What They’re Tak­ing From Your 401(k)

Ob­scure Re­tire­ment Plan Fees Add Up Shock­ingly

The Washington Post Sunday - - Business - By Kath­leen Day

Like 47 mil­lion other U. S. work­ers, soft­ware en­gi­neer Don Seng­piehl is count­ing on re­tire­ment money in­vested in a com­pany- spon­sored 401( k) sav­ings plan. But ask Seng­piehl how much that plan costs, and the 54- year- old Loudoun County res­i­dent — who stud­ied math at Mas­sachusetts In­sti­tute of Tech­nol­ogy — won’t be able to do much more than guess. Dis­clo­sures about 401( k) fees be­wil­der him, and he says he doesn’t have the time or know- how to fig­ure out what he’s be­ing charged, much less to mon­i­tor whether his em­ployer is push­ing for the low­est pos­si­ble fees.

“ I ba­si­cally set it up, put it in mo­tion and hope for the best,” he said.

Many work­ers share Seng­piehl’s ig­no­rance about re­tire­ment plan fees, even as 401( k) s have be­come the dom­i­nant re­tire­ment sav­ings ve­hi­cle of­fered by cor­po­rate Amer­ica. Fi­nan­cial in­dus­try ex­ec­u­tives, con­sumer groups and fed­eral reg­u­la­tors say that con­fus­ing and of­ten frag­men­tary dis­clo­sures by em­ploy­ers and 401( k) man­agers make it hard for most work­ers to un­der­stand what they’re be­ing charged.

Un­like tra­di­tional pen­sion plans, in which com­pa­nies make all the in­vest­ment de­ci­sions and prom­ise a set amount upon re­tire­ment, 401( k) s re­quire em­ploy­ees to take more re­spon­si­bil­ity for how the money is in- vested — and there­fore how much they will have at re­tire­ment. In­creas­ingly, work­ers and reg­u­la­tors are ask­ing how peo­ple can be ex­pected to make wise choices with­out eas­ier- to- un­der­stand, more com­plete in­for­ma­tion, es­pe­cially about fees.

In re­cent months, class- ac­tion law­suits have been filed against about a dozen big com­pa­nies — in­clud­ing Boe­ing, In­ter­na­tional Pa­per and Bethesda- based Lock­heed Martin — claim­ing that th­ese em­ploy­ers have al­lowed fi­nan­cial man­agers of their 401( k) plans to charge ex­ces­sive fees. In many cases, the law­suits say, the com­pa­nies sim­ply have not fully un­der­stood which fees were be­ing charged. Fed­eral law re­quires em­ploy­ers that spon­sor 401( k) plans to pro­tect em­ploy­ees’ in­ter­ests, and the law­suits claim that the com­pa­nies have failed to seek the best price pos­si­ble given the ser­vices pro­vided.

The com­pa­nies dis­pute the charges, and even some re­tire­ment ex­perts who fa­vor more dis­clo­sure say the suits ex­ag­ger­ate the is­sue. Thomas Greer, a spokesman for Lock­heed Martin, said, “ We be­lieve the suit to be with­out merit. We in­tend to de­fend against it vig­or­ously. We do not feel our fees are ex­ces­sive or out of whack, and we be­lieve that the in­vest­ment man­age­ment and ad­min­is­tra­tive ex­penses as­so­ci­ated with the com­pany 401( k) plans are ap­pro­pri­ate, fair, rea­son­able and in line with other ma­jor com­pa­nies’.”

The law­suits have helped fo­cus pub­lic at­ten­tion on the fee is­sue, as have re­cent con­gres­sional hear­ings. But the im­pe­tus be­hind both is the large and grow­ing num­ber of peo­ple af­fected. There are more than two work­ers in­vested in a 401( k) for ev­ery one cov­ered by a tra­di­tional pen­sion, the mir­ro­rop­po­site of 35 years ago, and the Pen­sion Pro­tec­tion Act en­acted last sum­mer is ex­pected to ac­cel­er­ate the trend. De­signed to en­cour­age Amer­i­cans to save more for re­tire­ment, the new law al­lows em­ploy­ers to au­to­mat­i­cally en­roll new hires in 401( k) s.

