Tuesday, February 5, 2008

Insidious 401(k) Fees

Have you ever tried to determine exactly what your 401(k) plan charges in fees? It's nearly impossible. Sure, the plan sponsor will usually provide the investment management fee. That's the fee assessed by the firm managing a particular fund within the 401(k). If the fund is public, then that fee information can also be found at Morningstar or other similar sites, as well. But what about the plan sponsor’s fees?

I have never seen any fee or expense broken out on my 401(k) statement. And based on the statement below by a major financial investment company the fees may never be disclosed!


In a letter to the Department of Labor, Fidelity Investments, the nation's largest plan sponsor, says ample information is available on fees, and additional disclosure will confuse workers and deter participation: "The complexity of the choices presented to participants when deciding to participate in a 401(k) plan already represents a barrier to enrollment. Overwhelming participants with even more information could discourage participation further."

That is an incredibly condescending statement made by an out of control, greedy capitalist. Evidently, their industry would like a little more oversight and government intervention.

What are these fees? Here’s a summary of some of the possible fees and expenses:

Plan Administration Fees - The day-to-day operation of a 401(k) plan - such as plan record keeping, accounting, legal and trustee services -- that are necessary for administering the plan as a whole. These fees may be deducted directly from investment returns thus making it very difficult to identify. Or they could be paid directly by the plan. In that case, the fee is either allocated among individual accounts in proportion to each account balance (i.e., participants with larger account balances pay more of the allocated expenses) or passed through as a flat fee against each participant’s account.

Investment Fees – this is the largest component of 401(k) plan fees. Fees for investment management are assessed as a percentage of assets invested and are deducted directly from your investment returns. These fees are not specifically identified on investment statements.

Not only are these fees hidden from you, the employee, but in some cases not even your employer knows the fee! The experts say that because the fees are subtracted before investment returns are reported, buried in "bundled services," or not disclosed at all, employers may not be aware of the true costs of their plans.

On the bright side, there are some members of Congress trying to change all of this. Legislation was introduced last month that would require disclosure of all fees to plan participants. Let's hope it passes.

More information on this topic can be found here: The 401(k) Fee Flimflam.


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