The 401(k) Krunch: Excessive Fees Cost You a Fortune

Chicago, ILThe reason why Fortune 1000 companies became Fortune 1000 companies, has a lot to do with the creative management of money and assets. However, when it comes to your 401(k) plan, a lack of diligence could be costing you money you can ill afford to lose.

In view of the current 401(k) environment, it would be wise to read everything you can get your hands on about your 401(k), including a detailed review of statements. If there's anything you don't understand, seek the assistance of a financial services professional to help you navigate through the plan. Know what you're paying - and if you're paying too much, fight back. And you might want to get legal advice.

"The costs associated with management, is the issue. And if the costs aren't right, the price you're paying is way too high, in more ways than one.

The dramatic rise in popularity of the 401(k) as a retirement savings vehicle has raised the hackles of various watchdogs as they track the pendulum swing away from traditional, defined-benefit pension plans which carry less risk, but also the potential for lower returns than the 401(k) scheme, which is tied to the stock market. Little wonder that the popularity of the 401(k) soared in the 1990's when the market was a raging bull and double-digit returns were not uncommon. And for an employer accustomed to contributing, on average, eight per cent into a defined-benefit plan, the chance to drop those contributions to 3 per cent - or none at all - by switching to a 401(k) is sweet music to the chief financial officer's ears.

What's more, with the onus on the worker to take a more defined role with his or her retirement portfolio, the employer has less responsibility. Smaller employers who might have found managing a defined-benefit plan a hard go, could now offer their employees a chance to create a retirement nest egg by sponsoring a 401(k).

But there have been problems. - not the least of which is the level of fees charged to maintain, and direct your 401(k). In the last several months, there have been numerous instances where plan fees and charges have proven, or are alleged to be, excessive.

Further, the U.S. Department of Labour has uncovered a 'small fraction' of employers, according to its web site, that have been found to misuse funds. An anti-fraud campaign determined that in some cases, an employer held onto employee contributions for too long before making the investment on the employee's behalf - or worse - used the money for corporate purposes.

However, the latter seems to be the exception. The larger issue appears to be the collection of fees and charges associated with administering, and directing your 401(k).

At a hearing in March before the U.S. House Education and Labour Committee, retirement consultants testified that workers are being overcharged billions of dollars in dubious and sometimes hidden fees each year. Given that the average worker has neither the time, nor the expertise to navigate through complex and often confusing forms, fees fall below most workers' radar, and amount to a licence to print money on the part of those responsible for pushing the buttons, and pulling the triggers on those fees and charges.

Nor, it is alleged, are such charges adequately communicated to the plan holder.

This past fall, lawsuits were filed in federal court in Connecticut, Illinois, Missouri and California. Some of the companies facing class-action lawsuits are certainly no bit-players in the corporate world: Boeing, Lockheed Martin, and International Paper. Other members of the Fortune 1000 Club have been accused of failing in their fiduciary duties by not properly disclosing fees, or allowing their fund managers to levy questionable and unnecessary fees that in the end, have the potential to cost the 401(k) participant a fair bit of coin.

One independent pension fiduciary has suggested that participants of 401(k) plans routinely face at least seven hidden charges relating to brokerage fees and trading costs when a plan is adjusted. It has also been suggested that 401(k) participants have been charged for services they did not even receive.

The U.S. Department of Labour, which regulates 401(k) plans, provides this illustration:
$25,000 in savings earning an average of 7 per cent annually has the potential to grow to $227,000 in 35 years. That's based on a fee of 0.5 per cent, which is at the low end of the scale. However, with a 1.5 per cent fee - at the higher fee scale that many people are charged - the investment drops in final value to $163,000.

An estimated 47 million workers participated in a 401(k) plan in 2005, up from 7.5 million twenty years ago. The financial stakes are huge; it is estimated that U.S. $2.7 trillion is currently invested in 401(k) plans and managed by mutual fund companies on behalf of sponsoring employers.