Look Out for The Hidden 401 (K) Costs

Look Out for The Hidden 401 (K) Costs

When it comes to your 401(k), you probably don’t think about fees. After all, your employer foots the bill, right?

Wrong. Employees typically paid mutual-fund expenses, but now more are shouldering administrative expenses, which employers used to pay.

“Fees for 401(k) plans run anywhere from 10 basis points (0.01 percent) for IBM’s plan to 300 basis points (3 percent),” says Ted Benna, who created the first 401(k) plan in 1981 and is founder of the 401(k) Association, a Pennsylvania benefits consulting firm. At a Fortune 500 corporation, your fees are likely to be lower than what you would pay if you worked for a small company; 90 percent of plans cover fewer than 100 participants.

Depending on their size, fees can determine whether your nest egg looks like an ostrich’s or a sparrow’s. Say you invest $50,000 in a plan that charges a 0.5 percent fee, and you enjoy an 8 percent annual return for 30 years. You will retire with $437,748. Pay fees of 1.5 percent and you will have $107,000 less.

The fees are not always visible. Typically a broker will set up a company’s plan at no charge, bundling fees for administering the account with mutual-fund expenses. The broker stuffs the plan with higher-cost share classes, which drain money from employees’ accounts. “In essence the company shifts the costs of administering the plan directly to the employees,” explained Don Phillips, managing director of Morningstar, the Chicago-based mutual-fund research company.


HOW YOU CAN SAVE
• Choose funds with low expense ratios.

• Ask your human-resources department to disclose the total fees you are paying. One percent is reasonable, says Benna. If you don’t get a response, call the Employee Benefit Security Administration at 866-444-3272 to complain.

• If you left 401(k) accounts with an old job, particularly with a small company, consider rolling the money into your new employer’s plan or to an Individual Retirement Account to save on fees.

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