Hidden Drain on Your Retirement Nest Egg: 401(k) Fees

Roberta Spencer, who works for a large retail chain in northern New Jersey, has "no idea" what she is being charged for her company's voluntary retirement plan. And she is not alone.

"I don't think I've ever gotten a detailed statement of administrative fees on my account," she says.

Yet the impact can be enormous. Annual expenses differ by hundreds of dollars per participant from company to company. And over the long haul, that difference could mean big money to you - as much as half a million dollars or more.

That's because the more fees you are assessed, the less profit your account will likely achieve.

Welcome to the world of 401(k) retirement plans. It is a world where what you see - or think you are getting in terms of total return - is often mixed with confusion, lack of information, and sometimes deliberate obfuscation about excessive or undisclosed fees.

Some 25 million Americans have set aside more than $1 trillion in their 401(k) retirement accounts. The programs are praised for allowing individuals to build nest eggs tax free, and often with substantial matching money kicked in by their employers.

But concern is growing that shareholder value is too often eroded by unnecessarily high fees.

Last month, the Labor Department probed the issue in two days of hearings.

"One of the things that came out of those hearings is that many people are never told what their total fees are," says Myra Dandridge, a Labor spokeswoman. The agency is assessing "whether there should be future action."

"I would be surprised if Labor didn't come out with a regulation of disclosure of all fees by the end of 1998," much as the mutual-fund industry has had since the 1940s, says Stephen Butler, president of Pension Dynamics in Lafayette, Calif.

Much of the opposition to disclosure, he maintains, comes from the insurance industry. Not surprisingly, total fees in plans administered by insurance companies tend to be far higher than those in plans administered by mutual-fund companies, Mr. Butler notes.

Say a company with 100 employees wants to set up a 401(k) plan. If it hires insurer CIGNA to run the plan, and the 100 employees each save $10,000 a year in it, after five years investment costs and administrative fees would total more than $3,000 per participant, Butler says.

For those same participants, the bottom end of the fee spectrum means about $600 in fees over five years if the plan is run by the Vanguard Group, a low-cost mutual-fund company in Malvern, Pa.

The fee scrutiny comes as the total mix of fees, including administrative charges and investment costs, is generally rising, says Joseph Valletta, a principal at HR Investment Consultants in Baltimore.

Cost hikes relate partly to demand for more services and choices by plan participants. Still, 401(k) providers with similar services charge widely varying fees, he says.

And small companies, lacking leverage to bargain with plan providers, end up paying higher costs than large ones pay.

Thousands of businesses in the United States offer contributory retirement plans, known as 401(k)s. And nonprofit employers offer 403(b) plans.

But in most cases, the employers themselves do not administer the plans. While legally responsible, they usually bring in outside vendors - insurance, bank, or mutual-fund companies - to administer the plans.

Record-keeping charges have gone from $49 per person in 1995 to more than $54 per person in 1997, according to a study of 100-person 401(k) plans by HR Investment Consultants.

Add in the cost of the investments (including mutual-fund management fees), and the total bottom line this year is much higher - ranging from $176 per person at some plans to as high as $787. Average fees in the 122-firm study are about $400 a year (see chart).

If you are in a 401(k) plan, it's vital to understand fees and their impact.

F. William McNabb, managing director overseeing Vanguard's 401(k) plans, offers an example.

Consider two fund investments of $10,000, both earning 12 percent annually for 50 years.

Account A charges an expense ratio of 0.8 percent a year. Account B: an expense ratio of 1.5 percent.

Over 50 years, Account A will earn $2,019,480, Mr. McNabb says. Account B: $1,472,700.

In other words, one account earns half a million dollars less than the other, a significant impact from what might initially seem a minor difference.