John Fuchs was checking his 401(k) account online one afternoon when he saw something that seemed amiss. Listed along with his regular contributions was a $48 charge, in red.
That’s odd, he thought.
Why would anyone be taking money out of his account? After a flurry of phone calls and e-mails, Fuchs learned that the $48 deduction was no mistake. The money was paid to an outside firm that enrolls employees in his company’s 401(k) plan, mails quarterly account statements and handles other administrative tasks.
Fuchs knew the mutual funds he’d chosen charged fees for investing his money. He didn’t know that overhead costs were also being taken out of his account. They now cost him about $500 a year.
Because the administrative fee is a percentage of his balance, he will pay more and more as his savings grow. Fuchs figures that by the time he retires, it will have cost him more than $316,000 in direct charges and lost investment returns.
“I think a lot of people out there pay this fee but don’t know it,” said Fuchs, 38, an information technology manager for an engineering firm in Exton, Pa. “To the average employee, it’s totally invisible.”
As many employers scrap their traditional pensions and doubts grow about the future of Social Security, Americans’ hopes for a secure retirement depend more than ever on their 401(k) accounts. About 44 million workers have more than $2 trillion invested in these accounts.
Yet unknown to many of them, obscure fees and deductions are quietly eroding the value of their nest eggs. In many cases, employers could bargain for lower charges, but don’t. Mutual fund management fees are the biggest expense. But they are prominently disclosed, have attracted wide publicity and have been declining as fund providers compete for customers.
Administrative fees are another matter. They usually don’t show up on quarterly or annual statements. Brochures touting the benefits of 401(k) investing rarely mention them. Employees have to work hard to find out how much they’re paying – for instance, by scouring their plan’s website for a record of all activity in their accounts.
Plan consultants and providers collect their cut in varied ways.
Some take a percentage of each employee’s account balance. That’s the charge Fuchs stumbled upon. Others collect a commission from insurance companies that run 401(k) plans.
Because of outdated federal disclosure rules, publicly available records on fees often reveal only a fraction of the money leaking out of retirement accounts.
“It’s very difficult for the average participant to determine what the total expenses are, how those expenses measure up, and who exactly is getting paid and how much,” said Bud Green, a principal at Fortress Wealth Management Inc., a 401(k) consulting firm in Santa Monica, Calif.
Workers who save conscientiously take a disproportionate hit because fees are typically a percentage of their account balances.
Someone with $100,000 pays 10 times as much as a co-worker with $10,000, even though it costs about the same to administer the two accounts.
The peculiar structure of 401(k)s leaves employees with little or no voice. Employers sponsor the plans and hire the providers and administrators. But workers pay most of the fees.
“People can be paying thousands of dollars in fees if they’ve been in their 401(k) plans for years,” said John Turner, a senior policy advisor at the AARP Public Policy Institute. “They can be paying thousands of dollars more than they need to be paying.”
Fuchs works for Groundwater & Environmental Services, which cleans up contaminated groundwater at gas stations and other sites. The company, which has 600 employees, selected Benefits Sources & Solutions, a consulting firm in Bound Brook, N.J., to run its 401(k).
Benefits Sources does not bill Groundwater for these services. Instead, it collects a percentage of employees’ total savings every three months.
In 2004, this fee averaged 0.51 percent – $51 on a $10,000 account. Overall, the company took in $48,185 from Groundwater employees that year, the most recent for which figures are available.
The payments do not appear as a line item on employees’ quarterly statements. Rather, Benefits Sources takes a cut of the mutual-fund shares in each account. That makes the fee all but invisible.
Most employees focus on their dollar balance, not the number of shares. The share balance changes constantly as fresh contributions are added and dividends are reinvested. To detect the deductions, an employee would have to track his or her shares rigorously enough to notice that the number isn’t climbing as quickly as it would otherwise.
“I think it’s pretty sneaky,” Fuchs said. “The fees should be reported in a forthright manner, but they’re not. All these companies do it. A lot of human resources people don’t even know what’s taken out of their own funds.”
Fuchs said his employer wouldn’t reveal details of Benefits Sources’ fee. From Internet research, he learned that he could ask Groundwater for a copy of its Form 5500, which employers must file annually with the Labor Department, listing certain expenses paid from retirement savings plans. With the document in hand, Fuchs was able to calculate the size of the fee and how much he was being charged: about $500 a year.
Over time, the effect of such charges can be huge. In addition to the direct cost, workers lose out on the interest, dividends and other returns that would pile up if the money had been left in their accounts to grow.
Fuchs used calculators on the Securities and Exchange Commission website (www.sec.gov under “investor information”) to arrive at his $316,000 estimate of how much administrative expenses will cost him by the time he retires in 2030.
John Zelechoski, Groundwater’s manager of human resources, said that Benefits Sources had done a good job selecting mutual funds and that he had gotten few employee complaints about the plan.
