Those Pesky 401(k) Fees. You Could Be Paying Excessive and Unreasonable Fees.
It's been a precipitous fall. The balance in the majority of 401(k)s keep going lower and lower and lower.Now,to add insult to injury, investors are learning that it's not just the stock market that is hurting their bottom line, it's the fees being charged by their 401(k)provider.
"The financial industry is a scam. Advisers and money managers earn more on your money than you do, " says Michael Edesess,Partner and Chief Investment Officer of Fair Advisors, and author of the 2007 book, The Big Investment Lie."The problem with 401(k)s is that in very many cases the costs are greater than the tax benefits, making them a net negative
About those costs - do you have any idea how much you are being charged in administration fees for your 401(k)?
It seems like a reasonable question. It seems like a question that most people would not know right off the top of their heads but with a little searching through paperwork, could come up with the answer. And, if that failed, certainly you could shoot off an email to your plan administrator and say, "could you send me information on the fees we're paying."
It sounds reasonable.Yet, it's a trick question.
If you can believe the experts, it is virtually impossible for anyone to figure out exactly how much they are being charged by their 401(k) administer.
That’s right. Even if you tried to do the due diligence, you still wouldn’t get the answer.That's because in every 401(k) there are hidden,or some like to call them, buried, fees. And, until the market crashed, few people seemed to be aware, care, or have much passion about finding out the answer.
Today, some people are starting to care.
Unfortunately, this laissez faire attitude has cost people a boat load of money – that ‘s money on top of the money lost from portfolios that lost around 40% of their value.
According to a report on 60 Minutes, over a thirty year period, these hidden/buried fees could eat up to half the income in a 401(k)
Because I was not sure that I heard that correctly, I re-watched the report again on . Sure enough Croft reported that these hidden fees could indeed eat up half the income over a 30 year period.
How could this possibly be? And if that is true, why hasn’t someone been screaming their head off about it?
Turns out there are some people who have been fighting mad about this issue for a long time, but it never has gotten much traction.That could be changing.
Nothing like having people watch their life savings disappear to get their attention that they could be paying an arm and a leg to have a 401 (k) provider administer their plan.
The bigger question is how did we get ourselves into a situation where businesses agree to do business with 401(k) providers without really understanding what it is going to cost the company, and what it's going to cost individual participants?
Jeff Acheson QPFC, Manager Director of Schneider Downs Wealth Management Advisors in Columbus, Ohio,says the problem is apathy on the part of employers. “ If no one is complaining, the employer has been happy doing nothing. “
Acheson,who says his firm does provide complete transparency on fees for administering 401(k) plans, says in the past when he tried to use transparency as a selling point, it fell on flat . “Many plan administrators saw a certain degree of security going with the big guys. Their thinking was, you can’t go wrong if you have a major financial institution administering your plan.”
Susan Howe,who is an Executive Director at Ernst &Young and part of the AIPCA Commission for financial literacy that runs the 360 Degrees of Financial Literacy website says most participants don’t do the correct amount of due diligence because they assume the company has done that for them.
“Unfortunately, a lot of people are in the mode if this is a program being offered by employer then there was some due diligence that has gone with this, ” said Howe who explained despite being in the financial industry,this whole issue of exorbitant fees on 401(K)s was something she was not aware of until watching the 60 minutes report.
Of course people’s willingness to trust financial institutions is undergoing a seismic shift.
It’s not as if ,some people haven’t been reporting about this fee scam for a long time. I can remember in 1997 when I was working at a firm that had a 401(k). Because of my start date, I wasn’t eligible to contribute, but I remember a conversation I had with my friend Melanie who was very keen on learning what the fees were for the company’s 401(k). If I remember correctly , she had read an article in MONEY magazine alerting people to start asking questions to their company’s firm administrators about those fees.
The article showed how much money could be eaten up in an individual’s savings from excessive fees.
I caught up with Melanie shortly after she had tried to have a conversation with our CFO about the fees. He was not amused and basically told her to mind her own business and warned her about making waves with the home office in New York.
The more you talk to 401 (k) experts, the more you feel like you are a character in a Kafka novel. The experts say, even if you ask your plan administrator what the fees are, they probably don’t know either.
It’s not as if people haven’t tried to find out what all the fees are, it’s just the current laws protect the financial institutions.
