Retire Smart: To Understand Your 401K Plan, Just Focus on the Fees
Saturday, September 11, 2010

By Mark Miller
Tribune Media Services

If you've spent hours analyzing the investment strategies of the mutual funds in your retirement portfolio, here's some bad news: You could have saved a lot of time just focusing on the fees.

A growing body of research-and regulatory trends-points to the fees charged by mutual funds as the most important predictor of success for investors. And expense is an especially big problem confronting investors in workplace retirement accounts. Expenses in 401(k) plans often are higher than investors realize, yet difficult to pin down.

But expense is the most important determinant of results. A Morningstar study released earlier this month found that fees trumped even the investment firm's vaunted star rating system as a predictor of success; low-cost funds reviewed by Morningstar had much better returns than high cost funds across every asset class from 2005 through March 2010.

Morningstar found that domestic equity funds with the lowest cost in 2005 returned an annualized 3.35 percent over the time period studied, compared with 2.02 percent for the most expensive group. Likewise, A 2006 report to Congress by the U.S. Government Accountability Office (GAO) found that a one-percentage point increase in fees reduced return over a 20-year period on a typical portfolio by 17 percent.

401(k) plan expenses vary widely between large and small plans. Data from shows that average 401k total plan cost can vary from an ultra-low 0.20 percent of assets for the largest plans, up to a whopping 5 percent for small plans.

Determining actual costs can be very difficult for plan sponsors and investors alike. A wide array of costs are charged to plans for marketing, administrative and asset management; some are explicitly stated in the statements sent to participants, but about half are not.

Author and investment advisor David Loeper has been sounding the alarm bells on this issue for years. In his book "Stop the Retirement Rip-off: How to Avoid Hidden Fees and Keep More of Your Money" (John Wiley & Sons, 2009), he narrates his own quest to understand the fees in his own money management firm's small 401(k) plan.

"I was looking at my own statement, and saw a column of expenses that had nothing but zeros in it. Since I was the plan trustee, I know that was false. So I decided to put myself in the shoes of participants and try to figure out what we are paying. I had to dig up a half dozen documents, and it took me a half hour to see my annual fees really were $1,500, when the statement said 'zero.' It's a complex maze of documents that are not given to you," he says. "You need to obtain them and have good math skills."

Efforts to force more disclosure of fees to investors via regulation and legislation have been moving slowly. New rules unveiled in July by the U.S. Department of Labor (DOL) will force 401(k) providers to disclose more data-more clearly-to employers so that they can negotiate fees more easily. New rules requiring more clear disclosure of fees to participants by employers also are in the works, but won't be implemented until next year.

Loeper thinks the new DOL regulations on disclosure of fees to plans are a good first step but won't have a major impact. "There are 600,000 plans in the U.S., and most of them are sponsored by small companies," he says. "If the employer thinks everyone is happy with the plan and doesn't have anything to compare against the new fee information, nothing will happen (to get those fees down.)"

Recent court decisions are adding some pressure on plan sponsors to pay more attention to expense and performance. In 2008, the U.S. Supreme Court ruled in LaRue vs. DeWolff, Boberg and Associates that individuals can sue retirement plans for breaches that affect their personal plan balances. And earlier this summer, a federal court judge ruled that fees in a plan sponsored by West Coast utility Edison International were excessive, and that employees had a right to recover some of the charges.

Litigation aside, Loeper recommends that plan participants start by reading the annual summary plan report provided by sponsors, which does provide a picture of administrative expenses above and beyond expense ratios. You can also look up your plan for free on, which has assembled the industry's most comprehensive database of 401(k) performance, and includes detailed information on fees.

If your plan doesn't stack up, Loeper urges workers to question employers about their plans. "With 9 percent unemployment, I wouldn't put too much pressure on your employer," he says. "But you can start a conversation in a simple, positive, proactive manner. Tell your benefits person that you were reviewing your plan and wonder why the plan isn't using a lower-cost index fund.

"If you can get 10 others at work to ask the same kinds of questions, the employer starts to perceive that the positive benefit of having a plan is backfiring, and that they need to start investigating their options to cut costs."

Millions of Americans are reinventing retirement, and Mark Miller is helping write the playbook for new career and personal pursuits of a generation. Mark blogs at; contact him with questions and comments at mark@retirementrevised.

This column was originally printed in the September 12, 2010 - September 11, 2010 edition.


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