Costly 401(k) fees are a puzzle to both workers and employers

Consumer Reports News: May 29, 2012 06:23 AM

If you think your employer knows more about your 401(k) plan's fees than you do, think again. Sponsors of some 401(k) plans don't understand the fees they're paying toward plan administration, says a new report by the U.S. Government Accountability Office. The GAO reported on one case, in fact, where a relatively large plan underestimated its recordkeeping costs by $58,000. And more than 90 percent of plan sponsors don't use free tools the government supplies to help compare costs among 401(k) plan providers, the report says.

Minimizing 401(k) fees can dramatically affect your investment performance. As we report in the July Consumer Reports, 401(k) fees, small as they seem, can take a huge bite out of your returns. A recent report by Demos, a research and advocacy group, demonstrated that a two-earner family who continuously saved for retirement could lose $155,000 to fees over 40 years of saving and investing.

What those fees include
Several fixed annual fees may be bundled together in what's called the expense ratio. They include administrative fees--generally ranging from 0.2 to 0.4 percent of your account assets--to keep records and process transactions, among other tasks; asset management fees--typically 0.5 to 1 percent of assets--to pay the salaries of those responsible for a mutual fund's investments; and marketing or 12b-1 fees--up to a maximum 1 percent--to cover the costs of advertising and selling the mutual funds in the plan.

A fourth expense, trading costs, varies yearly and reflects sales commissions, among other costs. It can be as high as 1 percent of assets, says Robert Hiltonsmith, a Demos researcher. Trading costs, he adds, "are nearly completely hidden from retirement savers, though they can be nearly as large as the expense ratio itself."

A new federal rule requiring more transparency in 401(k) plan statements should help plan participants understand the fees they pay. You can expect to receive the new, improved 401(k) documents starting this summer. Data provider also reports on and compares the fees of more than 45,000 401(k) and 403(b) plans; by plugging in a few numbers, you can get a free estimate of how your plan's fees affect your bottom line.

Who foots the bill
The GAO report shows some interesting correlations between size of a 401(k) plan and the fees its participants pay. Sponsors of smaller 401(k) plans generally pay higher average fees than do larger plans: 1.33 percent of assets versus 0.15 percent. But larger plans are more likely than smaller plans to pass on those costs to plan participants. Regardless of plan size, participants also are more likely than sponsors to be stuck with the bill for a 401(k)'s investment and plan consulting fees.

In our July article, we outline a number of steps you can take to minimize fees and maximize your 401(k) returns. Among them: agitating for less-costly investment options such as index funds.

Tobie Stanger

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