retirement

Shedding Light on 401(k) Fees

The dark side of 401(k) plans is coming to light. You or your employer may be paying too much to outside managers.

If you're like four out of five 401(k) investors, you don't know how much you pay to participate in your company's plan. You needn't feel like a dunce. New investigations into 401(k) fees show that employers are often in the dark about 401(k) costs, too. Nor does the U.S. Department of Labor -- the cop on the 401(k) beat -- have all the info it needs.

Regulators, prosecutors, Congress and class-action lawyers are all looking into 401(k) fees. All that attention is bringing two aspects of 401(k) fees to light. The first is that investors, employers and regulators may not understand all the fees they're paying and lack easy access to all the information to evaluate them -- the conclusion of a government report in November. The second is that embedded in some of those fees are questionable business practices and conflicts of interest that can seriously hurt 401(k) participants.

At the center of the controversy is a practice known as revenue sharing. That's when an investment company shares some of what it earns with plan administrators, record keepers and other service providers. Some forms of revenue sharing bear an unsettling similarity to kickbacks. What would you think of a 401(k) consultant who steered your plan toward a fund that paid the consultant to make the recommendation? The Securities and Exchange Commission expressed concerns about that in 2005.

Last fall, insurance giant ING settled, without admitting wrongdoing, an investigation by New York Attorney General Eliot Spitzer into payments to a New York teachers union to endorse and promote ING annuities in the union's retirement savings plan. ING will now disclose costs to plan investors and also explain that mutual fund managers often pay ING to have their funds appear on the menu of options offered to investors.

Lawsuits filed in September by plan participants against ten big employers address revenue sharing as well as other hidden 401(k) fees. The suits allege, for instance, that some plans are invested in expensive share classes when cheaper ones are available, and that actively managed funds so closely hew to an index that they should cost much less to run.

It's difficult for investors to discern such arrangements. If your plan invests directly in mutual funds, revenue-sharing payments would be hidden inside each fund's expense ratio, found in the prospectus. The lower the expense ratio, the less you have to worry about.

The Labor Department may soon require employers to summarize all fees paid out of plan assets or directly by participants. In the meantime, ask your employer how funds are selected and about administrative costs.

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