Saturday, October 3, 2009

Avoid Hidden Fees on your 401k Plan after Retirement

There can be no question that saving for your own retirement is a financially sound and important thing for you to do, and one of the most common and popular methods of doing this is by investing in a 401K plan at your place of work. But what you may not know is that not all 401K plans are the same.

If you are like many people in the United States, the chances are that you have had several jobs over your working life and, as a result, still have a number of 401K plans with different former employers. Or perhaps you have recently retired, but are not yet ready to cash in your 401K plan(s). Whatever your individual circumstances may be, you should be aware that your 401K plans could actually be costing you money.

Under the current laws, not only are the companies administering your 401K allowed to charge maintenance and service fees, but they are also not required to inform you what those maintenance and services fees are. Some insurance companies and stock brokerage houses are charging as much as 4% or 5% per year off the top for the plans they administer, which can significantly decrease the annual yield and value of your plan. (There are also fees and charges associated with maintaining IRA accounts, and generally there will be management or transaction fees associated with most products.)

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401K Plans Fees
401(k) plan fees and expenses generally fall into three categories:
Plan Administration Fees - The day-to-day operation of a 401(k) plan involves expenses for basic administrative services -- such as plan record keeping, accounting, legal and trustee services -- that are necessary for administering the plan as a whole. Today a 401(k) plan also may offer a host of additional services, such as telephone voice response systems, access to a customer service representative, educational seminars, retirement planning software, investment advice, electronic access to plan information, daily valuation and on-line transactions.

In some instances, the costs of administrative services will be covered by investment fees that are deducted directly from investment returns. Otherwise, if administrative costs are separately charged, they will be borne either by your employer or charged directly against the assets of the plan. When paid directly by the plan, administrative fees are either allocated among individual accounts in proportion to each account balance (i.e., participants with larger account balances pay more of the allocated expenses) or passed through as a flat fee against each participant’s account. Either way, generally the more services provided, the higher the fees.

Investment Fees - By far the largest component of 401(k) plan fees and expenses is associated with managing plan investments. Fees for investment management and other investment-related services generally are assessed as a percentage of assets invested. You should pay attention to these fees. You pay for them in the form of an indirect charge against your account because they are deducted directly from your investment returns. Your net total return is your return after these fees have been deducted. For this reason, these fees, which are not specifically identified on statements of investments, may not be immediately apparent.

Individual Service Fees - In addition to overall administrative expenses, there may be individual service fees associated with optional features offered under a 401(k) plan. Individual service fees are charged separately to the accounts of individuals who choose to take advantage of a particular plan feature. For example, individual service fees may be charged to a participant for taking a loan from the plan or for executing participant investment directions.

In particular, take a close look on specific fees that can be considered as “hidden”:

  • Trading costs, commissions between fund managers and brokerage firms.
  • Soft dollar “excess commissions” paid to brokerages pursuant to Securities
    Exchange Commission (“SEC”) rule 28(e).
  • Sub-shareholder (participant) servicing fees - called “sub-transfer agent fees”
    (“Sub-TA”).
  • Account distribution (sales) based 12(b)-1 fees.
  • Account servicing based 12(b)-1 fees.
  • Unitized variable annuity wrap fees.
  • Variable annuity mortality costs.
  • “On-the-fly” pass through fees.
  • Retail versions of institutional funds (i.e. funds that could be purchased at a lower price but are not, due to fiduciary ignorance).
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How to Find the Hidden Fees on your 401K Plan?
Administration fees are the fees that most participants don’t know about. They are in addition to the management fees, but much harder to find. Here’s where to look:
1.    Transaction History. Look at your transaction history for removal of partial shares. If you see a transaction that doesn’t look familiar, you can bet that the shares are being removed as part of an administration fee. Don’t be surprised to find that the plan is routinely removing enough shares to cover a standard fee on a regular basis.
2.    ERISA filing. If you can’t find any fees in the transaction history on your account statement, ask your human resources department. Most companies, depending on size, need to report the expenses of employee benefit plans to The Department of Labor in an annual Form 5500 filing. The filings are available to the public.
3.    Employer. Don’t expect your employer to give you the answers you are really looking for. Because employers and 401k providers negotiate packages, chances are they won’t tell you all the options they had to choose from and whether or not they picked the least expensive option. The reality is that you may never know how much of your retirement money is being eaten up by fees.

Unfortunately, it is true that managers at many companies have signed on with 401k sponsors and simply do not understand the fees involved. Since the fees are not paid by the company, but rather by you and the other participants, they have small motivation to look hard at the fees.  In fact, a study by Spectrem Group showed that most plan sponsors don’t know what they pay.

So unless you ask and thoroughly read the prospectus and make sure onerous fees are not being levied against your account, it’s best to do an IRA rollover and not leave your funds in a high priced qualified plan.

Questions about 401k Fees to Ask Service Plan Providers 
  • To save on 401k fees, find out what "class" of shares is held by the plan and if there are other "classes" available on the 401k plan, noting relative hidden fees in expenses paid by each. 
  • Ask 401k service plan providers if shareholder servicing fees are being paid by the investment funds held by the 401k plan.
  • Review the 401k prospectus to find out if 12b-1 fees being paid by the "class" of shares held by your 401k plan. If so, find out from the plan provider who recieves them on your 401k plan. 
  • Save by asking service plan providers if any 401k investment option can be replaced with a different share class with lower 12b-1 fees.
  • If you are using a consultant to go through a 401k service plan provider, you can find out if they are being compensated directly or receiving benefits as hidden fees from 28(e) soft dollars from mutual funds within the 401k plan. 
  • Ask the plan provider which fees and expenses are charged directly to the 401k plan and which fees and expenses are instated as hidden fees into the expense ratio of the 401k fund.  
  •  Find out if 401k plan providers charge extra costs, fees, or hidden fees for early termination and if there is an investment option. 
  •  Make certain the 401k service provider prepares an annual comprehensive fee review disclosing a complete tally of all revenue they receive from the 401k plan.
  • Keep track of all fees paid by the 401k plan.
401K Plans Rating
BrightScope saw an opportunity to step in and offer 401(k) plan employers and employees plan analysis. Currently, the small, California-based start-up rates 4,500 401(k) plans. Its goal is to have 30,000 plans rated by end of the year. The site recently started to offer more detailed information to employers for a fee, but the basic information to employees is free.

Anyone can click on the website and look up their employer's 401(k) plan rating. BrightScope crunches the data from public resources and compiles a large database of information. Under the rating is a general description of fees, company contributions, mutual fund investment options and other factors.

The service also compares the plan rating with a number of other company plans in the same industry peer group. The website makes every company open to public scrutiny. Workers can look up any company's 401(k) rating, not just their own plan.

BrightScope ratings are based on calculations that involve the public Form 5500 data that plan sponsors must provide to the Department of Labor. Although it is the most accurate information that is available, it's not made public in a timely fashion. Currently, the most recent data are from 2007. But that will change, because starting next year, the Labor Department's data will be electronic and more easily accessible.

Sources and Additional Information:

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