At a hear­ing be­fore the House Ed­u­ca­tion and La­bor Com­mit­tee last month, sev­eral re­tire­ment con­sul­tants tes­ti­fied that work­ers are be­ing over­charged bil­lions of dol­lars each year through ques­tion­able and of­ten hid­den fees. Dis­clo­sure forms are so com­pli­cated and in­com­plete, they said, that even ex­perts have trou­ble com­put­ing all the costs 401( k) in­vestors pay.

The con­sul­tants said many 401( k) plans are charg­ing from 1 to sev­eral per­cent­age points too much. While that may not seem like a lot, even a slightly higher fee can deeply erode sav­ings over time. The De­part­ment of La­bor, which reg­u­lates 401( k) plans, posts this ex­am­ple on its Web site: If you have $ 25,000 in sav­ings earn­ing an av­er­age of 7 per­cent an­nu­ally, with a 0.5 per­cent fee, your in­vest­ment will grow to $ 227,000 over 35 years. Rais­ing that fee by 1 per­cent­age point, to 1.5 per­cent, will re­duce the in­vest­ment’s fi­nal value to $ 163,000.

“ We have to ask whether all th­ese fees are nec­es­sary, and we have to ex­am­ine whether they are un­der­min­ing work­ers’ re­tire­ment se­cu­rity,” said com­mit­tee Chair­man Ge­orge Miller ( D- Calif.).

Miller said he will con­sider leg­is­la­tion that would re­quire 401( k) man­agers to pro­vide bet­ter in­for­ma­tion to em­ploy­ers spon­sor­ing th­ese plans. Em­ploy­ers, in turn, would be re­quired to tell work­ers more about the plans’ costs and risks, as well as about any po­ten­tial con­flicts of in­ter­est that money man­agers or the com­pany might have. The Se­cu­ri­ties and Ex­change Com­mis­sion and La­bor De­part­ment are also work­ing on new rules to make dis­clo­sures more clear and com­plete.

But un­til new rules are en­acted, work­ers are stuck with the sta­tus quo. That means plan par­tic­i­pants must dig through dense doc­u­ments and ask their em­ploy­ers tough ques­tions they may not be used to ask­ing.

For some work­ers and re­tirees, that can be frus­trat­ing. Ed Rosa, 71, who re­tired from Lock­heed Martin nine years ago and lives in Cal­i­for­nia, said he al­ways as­sumed the de­fense gi­ant did its best by him, but in the past few years, he’s be­gun to won­der whether he has got­ten enough re­turn on his 401( k) in­vest­ment.

“ You look at the state­ments, but, oh gosh, it’s not real clear,” said Rosa, who is not a named plain­tiff in the law­suit against Lock­heed. “ You’d have to be an ac­coun­tant to fig­ure out what you’re pay­ing, and even then, how’d you know it’s cor­rect? Are they man­ag­ing my money as if it were their own? Could I get the same ser­vice for less?”

Crunch­ing the Num­bers

Re­tire­ment ex­perts say you should not ex­pect to get a hardand- fast num­ber show­ing ex­actly how many pen­nies you pay for ev­ery dol­lar of in­vest­ment gain or loss. That said, based on a fund’s per­for­mance and the dis­closed costs, you can get a ball­park idea of how much you’re pay­ing and de­cide whether that’s ac­cept­able. Your em­ployer’s ben­e­fits of­fice can pro­vide writ­ten ma­te­rial about the com­pany’s 401( k) plan and di­rect you to in­for­ma­tion about spe­cific 401( k) in­vest­ments.

Mu­tual fund com­pa­nies man­age more than half of the $ 2.7 tril­lion now es­ti­mated to be in­vested in 401( k) plans, far more than banks and in­sur­ance com­pa­nies, which also op­er­ate th­ese plans. The In­vest­ment Com­pany In­sti­tute, the mu­tual fund in­dus­try’s main lobby group, says most costs are dis­closed through what are called ex­pense ra­tios and turnover rates, which can be found in the fee ta­ble in a fund’s prospec­tus. While turnover rates give in­vestors a sense of whether a fund’s trad­ing costs have been high or low, some trad­ing costs, namely bro­kers’ com­mis­sions, are listed in a sep­a­rate doc­u­ment called a State­ment of Ad­di­tional In­for­ma­tion, which in­vest­ment com­pa­nies pro­vide to plan par­tic­i­pants upon re­quest.

