because they don't ask, and sometimes it's because the plan administrator
won't tell them.
The employer often picks up at least some of the
administrative costs. But in the majority of cases the participant has to pay the
investment-management costs. There's no tried-and-true formula to say who pays how much
and for what. Like snowflakes, no two 401(k) plans are exactly alike, and that includes
the fees charged to participants. Concerned that workers don't get enough information, the
U.S. Department of Labor currently is currently pushing plan administrators and plan
sponsors to disclose more about fees.
In the meantime, here's a look at some of the basic fees,
how they're calculated and what you might want to ask your plan administrator.
The Impact Fees Have On Your Account
In this age of 20% market returns, it may seem silly to
worry about a 1% fee. But, there's no guarantee that the good times will last forever.
When the market's only growing 7%, a 1% fee can have a significant impact on your bottom
line.
The U.S. Department of Labor's pamphlet "A Look At
401(k) Plan Fees for Employees" provides an example.
Suppose you have 35 years until retirement and a current
401(k)-account balance of $25,000. Let's assume your average return is 7%, you don't
contribute another dime to the account, and the annual fees are 0.5%. In 35 years, your
account balance should grow to $227,000. If the fees were just one percentage point
higher, 1.5%, at the end of 35 years, your account balance would be $163,000. That's a
$64,000, or 28%, difference.
What You're Paying For
So the obvious question is, what do these fees buy?
Retirement fund fees go to pay for three general costs:
administrative, investment and services.
- Administrative fees cover the costs of maintaining
a plan such as the recordkeeping, accounting, legal and trustee services. They often
include the preparation and mailing of account statements and other educational materials.
The fees often cover the cost of running Web sites, access to customer service reps,
investment advice and access to plan information, daily valuation, and on-line
transactions.
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"If the plan is big enough, it
should pay for the administrative fees."
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| - Trisha Brambley,
president, Resources for Retirement Plans Inc |
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- Investment fees cover the costs of managing the
retirement plan investments. These fees go to pay the fund manager and any clerical staff.
The fees pay for investment-related expenses such as brokerage commissions and
advertising.
Sales charges, known as loads, are often included in
investment fees. These charges may be paid up front (known as a front-end load) or when
the mutual fund shares are sold (known as a back-end load or redemption fee).
- Special service fees often cover such things as loans.
In Hopgood's case, the recordkeeper said the extra $3 a
share he paid for his investments covered the company's administrative costs to operate in
50 states. His plan also offers extras such as 14 investment choices, a book to explain
investing strategies and Internet and telephone access to account balances and fund
allocation.
If your 401(k) plan is managed by an insurance company
rather than a mutual fund company, you may have to pay additional service fees known as
"wrap" fees. These service fees are common if a variable annuity contract is
offered. The annuity may also include an insurance element. The entire package may offer
the retired employee regular income payments, interest and expense guarantees, and death
benefits. Insurance companies often tack on extra charges for insurance as well as
surrenders and transfers.
How Fees Are Calculated
Most of the fees plan participants deal with are calculated
one of two ways: either as a percentage of the assets held in the plan, or on a per-person
basis.
Generally, administrative fees are charged on a per-person
basis. The reason is that often administrative costs are the same for every participant.
For instance, the administrative overhead for a single plan participant may be $150 a
year, regardless of whether the individual has $1,000 or $100,000 in the plan.
Investment fees, following the practice on Wall Street, are
charged based on the amount of assets held in the plan. For example, a fund may charge a
1% investment fee. That means a participant with a $1,000 investment in the fund pays $10
annually, whereas someone with a $100,000 investment pays $1,000 annually.
One point you should inquire carefully about is whether
administrative fees are included in investment fees. This is a common practice, says
Spencer Williams, senior vice president with Mass Mutual.
Special service fees may be charged on a per-person basis.
Guidelines
Given the variability of 401(k) plans it's impossible to
come up with a set of hard-and-fast rules about fees and how to judge yours.
