Monday, January 17, 2011

The Hidden 401(k) Fees You Are Paying (and Don’t Even Know About) – PART 2

The Hidden 401(k) Fees You Are Paying (and Don’t Even Know About) – PART 2

401(k) plan fees generally fall into three categories:

(1) Plan administration fees

(2) Individual service fees

(3) Investment fees

Plan administration fees are charged for things like toll-free numbers, online account access, seminars, and the customer service representatives you speak to when you call the company. You didn’t think these offerings were free, did you? The cautious good news here is that some employers may cover these plan administration fees. The bad news is that those employers are quite few and far between – if I were to bet my house on it, I’d say you are covering your own plan administration fees.

Individual service fees are assessed to you only if you use specific optional services, like taking out a loan from your 401(k). And to be very clear here, this is a separate charge from the interest you will pay on the loan. The best way to describe an individual service fees is as a processing fee of some sort.

This post focuses on the investment fees, because they are by far the largest and most lethal of the three. And the manner in which these fees are treated is quite disturbing – let’s see what you think after you’ve read the post.

Generally speaking, you might see the plan administration and individual services fees – which tend to run just a few bucks – on your 401(k) statement. BUT for some bizarre reason, the investment fees – which are by far the largest (and we’re talking an-arm-and-a-leg large here) – NEVER show on any of your statements. Really? Yes, really! It’s strange, and rather unfortunate, but information about your investment fees does NOT show anywhere on the statements you’ve been receiving. Is it just me, or do you also find that rather interestingly odd?

So How Are These Investment Fees Charged?

Your 401(k) investment fees are charged against your investment returns. So let’s say your 401(k) statement shows a positive 8 percent return (which is good, because you made money) – your fees have already been deducted. So if the fee were 2.5 percent, your investments would actually have gained 10.5 percent (the 10.5 percent total, minus 2.5 percent in fees, equals your 8 percent return).

In the 401(k) world, this nocturnal approach is called INDIRECTLY deducting the fees from your returns. You’ may be thinking, “Since my returns are down because my investments lost money, there won’t be a charge.” That would be nice, but sorry!

Here’s how that side of the equation works. Say your statement shows negative 7 percent (I know you don’t like losing money, but bear with me for just a moment). You haven’t avoided the 2.5 percent fee we are assuming for this example. It was still deducted, thereby making your loss much deeper than it would have been otherwise. In effect, your investment actually lost only 4.5 percent, but the 2.5 percent fee brought your total loss to that negative 7 percent. Again, this is done INDIRECTLY. You see, when you lose money, your fees are deducted from what you’ve already saved. Yes! That’s how it works.

How Can You Figure Out Your 401(k)’s Investment Fees?

Perhaps you are very concerned (or even pissed-off) right about now, and are trying to determine how much your 401(k) fees are costing you right now. The problem is that 401(k)s are not one of those investments where you can just ask and someone will give you the dollar amount or percentage of your investment fees. Here’s how that process (yes, process!) goes:

First, you’ll need to contact your plan’s administrator (who is usually someone outside your HR office). So you will likely end up calling an external vendor or even having to make that request in writing. Once you do that, you’ll receive a thick document containing, among other things, a bunch of numbers. This may take 7 to 10 business days to arrive. Then you’ll have to sort through that document for the fees (called expense ratios) for the SPECIFIC funds your money is invested in (because that book usually contains fees for all the funds that your administrator handles). Next, you’ll have to grab your 401(k) statement and multiply the expense ratio for each of your funds by your ending balances to determine their costs. (If your money is invested in, say, 13 different funds, you’ll need to do this for each of them). Then you’ll need to add them up! How easy and fun do you think this expedition will be for you? If it sounds like a full day’s job, that’s almost exactly how it will seem.

What do you think about all this revelation and the word TRANSPARENCY? You know, I often hear buzz about credit card fees being crazy and outrageous! And I’m not saying that they aren’t. But at least those credit card companies have the guts to show borrowers exactly how much they are being charged. That’s fair! Compare that with your 401(k) or other employer-sponsored retirement plan for which you have absolutely no idea how much you are actually paying. When it comes to any other investment program, aren’t the fees among the first things you’d inquire about?

Another interesting thing is that under the Employee Retirement Income Security Act (ERISA), employers are required to ensure that 401(k) fees are reasonable in the light of the level and quality of services provided. I trust that you know well what that key word “reasonable” means. No fear if you don’t, because even more bizarrely, your employer probably doesn’t know either! Ask about it at work, and you’ll be directed to – guess who? – the plan administrator. Yes, the same one.

Talk about a classic case of out of sight out of mind. One thing I’ve always wondered is what would happen if everyone actually saw their fees in plain sight – just like they do for credit cards and other forms of investments?

One last question: Has this ever come up in your discussions with your financial advisor? Or does he or she believe that those fees don’t matter much? For all you know, you may be working hard to line someone else’s pocket, being completely ripped-off in the process. Who in their right mind wants to do that? Or are millions already doing that?

Call us at 301.949.4449 or visit us on the Web to schedule your complimentary consultation to determine how effective - or ineffective - your employer-sponsored plan is for your retirement-planning needs.

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