The ex­pense ra­tio — also known as op­er­at­ing fees — typ­i­cally ranges from 0.5 per­cent in a low- cost fund to more than 1.5 per­cent in a more ex­pen­sive one. That means an in­vestor is charged from half a penny to 1 1⁄ cents for

2 ev­ery dol­lar in­vested. The ex­pense ra­tio in­cludes fees for man­age­ment, mar­ket­ing and some other costs. It doesn’t in­clude most trad­ing costs, which are one of the big­gest ad­di­tional ex­penses 401( k) in­vestors pay and typ­i­cally range from half to twice the op­er­at­ing fees, de­pend­ing on how of­ten a fund trades, ac­cord­ing to re­tire­ment con­sul­tants.

ICI spokesman F. Gre­gory Ah­ern said putting the num­bers in dif­fer­ent doc­u­ments can be con­fus­ing to con­sumers. None­the­less, he said, the num­bers are pub­lic and, if taken to­gether, pro­vide a nearly com­plete pic­ture of the to­tal costs an in­vestor pays in a 401( k).

He and oth­ers say that though trad­ing costs are im­por­tant, they need to be viewed in the con­text of a fund’s per­for­mance — high trad­ing costs might be worth pay­ing in ex­change for a 15 per­cent re­turn, for ex­am­ple, but not for a bad per­for­mance.

Matthew D. Hutch­e­son, an in­de­pen­dent pen­sion con­sul­tant af- fil­i­ated with G Fidu­ciary near Port­land, Ore., chal­lenges the in­dus­try’s claim that costs are clear and com­plete. He and oth­ers say that in ad­di­tion to op­er­a­tional costs, a fund com­pany might im­pose ex­tra charges to be part of a 401( k) plan, in­clud­ing au­dit­ing, le­gal and ed­u­ca­tion fees. Th­ese costs can sig­nif­i­cantly in­crease the to­tal amount in­vestors pay, some­times by 1 or more per­cent­age points over and above a fund’s ba­sic charges, re­tire­ment con­sul­tants say.

That’s why work­ers should not be shy about ask­ing em­ploy­ers for in­for­ma­tion. “ I think plan spon­sors are get­ting used to be­ing asked more ques­tions th­ese days,” said Robert Lib­erto, a con­sul­tant with Se­gal Ad­vi­sors, which spe­cial­izes in help­ing com­pa­nies pro­vide re­tire­ment plans.

One ques­tion they should ask is whether their em­ployer knows which costs are bun­dled into a mu­tual fund’s ex­pense ra­tio, said Stephen J. But­ler, founder of Pen­sion Dy­nam­ics, a Cal­i­for­nia com­pany that ad­vises com­pa­nies on se­lect­ing and op­er­at­ing 401( k) plans. List­ing the costs sep­a­rately can make it eas­ier to com­pare them among ven­dors and weed out un­nec­es­sary ser­vices.

And as more com­pa­nies be­gin to of­fer in­vest­ment ad­vice through their 401( k) plans — as the pen­sion act passed last sum­mer now al­lows — work­ers should ask em­ploy­ers to make ad­vis­ers dis­close busi­ness re­la­tion­ships con­nected to the plan so po­ten­tial con­flicts of in­ter­est can be ad­dressed. A worker will want to know, say, if an ad­viser gets a com­mis­sion for steer­ing some­one to a cer­tain in­vest­ment.

Dal­las Sal­is­bury, head of the Em­ployee Ben­e­fit Re­search In­sti­tute, a non­profit group that fo­cuses on re­tire­ment and eco­nomic se­cu­rity is­sues, says he wor­ries pub­lic­ity sur­round­ing 401( k) fees might dis­cour­age some work­ers from par­tic­i­pat­ing in plans by mak­ing them sound as if they are rid­dled with prob­lems, when, he says, “ they are not.”

“ Would peo­ple be bet­ter off if they read all the stuff, looked at ev­ery­thing on the Web sites and fully in­formed them­selves? Yes,” he said, even though he thinks few work­ers would use ad­di­tional pric­ing in­for­ma­tion. “ But the im­por­tant thing is that peo­ple join the 401( k) in the first place as soon as pos­si­ble.”

BY MATT COLLINS FOR THE WASH­ING­TON POST

IS­TOCK PHOTO

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