Hidden 401(k) Fees You're Probably Paying

Many employers significantly underestimate the amount they are paying for 401(k) fees. The Government Accountability Office recently asked 1,000 401(k) plan sponsors how much they pay in fees, and then compared the data they provided to publicly available filings, investment fund prospectuses, and fee reports generated by BrightScope, a firm that tracks and rates 401(k) plans, to see how much they actually paid in fees. Many companies didn't know or significantly underestimated the amount that is deducted from employee retirement accounts to pay fees.

"In several instances, sponsors of large and small plans did not know or fully understand the fees charged to their plans, because fee arrangements have become so complex and may be disclosed differently, adding to sponsor confusion about plan fees," according to the report. "In addition, because sponsors of plans of all sizes may not be aware of certain fees that participants are paying, such as transaction costs and wrap fees, it is difficult to get a clear understanding of the total fees that participants are actually paying." Here are some of the 401(k) fees you may not know you're paying:

Recordkeeping fees. Almost all plan sponsors (85 percent) report paying recordkeeping and administrative fees, ranging from 0.01 percent to 37 percent of plan assets annually. "Because recordkeeping fees under a revenue sharing arrangement can be based on the amount of plan assets under management, the amount paid to the provider for recordkeeping services could increase as the fund grows and may get quite large if the sponsor is unaware of these asset-based fees," GAO found. "This could result in the plan--the sponsor and participants--continuing to pay more for recordkeeping services as assets grow, although the level of recordkeeping services provided tends to remain the same."

Investment management fees. Investment management fees account for the majority of 401(k) plan charges, but about half of 401(k) plan sponsors did not know if they or their participants paid investment management fees or believed these fees were waived. Sponsors may not know if their plans paid investment management fees because these costs are usually deducted from participant assets and not invoiced to the plan sponsor. Among respondents who knew they were paying these fees, plan sponsors reported that participants paid between less than 0.01 percent and 3.24 percent of assets. In most 401(k) plans (73 percent) participants paid 100 percent of the investment fees.

Transaction costs. Many plan sponsors may not be aware that their participants are paying transaction or trading costs out of fund assets, including commissions when an investment manager buys and sells securities within a particular investment vehicle. Almost half (48 percent) of sponsors did not know if their plans incurred transaction costs, and only 12 percent said that their plans pay these expenses. One sponsor of a large plan with 15,000 participants and over $100 million in plan assets told GAO that its plan does not pay transaction or trading costs. However, BrightScope found that the plan was charged about $310,400 in transaction costs. Average transaction costs for the investment options offered in the 401(k) plans surveyed were approximately 0.45 percent of assets, and were found to be as high as 2.72 percent.

Consulting or advisory services. Some 401(k) plans hire consultants or advisers to select and monitor investments or negotiate fees and services. When this happens, 401(k) participants are usually the ones who pay for it. GAO's survey found that 85 percent of plans hired a retirement plan consultant or investment adviser in 2010, and in 77 percent of these plans participants paid between 0.01 percent and 1.4 percent annually for these services. Only 17 percent of sponsors paid for 401(k) consultants or investment advisers from another source.

Revenue sharing. Most plan sponsors don't understand exactly how revenue sharing works within their 401(k) plan. An estimated 48 percent of plans did not know if their service providers had revenue sharing arrangements with other providers, GAO found. GAO uncovered several examples of plan sponsors unknowingly paying high fees under revenue sharing arrangements. For example, one plan sponsor with about $6 million in assets reported not knowing if its plan paid revenue sharing fees, but a review of its investment documents indicated that the plan paid about $5,000. And some plan sponsors that are aware of revenue sharing arrangements appear not to understand the full cost and are paying higher fees than they reported. One 401(k) plan with over 500 participants and approximately $13.5 million in assets paid 16 times more in recordkeeping and administrative fees in 2010 than the sponsor reported during the GAO survey. Another small plan sponsor with 65 participants and about $5.8 million in assets told GAO the company did not pay anything for recordkeeping and administrative fees, but the fee report the sponsor provided indicated the plan actually paid about $10,700, including about $5,900 invoiced to the company and approximately $4,800 in revenue sharing fees deducted from participant accounts.

High fees for small plans. Plans with fewer participants and lower plan assets generally pay higher fees than large plans with more money invested. Small plans with fewer than 50 participants paid an average of 1.33 percent of assets in recordkeeping fees, compared to the 0.15 percent paid by sponsors of larger plans with more than 500 participants. For example, the plan that paid the highest fees, 37 percent of plan assets, started the plan in 2009 and had less than $1,350 in the plan in 2010. However, larger plans are more likely to deduct recordkeeping and administrative fees from participant accounts than smaller plans. Some 32 percent of larger plans reported charging these fees to participants, and another 22 percent paid only part of the cost. "Many of these fees charged in 401(k) plans are passed along to plan participants, which ultimately results in reduced retirement savings," GAO found.

Twitter: @aiming2retire

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