Fees Eat Away at Employees' 401(k) Nest Eggs
With pension plans vanishing, workers depend more than ever on these accounts. Yet obscure deductions are quietly eroding their savings.
By Walter Hamilton, Kathy M. Kristof and Josh Friedman
Times Staff Writers
April 23, 2006
John Fuchs was checking his 401(k) account online one afternoon when he saw something that seemed amiss. Listed along with his regular contributions was a $48 charge, in red.
That's odd, he thought.
Why would anyone be taking money out of his account?
After a flurry of phone calls and e-mails, Fuchs learned that the $48 deduction was no mistake. The money was paid to an outside firm that enrolls employees in his company's 401(k) plan, mails quarterly account statements and handles other administrative tasks.
Fuchs knew the mutual funds he'd chosen charged fees for investing his money. He didn't know that overhead costs were also being taken out of his account. They now cost him about $500 a year.
Because the administrative fee is a percentage of his balance, he will pay more and more as his savings grow. Fuchs figures that by the time he retires, it will have cost him more than $316,000 in direct charges and lost investment returns.
"I think a lot of people out there pay this fee but don't know it," said Fuchs, 38, an information technology manager for an engineering firm in Exton, Pa. "To the average employee, it's totally invisible."
As many employers scrap their traditional pensions and doubts grow about the future of Social Security, Americans' hopes for a secure retirement depend more than ever on their 401(k)s. About 44 million workers have more than $2 trillion invested in these accounts.
Yet unknown to many of them, obscure fees and deductions are quietly eroding the value of their nest eggs. In many cases, employers could bargain for lower charges, but don't.
Mutual fund management fees are the biggest expense. But they are prominently disclosed, have attracted wide publicity and have been declining as fund providers compete for customers.
Administrative fees are another matter. They usually don't show up on quarterly or annual statements. Brochures touting the benefits of 401(k) investing rarely mention them. Employees have to work hard to find out how much they're paying — for instance, by scouring their plan's website for a record of all activity in their accounts.
Plan consultants and providers collect their cut in varied ways. Some receive a fraction of each employee's savings. That's the charge Fuchs stumbled upon. Others collect a commission from insurance companies that run 401(k) plans.
When mutual fund companies manage 401(k)s, they often absorb overhead costs in return for the chance to give most of the "shelf space" to their own funds. They get their money back through fund management fees.
What's more, fund providers frequently offer 401(k) participants the same retail mutual funds they sell to the general public, not the low-fee alternatives designed for big groups of customers.
Employees tenacious enough to demand information about fees from benefits departments or 401(k) administrators often complain that they can't get straight answers.
[for more, see http://www.latimes.com/news/printedition/la-fi-retire23apr23,0,1598403.story} -- Jim Devine / "There can be no real individual freedom in the presence of economic insecurity." -- Chester Bowles