What's important is to know what your money buys. If your
plan has fees that seem on the high side, but offers such benefits as free investment
advice, Internet sites and financial planning services, maybe you're not getting such a
bad deal.
That said, experts we spoke with offered a few guideposts.
- In general, for a full-feature 401(k) plan, administrative
fees run between $100 and $200 per participant per year, Williams said.
- Most employers pick up the costs of the administrative fees,
said Trisha Brambley, president of Resources for Retirement Plans Inc., a 401(k) plan
consulting company. "If the plan is big enough, it should pay for the administrative
fees," she said.
- Many mutual fund companies are willing to waive sales
charges, said Ted Benna, creator of the first 401(k) plan.
- You should expect that total expenses, investment or
otherwise, should be 1% or less, Benna said. "If they are significantly above that,
you are going to be hit pretty hard," he said.
If there's a 29% fee like Hopgood's, "you have to think hard about if you want to be
in the plan," Benna said.
- An important issue to consider is whether you get a company
matching contribution. That could offset the impact of a pricey fee structure, Benna said.
"Even if fees are above average, you should still be putting money in the plan. I
would be encouraging someone to drop out only if there is a really bad situation," he
added.
What You Should Ask
John Fletcher, a retirement expert with Century Business
Systems, helps employers create 401(k) plans. He often visits his clients to tell
employees about their plans, and his presentation usually includes answering questions
from the audience.
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"No one ever asks about
fees."
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| - John Fletcher,
retirement expert, Century Business Systems |
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Many times he's hoping someone will ask what this plan
costs. Every single time, he's been disappointed. "No one ever asks about fees,"
he said, although they do sometimes ask whether it costs anything to switch investment
choices.
So before the employees can bolt out of their seats,
Fletcher explains the fee structure of the plan.
Unfortunately, most plan participants don't have someone
like Fletcher as a resource. Many employers don't employ consultants to educate their
employees. It's up to the employees to teach themselves.
Only about 15% of plan participants understand how plan
fees are charged, Williams said.
Here's a list of questions to arm yourself with to ask your
employer. Some of this information your employer is required to give you by law.
- Ask for a copy of all the prospectuses for the investment
options offered in your plan. The Securities and Exchange Commission requires all funds
registered with it to provide this document to investors, and your employer is required to
give it to you. The prospectus should show the fees charged to customers.
A small percentage of plans offer non-registered investment options such as privately
managed funds or investments. These are not required to have a prospectus, so if you have
these types of investment options in your plan your employer may not be able to provide
you with a prospectus. Still, it's a good idea to ask your employer if it can provide some
kind of documentation about these investment options, because it may contain information
about fees.
- Ask for a copy of the summary plan document for your 401(k)
plan. Again, your employer is required to give this to you. It may or may not spell out
what fees you are being charged and who pays for them. By the way, you can also request a
copy of the plan's annual report, called a Form 5500, which the plan has to file with the
IRS. However, don't expect the 5500 to explain the fees you pay, Benna said. "It's
for the plan in aggregate. For the individual it does nothing," he said.
- Who pays the plan administrative fees?
- Who pays investment fees?
- Are administrative fees included in the investment fees? How
much are they? This may be a very difficult answer to get, Benna says. "Some
providers are unwilling to disclose that information," he said. Currently, this
information is provided on a voluntary basis. The Department of Labor is developing
guidelines to report these fees.
- How are the fees paid? Are they charged to the plan or
deducted from investment returns?
Where To Get More Help
In addition to your plan administrator and fund provider,
the U.S. Department of Labor's Pension and Welfare Benefits Administration is a great
resource. It has produced a pamphlet titled "A Look At Plan 401(k) Plan Fees …
for Employees," and a similar one for employers.
It also publishes a 401(k) Plan Fee Disclosure form that
employers may voluntarily use to help explain plan fees to employees.
Further, in April 1998, the PWBA released a study of 401(k)
plan fees and expenses. All these pamphlets and the study can be found at the DOL Web
site. (www.dol.gov/dol/pwba/)
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