ShareThisBy KATHLEEN PENDER
Tuesday, March 13, 2007
When Willie Sutton was asked why he robbed banks, he famously replied, "Because that's where the money is."
If he were alive today, Sutton might be setting his sights on 401(k) and similar workplace retirement plans, says Carl Johnson, a pension attorney with Robinson, Bradshaw & Hinson who represents employers.
U.S. workers and retirees have almost $3 trillion sitting in 401(k) and other private-sector defined-contribution plans.
Although these assets themselves are generally well protected from theft, lax disclosure rules have made if fairly easy for financial services companies to siphon fees out of these plans without the knowledge of the active and retired workers who participate and, in many cases, the employers that sponsor the plans.
Fees vary widely, not just within a plan, but from company to company.
A participant in a large plan that takes a serious interest in keeping costs down might pay 0.2 percent a year or less, while someone in a small plan, especially if it is run by an insurance company, might pay 3 percent or more.
The difference between 0.2 and 3 percent in fees amounts to $1,400 a year on a $50,000 balance and $560 a year on a $20,000 balance.
Even smaller differences can really add up over time. Suppose a 45-year-old leaves $20,000 in a 401(k) account that earns 7 percent a year before fees. If the annual fee is 0.5 percent, the account will be worth $70,500 after 20 years. If the annual fee is 1.5 percent, the account will be worth only $58,400 after two decades. The one percentage point difference in annual fees would reduce the account balance by about 17 percent, according to a recent report by the Government Accountability Office.
The problem is, most employees have no idea how much their plan is charging. Even if they tried to find out, they might not get the full story.
"The information on fees that 401(k) plan sponsors are required by law to disclose is limited and does not provide for an easy comparison among investment options," the GAO concluded.
The GAO also says the myriad companies that provide services to 401(k) plans sometimes have undisclosed arrangements with each other that "may steer plan sponsors toward investment products or services that may not be in the best interest of participants and may cause them to pay higher fees."
People in the retirement industry have known about this dirty little secret for years. But only now is it attracting wider attention.
The U.S. House Committee on Education and Labor is planning to hold a hearing on 401(k) fees this month.
A St. Louis law firm, Schlichter Bogard & Denton, has filed suit on behalf of employees against a dozen large companies, alleging they breached their fiduciary duty by offering 401(k) plans with excessive or hidden fees. Although these aren't the first suits to allege fee gouging, they have gotten considerable attention.
The GAO report said Congress should consider amending federal pension law to require sponsors to disclose fee information on each 401(k) investment option in the plan to participants and to require that 401(k) service providers inform plan sponsors about the compensation they receive from other service providers.
If you are stuck in a 401(k) plan, there's not much you can do about high fees other than complain to your employer.
If you have money in a 401(k) plan from a previous employer, it's important to know how much you are paying so you can determine whether you would be better off rolling your money over into an individual retirement account or a new employer's plan (providing you can find out what the new plan is charging).
The biggest cost in a 401(k) plan is usually the cost of managing the investments, which are usually mutual funds or products offered by insurance companies such as annuities.
Participants usually pay the entire cost of investment management.
If your plan offers nothing but mutual funds, it's fairly easy to find out how much the fund itself is charging in annual expenses by looking at the fund's prospectus or on a Web site such as www.morningstar.com.
The trick here is to know the exact share class in your plan. Many funds have multiple versions of the same fund. All have the same underlying investment portfolio, but each share class charges different fees.
Each share class has a unique ticker symbol, which can also help you identify which fund is in your plan. Some plans provide their funds' ticker symbols on their Web sites, even if they don't include them in paper statements.
Once you have the fund's proper share class or ticker symbol, look for its "expense ratio." This tells you the fund's annual fees. An expense ratio of 1.5 percent means the fund will charge $150 a year on a $10,000 balance.
You will never see these charges broken out on a statement. They are taken out of the fund's assets. The performance of your fund is stated after these fees are taken out. Otherwise-identical funds with higher fees will have lower performance.
If you have insurance products such as variable annuities in your 401(k) plan, it's much more difficult to find out what the fees are. In addition to annual fees, these products often levy "surrender charges" if you cash in your investment before a certain number of years.
Clearly, the system needs fixing. Better fee disclosure would help, at least temporarily.
Financial service providers "are always trying to find new ways to make money. You have to be aggressive and sharp to keep up with them," Johnson says.
E-mail Kathleen Pender at kpender(at)sfchronicle.com. For more stories visit scrippsnews.com
