January 30, 2008
Weaving Fees into the Fabric of the Fund
Fees on 401(k)s Rock Boomers Facing Flawed Disclosure, by Darrell Preston and Gary Matsumoto
“Since its introduction 30 years ago, the 401(k) has become the fastest-growing form of retirement savings plan for U.S. workers … From 1985 to 2006, the number of active 401(k) participants climbed fivefold to 50 million. Assets in the plans soared more than 19-fold to $2.97 trillion.
… most workers don’t know that fees, rebates and revenue-sharing agreements among employers, 401(k) administrators and mutual funds — many of them buried in the fine print or not disclosed at all — are slowing the growth of their nest eggs. The amount ceded to fees widens as investors lose the benefit of compounding returns during decades of working.
Legislation introduced in the U.S. Senate last year would aid consumers in making better sense of their 401(k)s. The proposal requires that investors get more information on fees. The new law would disclose revenue sharing and other relationships between parties with financial interests in the retirement plans.
Analyzing 401(k) plans to unearth hidden fees is daunting. One set of clues can be found in the annual returns 401(k) plans must file on Form 5500 with the Labor Department. This form requires information on some fees, although not all. Administrative costs, which aren’t noted on investors’ financial statements, must be listed in 5500 filings.
To find the fees in his company’s own 300-worker 401(k), Jeff Acheson reviewed more than 20 documents, including mutual fund prospectuses. Schneider Downs cut total fees half a percentage point to 0.75 percent from 1.25 percent, Acheson says. ‘They’re hidden in the legalese that you have to be able to interpret,’ he says. ‘It’s very challenging even for those that have some degree of background in the financial services business.’”
Disgusting, isn’t it? The world’s greatest skimming operation fleecing clueless working folks. Clear, comprehensive disclosure of all fees is a must.
Related: Multi-layered Feeder Fund and Fund-of-funds Structure
January 30th, 2008 at 12:16 pm
Beyond disgusting, it’s usurious to assess fees that people either don’t comprehend or don’t even know they are paying.
January 31st, 2008 at 10:05 pm
Even with disclosure, it doesn’t give the average person many options….
Participating in your 401k is still better than not, even with the fees….
What hopefully it will do is educate people to take their 401k with them instead of leaving it with their former employer. It’s amazing how many people just default to leaving it there….
January 31st, 2008 at 10:17 pm
Linda: The employees should make sure management fights for the best possible terms for the 401k … the added disclosure makes it easier for management to shop among plans. I’m not sure what you mean by “leaving it there;” you don’t mean people abandon their 401k plan, right?
January 31st, 2008 at 10:49 pm
No Chairman, but instead of moving their 401k into a rollover IRA, many people just leave it with their old employer, to let them manage it.
I hear what you are saying about informed employees forcing management to shop the plan around, but from personal experience, as someone that use to sell 401k plans, I know that is not what happens. The decision is made by a small group of people, whose biggest concern is covering their own rearends.
But ideally, if enough employees got informed, and made their case known, you could get alot of plans switched to low cost indexing options ala Vanguard.
The challenge is to motivate people to care…
January 31st, 2008 at 11:00 pm
Linda: Right, well the thing that drives me nutty is when dummies say, “hey, it’s makin’ money, what do I care about fees?” The financial illiteracy out there is staggering and is shamelessly taken advantage of by many unscrupulous bastards.
February 2nd, 2008 at 1:53 pm
I provide a 401k plan option to all of my 60 or so employees.
By far the easiest 401k option for an employer is to go with their payroll service as the plan administrator. This eliminates a TON of work for the employer but the downside is that payroll companies usually offer semi-sucky fund choices for the employees.
The most labor intensive option is to go with a third party administrator which allows you to completely customize your plan and give your employees a range of excellent funds. This is what I do, but it is a major paperwork hassle.
The vast majority of people simply refuse to spend as much time planning their financial future as they spend planning their vacations, so they end up getting hosed. Only about a third of my employees take advantage of the plan. I ask them “if you gave me a 100 dollar bill and I gave you back $110, how many 100 dollar bills would you give me?”.
February 2nd, 2008 at 2:28 pm
Cap: Quit tricking the ladies in your sweatshop with difficult questions. :-)
February 2nd, 2008 at 3:05 pm
I know I’m a bastard like that :-)
February 2nd, 2008 at 3:21 pm
Cap: As long as you don’t go soft and start working them less than 18 hours a day, you’re OK with me. :)