John Fuchs was checking his 401(k) account online one afternoon when he saw something that seemed amiss. Listed along with his regular contributions was a $48 charge, in red. That’s odd, he thought. Why would anyone be taking money out of his account?
After a flurry of phone calls and e-mails, Fuchs learned that the $48 deduction was no mistake. The money was paid to an outside firm that enrolls employees in his company’s 401(k) plan, mails quarterly account statements and handles other administrative tasks.
Fuchs knew the mutual funds he had chosen charged fees for investing his money. He didn’t know that overhead costs were also being taken out of his account. They now cost him about $500 a year.
Because the administrative fee is a percentage of his balance, he will pay more and more as his savings grow. Fuchs figures that by the time he retires, it will have cost him more than $316,000 in direct charges and lost investment returns.
“I think a lot of people out there pay this fee but don’t know it,” said Fuchs, 38, an information technology manager. “To the average employee it’s totally invisible.”
As many employers scrap their traditional pensions and doubts grow about the future of Social Security, Americans’ hopes for a secure retirement depend more than ever on their 401(k)s. About 44 million workers have more than $2 trillion invested in these accounts.
Yet obscure fees and deductions are quietly eroding the value of their nest eggs. Administrative fees usually don’t show up on quarterly or annual statements. Employees have to work hard to find out how much they are paying by scouring their plan’s Web site for a record of all activity in their accounts.
Some plan consultants and providers take a percentage of each employee’s account balance. That’s the charge Fuchs stumbled upon. Others collect a commission from insurance companies that run 401(k) plans.
When mutual fund firms manage 401(k)’s they often absorb overhead costs in return for the chance to give most of the “shelf space” to their own funds. They get their money back through fund management fees.
And fund providers frequently offer 401(k) participants the same retail mutual funds they sell to the public, not the low-fee alternatives designed for big groups.
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Because of outdated federal disclosure rules, publicly available records on fees often reveal only a fraction of the money leaking out of accounts.
“It’s very difficult for the average participant to determine what the total expenses are, how those expenses measure up, and who exactly is getting paid and how much,” said Bud Green, a principal at Fortress Wealth Management Inc., a 401(k) consulting firm in Santa Monica, Calif.
Workers who save conscientiously take a disproportionate hit because fees are typically a percentage of their account balances. Someone with $100,000 pays 10 times as much as a co-worker with $10,000, even though it costs about the same to administer the two accounts.
The structure of 401(k)’s leaves workers with little or no voice. Employers hire the providers and administrators. But workers pay most of the fees.
“People can be paying thousands of dollars in fees if they’ve been in their 401(k) plans for years,” said John Turner, a senior policy adviser at the AARP Public Policy Institute. “They can be paying thousands of dollars more than they need to be paying.”
Fuchs works for Groundwater & Environmental Services Inc., which cleans up contaminated groundwater. The company selected Benefits Sources & Solutions, a consulting firm to run its 401(k). The consultant advises Groundwater on which mutual funds to include, processes employees’ payroll deductions and holds educational workshops, among other tasks.
Benefits Sources does not bill Groundwater. Instead, it collects a percentage of employees’ total savings every three months. In 2004 this fee averaged 0.51 percent–$51 on a $10,000 account. Overall, the company took in $48,185 from Groundwater employees that year, the most recent for which figures are available.
The payments do not appear as a line item on workers’ statements. Rather, Benefits Sources takes a cut of the mutual fund shares in each account. That makes the fee all but invisible.
Most employees focus on their dollar balance, not the number of shares. To detect the deductions, an employee would have to track his or her shares rigorously enough to notice that the number isn’t climbing as quickly as it would otherwise.
“I think it’s pretty sneaky,” Fuchs said. “The fees should be reported in a forthright manner, but they’re not. All these companies do it. A lot of human resources people don’t even know what’s taken out of their own funds.”
Fuchs said he learned about the administrative fee by chance: He happened to check his balance online the day the $48 was withdrawn. “The `pending transaction’ in red got my attention,” he said.
Fuchs said his employer wouldn’t reveal details of Benefits Sources’ fee. From Web research he learned that he could ask Groundwater for a copy of its Form 5500, which employers must file annually with the Labor Department, listing certain expenses paid from retirement savings plans. With the document in hand, Fuchs was able to calculate how much he was being charged: about $500 a year.
Fuchs used calculators on the Securities and Exchange Commission Web site (www.sec.gov under “investor information”) to arrive at his $316,000 estimate of how much administrative expenses will cost him in interest, dividends and other returns by the time he retires in 2030.
