Don't let fees shrink your 401(k)

By Walter Updegrave, senior editor


(MONEY Magazine) -- How can the average employee get a better handle on the expenses in company 401(k) plans to be able to make more informed choices? -- Chad Tuttle, Hudsonville, Mich.

Holding the line on expenses is the single most important way to maximize your 401(k), after contributing as much as you can.

walter_updegrave__2009b.03.jpg
Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).

The reason: Bloated fees can seriously diminish the size of your nest egg. This makes it all the more disappointing -- and frustrating -- that participants' access to information about the fees and expenses they pay has been spotty at best.

Starting next year, though, that should change. A new rule issued last October by the Department of Labor will require 401(k) plans to explain their fees and disclose them.

Overall, this new requirement is an improvement but far from perfect. You'll finally know how much you're paying in overall expenses for your 401(k). But you may not know how much of that total goes to investment management fees vs. administrative costs or how those charges compare with other plans.

Here's how it will work. Once a year your plan will give you a breakdown of the annual operating expenses for each of your investment options, as a percentage of assets and a dollar amount per thousand dollars invested, plus reveal sales fees and other charges.

That way you can quickly identify the lowest cost funds in the plan, though you won't know whether the fees are truly low compared with other plans or outside investments.

You'll also receive a quarterly statement disclosing your 401(k)'s expenses for accounting, record keeping, and other administrative services (these costs average 0.11% to 0.18% of assets in plans with $500 million or more in assets and double that or more in small plans).

But the statement will show only fees that are deducted directly from your account. While some plans do dock your balance directly for all administrative costs, it's more common for them to also tap a portion of your investment expenses to cover some or all of these fees.

And those indirect charges won't be broken out. So if your account is charged, say, $100 a year for legal fees, and a fifth of the 0.75% you pay in annual investment expenses goes to cover other administrative costs, only the $100 will show up on your statement.

Despite this shortcoming, wider disclosure should serve to focus more attention on fees. And that could create pressure (say, from employees chagrined at how much they're paying) to drive costs down.

What can you do until the new rules take effect? Check with your HR department to see what expense data is available about your plan. If your account is accessible online, at the very least you may be able to get info about investment fees in the section that describes the plan's fund options.

Then go to brightscope.com. If your 401(k) is among the 55,000 that BrightScope rates, you can get a free estimate of how much you're paying in investment and administrative fees -- and how that total compares with a low-cost 401(k).

One caveat: BrightScope's info can be one to two years old -- and in some cases incomplete. This legwork can help you zero in on your plan's lowest-cost funds.

While you can't control administrative fees, if BrightScope shows they're high, share that info with HR -- and politely suggest your employer find a way to lower them. And take heart in knowing better disclosure will arrive soon. To top of page

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