Investing > Retirement Investments

Are you paying too much in 401(k) fees?
Associated Press.
Copyright Associated Press

DENVER (AP) - These days, 401(k) plans form the backbone of retirement funds for many workers. Yet 401(k) fees and expenses are rising, and responsibility for paying them is increasingly being shifted from employers to their employees.

This shift can mean smaller nest eggs for employees in the future, says a retirement expert at the College for Financial Planning.

Robert Pennington, an academic associate at the College, has answers for some commonly asked questions regarding 401(k) fees.

- How much are 401(k) fees rising?

A study by HR Investment Consultants released in the fall of 1997 found that for companies with 100 employees, administrative and record-keeping costs rose from $49 a year in 1995 to $54.42 in 1997. Costs at smaller companies tend to be even higher. Perhaps of greater concern is the range of fees, says Pennington. "Fees for participants in some 401(k) plans can be quite high."

Pennington cites the HR Investment study, which looked at plans with at least 500 participants and account balances averaging $30,000. Investment fees paid by the employees ranged from $159 annually (0.53 percent of the account value) to $768 annually (2.56 percent of the account value). Record-keeping and administrative costs paid by employees ranged from being nonexistent in some plans to costing as much as $75 in others.

- How much do these fees affect an employee's nest egg?

"Throughout an employee's work history, 401(k) fees can erode the annual return and ultimately the size of his or her nest egg," says Pennington. He points to an example from a new booklet on 401(k) fees published by the Pension and Welfare Benefits Administration of the Department of Labor.

The example uses a current account balance of $25,000 with an average annual growth of 7 percent, to which no further contributions will be made. With these parameters, if fees and expenses are 0.5 percent, the account will grow to $227,000. If fees and expenses are 1.5 percent, the account balance will grow to only $163,000. The 1 percent difference reduces the size of the final nest egg by 28 percent.

Pennington notes that the impact of these fees will be even greater if investment returns remain below the double-digit returns many investors have earned the past three years.

- What fees can a 401(k) plan charge an employee?

Pennington says an employer can charge certain reasonable fees to either the 401(k) plan or your plan account. The plan itself incurs administration fees for record-keeping, accounting and trustee services.

The biggest cost of a plan is for having its investments managed (administration services may be included in this fee). Plan fees and expenses are taken off the top, thus reducing each participant's investment return.

Participants who self-direct the investments in their account balances are individually charged for the purchase or sale of an investment, as well as for other services such as taking out a loan. Management fees incurred by a particular investment, such as an actively managed mutual fund, will also directly affect a participant's return.

There are certain fees that an employer cannot charge to the plan or account holders, such as the cost of designing, establishing and terminating a plan.

Pennington says plan participants should keep in mind that employers don't necessarily have to charge them all of these fees. For example, some employers pick up the tab for record-keeping, some administrative and management costs, or loan costs.

- How can you find out if the fees the plan charges are reasonable?

Pennington recommends contacting the plan administrator. The plan itself should provide information on the cost of specific investments offered in its menu of investment choices. The summary plan description should detail what services the plan provides and the cost of those services, as well as explain whether the plan itself or the employer pays the administrative expenses.

You should also conduct research at your local library or over the Internet and particularly look for magazine or newspaper articles that discuss 401(k) fees. This will allow you to evaluate your plan's fees and see whether or not they are excessive.

- What can you do to reduce your plan's fees?

Pennington makes several suggestions. Compare the costs of the specific investments you're considering. Encourage your company to offer more investment choices, so you will be in a better position to find lower-cost options.

Serve on the plan or investment advisory committee, if your employer permits this. Ask the employer to pay for as much as possible in regard to trustee costs, fees for investment management, record keeping and so on.

Above all, stay informed and educated.

A good place to start is with the Department of Labor's booklet on 401(k) fees; you can get a copy by calling 800-998-7542.

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