DEVIL IS IN THE DETAILS OF 401(K) FEES: THE AVERAGE INVESTOR IS IN TROUBLE WHEN A LAWYER FINDS IT HARD TO COMPARE CHARGES

When many employers launched 401(k) retirement plans less than a decade ago, workers were hungry for services such as quarterly account statements and toll-free phone numbers to check their balances. Roll-over and loan privileges were also viewed as a necessity.

But few thought to ask how much all this service was costing.

Now, 401(k) balances have risen and investment fees — often charged as a percentage of a total portfolio — have become substantial, if not onerous. Spurred by a U.S. Department of Labor investigation launched last November, many companies are scrutinizing fees for the first time.

The government has found a wide disparity in fees. These differences were confirmed in a study by HR Investment Consultants in Towson, Md., that found that for a company with 300 workers, annual fees ranged from $158 to $767 for employees with medium-sized accounts. At big companies like Exxon Corp., some 401(k) savers pay as little as a nickel for each $100 invested, but at other companies, the fees run $2 and more for each $100.

By one calculation, a two percentage point difference in fees can reduce returns on a 401(k) held for 30 years by nearly $250,000, or close to 25% of the balance.

Individuals and benefit administrators alike have a difficult time sorting through the maze of fees their 401(k) plans are assessed to calculate total costs. Some plan administrators charge separate fees for everything from legal work to audit and employee communication services.

shifting the burden

Even prospectuses don’t tell the whole story. Comparison shopping is nearly impossible in many cases.

Ronald Boorstein, owner of Acorn Self Storage in Chicago and Mundelein, Ill., is seeking a 401(k) plan for his 20 employees and has encountered nothing but frustration.

“It’s very hard to compare proposals,” says Mr. Boorstein, a lawyer. “Fees are obfuscated and buried. Some providers want to charge you for every single employee communication, others want to charge you every time you add or drop an employee in the plan.”

On average, about 75% of a typical 401(k) plan’s fees goes for investment services and 25% for trustee and administrative services. Corporations once routinely financed the latter, in many cases doing the administrative work in-house. But increasingly, plan maintenance is being farmed out and more companies ask their employees to pay the fees.

A survey by Hewitt Associates LLC, a personnel consulting company in Lincolnshire, Ill., found that companies, not employees, paid record-keeping fees for only 65% of 401(k) plans last year, down from 78% in 1991.

According to HR Investment Consultants, the average plan participant last year paid $37.16 in record-keeping fees and 1.11% of portfolio assets in investment fees. But comparing fees paid is tricky: Big companies usually are able to negotiate more favorable fees, while a company with employees in 15 locations likely will be hit with much higher record-keeping fees than a company with just one location (and thus just one set of payroll records to send to its 401(k) administrator).

it’s about service

Joseph Valletta, a principal with HR, says comparing fees is difficult, in part, because new services are being introduced all the time.

“It used to be that participants were happy with their 800 numbers to call,” Mr. Valletta says. “Now, they want access to their account information via the Internet and they want to be able to do transactions over the Internet”

The fee maze has been further complicated by the rise of bundled providers: big insurance companies and brokerages that provide both administrative and investment services. Some muddy comparisons by charging unrealistically low administrative fees and recouping the difference on investment commissions.

“If you’re not paying for administration, then you’re almost certainly paying for high-cost funds,” says Tim Murphy, a consultant in Hewitt’s benefits delivery group. He advises clients to focus less on individual fees and more on overall costs in comparing plans.

Most 401(k) participants invest in big-name mutual funds and, by law, must pay retail load expenses. Some corporations have introduced their own generic wholesale funds to give their employees a lower-cost option.

But their appeal is often limited.

“Many investors are reassured by the fact they’re using a retail investment vehicle rather than some generic equity fund, even if the retail fund carries higher fees,” says C. William Burke, a partner in human resource counseling at Ernst & Young LLP in Chicago.

Joel Solomon, vice president at Rothschild Investment Corp., a management and advisory firm in Chicago, says corporate clients are asking more questions about their 401(k) fees. But most have other priorities.

“Service is the most problematic issue for most companies,” Mr. Solomon says. “If statements aren’t timely, if (toll-free) phone lines go unanswered — those are the reasons that a 401(k) plan is likely to be discontinued. When we focus on a client, we stress service and performance, not fees.”

Crain News Service