The Costly Secrets In Your 401k

Paying as little as 1% extra in fees can mean thousands less for retirement. So why is figuring out what you’re paying for your plan almost impossible?

How much does your 401k cost? It’s a surprisingly difficult question, but the answer is crucially important because the amount you’re charged for your tax-exempt retirement plan can make a huge difference in how much you’ll have when you retire. The problem is, navigating the web of fees extracted by the army of Wall Street intermediaries who administer your plan and its investments is an exercise in guesswork.

What’s too high for fund fees?

Bits of your hard-earned cash are siphoned off to pay a long list of middlemen. Plan administrators, bookkeepers, lawyers, compliance experts and the investment advisers who manage the mutual funds you hold are just some of the folks who get paid in the process. But don’t expect their cut to show up on your quarterly statement.

Instead, the fees most investors see barely scratch the surface. Right now, the 50 million or so Americans who depend on 401k’s for their retirements must rely on glaringly incomplete measures such as individual mutual fund expense ratios that cover only part of the expenses charged by their plans. Many other costs are unknowable, painted in broad strokes or obscured by confusing language, experts say.

As a result, most workers don’t know how their 401k fees work. In an oft-cited survey from AARP, more than 80% of 401k participants didn’t know what kinds of fees and expenses were associated with their plans.

“The problem is, people simply don’t understand what they’re paying, and for what,” says Olena Berg, a board member at the Pension Rights Center and former head of the Department of Labor’s Employee Benefits Security Administration.

For a sense of just how great a difference fees make, consider this example: You’re an employee with 35 years to retirement who’s managed to save $25,000 in your 401k. If your returns average 7% a year and fees and expenses shave 0.5% off of you returns, you’ll retire with $227,000, even if you don’t contribute another dime to your account. But if fees rise to 1.5%, your account will grow to just $163,000, according to the Department of Labor. That’s a 28% ($64,000) difference.

Luckily, understanding 401k costs could be getting easier, and the most sweeping change could come soon from Washington.

As part of the American Jobs and Closing Tax Loopholes Act of 2010, regulators are taking aim at the way fees are disclosed and how they’re presented to both employers and workers. Included in the bill are provisions that get to the heart of the transparency issue. Specifically, the bill requires fees for investment options in retirement plans be expressed in dollars or as a percentage.

It also requires 401k providers to break out fees in more-comprehensive ways for plan sponsors. They’ll need to disclose all fees assessed against a participant’s account and group those fees into three categories: plan administration and record-keeping fees, investment management fees and all other fees.

“Guaranteeing the disclosure of hidden 401k fees will give Americans a fighting chance to strengthen their retirement and increase our nation’s future economic security,” said Rep. George Miller, D-Calif., who authored the legislation, in a news release. At the same time, old hands in the industry are getting ahead of the legislation with better fee tools of their own.

Putnam Investments, which runs about $22.6 billion in defined-contribution plan assets, has taken the lead in building better ways to break out fees in plain English. The firm is launching online tools for retirement plan sponsors that will break out fees paid to plan providers in ways that generally match the model proposed by the government. For 401k participants, Putnam in July will unveil tools to outline fund expense ratios, transaction fees and other information designed to show individual costs of their plans, by U.S. News & World Report.

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