John Zelechoski, Groundwater’s manager of human resources, said that Benefits Sources had done a good job selecting mutual funds and that he had gotten few employee complaints about the plan.
Scott Rappoport, president of Benefits Sources, said its fee was in line with what other 401(k) administrators charge. He said the firm earned its money by researching investment choices, educating workers and providing other services. He declined to detail the cost of those services or explain how the firm arrived at the fee.
The losers were employees.
In 1988, 87 percent of U.S. employers paid all 401(k) administrative costs. Today, only about 25 percent do. The rest have shifted some or all of those expenses to workers, said Pam Hess, a 401(k) expert at Hewitt Associates, a benefits consulting firm that also administers retirement plans.
As a result, employers have little incentive to hold down 401(k) costs. A 2004 Hewitt survey found that about half of employers have not even tried to figure out what their workers are paying in fees.
There are wide variations in fees. HR Investments Consultants of Baltimore surveyed about 80 401(k) providers, asking what they charge for plans of varying sizes. For a medium-size plan with 500 participants and $20 million in assets, the fees ranged from $205 to $818 per employee each year. Investors should benefit from economies of scale as 401(k) plans grow, allowing overhead costs to be spread over a bigger pool.
The HR Investments survey, released in 2004, found that workers realized little savings. The average fee for a 500-employee plan was $482 per person. For one 10 times as large–5,000 participants and $200 million in assets–it was $450 per person, just 6.6 percent less.
The figures partly reflect the industry custom of charging fees as a fixed percentage of assets. Chris McNickle, a 401(k) specialist at Greenwich Associates, a Connecticut consulting firm, says this is necessary because small accounts are unprofitable. The entire mutual fund industry relies on the largest 10 percent to 20 percent of accounts for all its profit, he said.
Leading 401(k) providers contend that their fees are reasonable and that competition holds costs in check.
In addition to basic services such as staffing call centers and keeping account records, 401(k) firms shoulder the cost of complying with federal tax laws. For example, they must perform complex statistical analyses to ensure that highly paid employees do not benefit disproportionately from matching contributions and other plan features, said Stephen Malbasa, head of retirement-plan sales and marketing at American Funds in Los Angeles.
“This isn’t a business where everyone is making a lot of money,” said Peter Demmer, chairman of Sterling Resources Inc. of Paramus, N.J., a consultant to 401(k) providers.
Demmer acknowledged that it could be hard for 401(k) participants to figure out what they pay in fees. But he questioned whether more disclosure would be beneficial. Employees might stop contributing to their 401(k)’s if they knew too much about expenses, he said. “If you single out retirement plans to do that sort of detailed disclosure, you’re doing providers of those plans a disservice. But at the end of the day, you might do the participants a disservice.”
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RETIREMENT ACCOUNT
Try to figure out 401(k) fee bite
Figuring out what you’re paying for your 401(k) isn’t easy. Here are some pointers.
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Mutual funds, where most 401(k) money is invested, collect a percentage of your account balance for management fees and operating costs. This charge, called the expense ratio, is disclosed in fund prospectuses and on many fund-company Web sites. In contrast, fees related to the administration of your 401(k) plan–for record-keeping, employee education and other services–are harder to find.
Retrieve your most recent quarterly account statement or log on to your plan’s Web site. If you have a printed statement, look for line-item charges under such headings as “record-keeping” or “administration.”
Online, the fees may be listed under “investment transactions,” “daily activity” or “account history.”
They may not appear in dollars and cents. They’re often collected by reducing the number of shares you own in your mutual funds. If you don’t see any deductions, contact your employer’s benefits department or the outside firm that administers the plan. Ask where you can find any overhead costs.
If your 401(k) plan is run by a mutual fund provider, there won’t be distinct administrative fees. Fund companies often absorb such costs in return for the chance to stock the plan with their own funds, from which they earn management fees. Review the fund choices closely.
Also, check whether the funds charge 12b-1 fees to cover sales and promotional costs. Switching to funds without 12b-1 fees can boost your returns.
More information can sometimes be gleaned from federal Form 5500, in which employers must disclose certain fees and commissions paid to 401(k) brokers and plan providers.
You can request the form from your employer or view it at no charge at www.freeerisa.com, a Web site run by a benefits consulting firm.
–Walter Hamilton, Tribune newspapers: Los Angeles Times