The 60 Minutes piece did feature California Congressman George Miller who has been fighting to force financial institutions to disclose all fees associated with 401 (k)s. He is currently holding hearings on the issue.
It is the tremendous lack of regulation that is so mind-boggling. After all, 401(K)’s are the primary and most popular retirement savings vehicle in the country. Lorraine Ell,Director of Client Relations at Portfolio LLC in Albuquerque, New Mexico,says the reason why these plans have been able to get away with these buried fees is that they were never intended to become a replacement for corporate pension plans.
“When the 401(k) first came on the market it was mean to be a supplemental way to put extra money aside for retirement so there wasn’t as much regulation as pension plans. Once companies figured out that they could offer 401(k)s and get rid of their pension plans, the 401`(K) assumed the role previously provided by pension plans.”
Ell says that’s a critical point to understand because pension plans are very regulated. And, unlike 401(k)s where all the savings are at risk depending on market performance, people participating in pension plans, know the exact amount of money they will receive once they retire.
As all the experts said, while the market was delivering great results, few people had the energy or desire to fight the financial industry about these fees. Participants weren’t complaining and the financial industry does have its lobbyists.
The Catch 22 is even if you are like my friend Melanie and you ask your plan administrator to provide information about the fees, including a cost comparison, it’s still impossible for them to do.
Feel like your hands are tied behind your back? They are. Most of the experts I talked with said that if you work for a Fortune 500 chances are your fees are not exorbitant – but they couldn’t be sure about that because even the administrators of these plans probably don’t know all the fees.
The experts I talked with were less confident about plans administered for smaller businesses. They cautioned that people in these plans really needed to do additional homework.
What are some things to look for? The experts say it will definitely cost more if the plan is administered by an insurance company.Think Transamerica. Think AIG.
In addition, if your plan includes annuities you are paying double for a tax benefit. The experts I talked with say you do not want annuities in your 401(k).
These experts also agree that plans that use Vanguard and Fidelity are not going to be charging excessive fees.That doesn’t mean that all Vanguard and Fidelity funds are going to be great performers, it just means that there are no hidden fees.
There is also a web site in Beta right now called Brightscope Rating where you can try check to see how your firm’s 401 plan performs compared to other comparable ones in the same industry. Just because you work for a large corporation, doesn't mean you aren't paying more than you should.
Of course, Brightscope is a starting point. Personal Finance columnist Liz Pulliam Weston says employees should request meetings with their plan administrators to get a better understanding of what due diligence the company is doing to insure the fees are not exorbitant.
Weston says her biggest concern is that people are going to be so angry about these fees that they will stop contributing to their 401(k)s and she says that would be a big mistake.
“The worse possible outcome of the 60 minutes report would be for people to stop contributing to their 401(K)s. An individual would have to save a heck of a lot on their own to end up with more money than they would in a 401k.”
Weston says the combination of being able to contribute pre-tax dollars and also having companies match the individual contributions makes 401(k)s a great retirement savings vehicle, even with the fees.
Michael Edesess says, “ if your company offers a matching contribution, contribute up to the max and then put the rest of your savings in IRAs or taxable investments."
Of the financial experts that I talked with only one,Joshua Kadish, of Retirement Planning Group said the issues of 401(k)fees is overblown. Kadish says the real issues isn’t whether a plan is being charged 2% or 3%,
"The fees didn’t cause someone to lose 40%. The issue is not the 401(k) plan,” says Kadish, “ The issue is the lack of education that the investing public has. Most people don’t have any idea of the level of risk that they are currently assuming. They have no idea of the amount of money they are required to save. They don't know the rate of return they need to reach their goals.”
Want to get educated?
The High Cost of 401(k) fees, Kiplinger.com
401(k) fees can chomp a hole in your savings
Fees, fees and more fees, aarp
Money Ning- fees in your 401(K)
401(K) Fair Disclosure for Retirement Security Act of 2009
Note:All the experts I interviewed are enthusiastic advocates of complete transparency when it comes to 401(k) fees. Also, after watching Suze Orman on the Morning Joe Program talk about Twitter and how she answers all her tweets personally, I sent her a tweet inviting her participation in this post. To date, I have not received a reply.
Elana blogs about business culture at FunnyBusiness