How Fees Affect Your Clients' 401(k) Plans

(Dow Jones) There are many reasons why one client might have a much brighter retirement outlook than another, or vice versa. Maybe one sets aside more each month, started saving younger, or chose investments that fared better in the downturn. But to what degree does their 401(k) plan itself make a difference?

A lot, says Mike Alfred, chief executive of San Diego-based 401(k) rating company BrightScope, which keeps a database of information on some 30,000 retirement plans.

For instance, when you compare Google Inc.'s (GOOG) retirement--plan rank of 84 to, say, the 67 earned by Procter & Gamble Co.'s (PG) profit-sharing plan, you might wonder where your own plan stands--and why the variation?

BrightScope's rankings are based on total plan cost, the size of the company match, the quality of the investment choices offered, how many employees participate and how much they save, among other things.

"The biggest problem is fees," Alfred said.

There's a "huge divergence, particularly at the small end of the market," he said. "Coupled very closely with that is the fundamental lack of transparency and disclosures. ...That's why you see two companies in the same industry, with the same demographics--and one has fees twice as high," he said.

Others agreed there are wide differences in the types of plans companies offer their employees, and how much those plans cost.

"There clearly is variation within the 401(k) marketplace," said Pam Hess, Chicago-based director of retirement research at Hewitt Associates. "You find more of it on the small end of the market, where there's less leverage for an individual employer than at the large end of the market."

"If you're a big company, the market's pretty competitive for you because you can negotiate, and there are fixed costs that can be spread over more people and you have billions of dollars of assets potentially to use to get lower fund costs," Hess said.

Of course, the outlook for any one worker to save enough of a nest egg to last in retirement will depend on many factors--not just the 401(k) plan--including how much that person saves, the age at which they retire, and the return their money earns.

But fees, for one thing, can take a big bite out of your savings. Do you know how much your plan costs? Even employers have a hard time answering that question.

"It seems impossible to get your hands on a solid number," said Kathleen Demarest, a senior manager in human resources at Synteract Inc. in Carlsbad, Calif.

Demarest investigated Synteract's plan, set up by a prior employee, after seeing its BrightScope rating. The company, which offers services related to clinical trials on a contract basis, employs about 260 workers.

"We got a rating of 51. The average rating for our peer group is 55, so we did OK," she said. "We didn't have employees coming in to complain or inquire about our plan, but (during the economic downturn) what people suddenly took a great interest in was what were their fees?" she said.

When they took that question to the company administering the plan, Demarest said, "We couldn't get a really solid answer."

Eventually, they found they were paying almost 2% for their plan. Now, with their new broker, they're paying 1.45% in total plan costs and are working to get that down to 1.25%, Demarest said.

Part of the problem is that fees can be hidden. It's easy to look up mutual-fund expense ratios but those "are not necessarily the end of the fees that participants pay, though it varies by plan," Greg McBride, senior financial analyst with Bankrate.com, said in e-mailed remarks.

"A separate administrative fee or asset charge can be assessed by the plan administrator. Sometimes this is covered by employers," he said. "Also, many plans now offer advice or management of the account for participants through an advisory service. The benefit is that it removes the burden of making investment decisions from the participant, but of course it comes with an additional fee."

Employers Are Taking Note

With workers increasingly concerned about fees--and lawmakers promising to require employers to better disclose fees--more companies are working to clarify who pays what and when.

Of employers responding to a 2009 Hewitt survey, 69% said they're very or somewhat concerned about plan expenses, up from 61% who said that in 2007.

Of companies, 84% said they've attempted to calculate the total cost of maintaining their 401(k), up from 60% in 2007 and a measly 29% in 2001, according to the survey.

The No. 1 reason companies cite for having not calculated the total cost? Complexity.

For participants invested in mutual funds, the fund expense ratio is often the sole fee, and it's detailed on the fund fact sheet, Hewitt's Hess said.

But that doesn't tell the whole story. "You have to disclose the expense ratio but you don't have to disclose revenue sharing, which is how those administrative fees are paid," Hess said.

Particularly in smaller plans, participants may find extra costs, Hess said, or a flat fee every year.

"A friend at a smaller plan had 90 basis points added to every fund fee," she said. At other plans, "you have to pay $75 every year to be in your 401(k) but you get to use all these separate accounts" that have really low fees.

"There are a million different ways to do it. There's no right or wrong way and it's very hard to compare," she said.

Fees are one way plans differ widely. Investment options are another.

Some of the investments offered "might be all passive, some might be active and passive, some might have five funds, some might have 55 funds," Hess said. "There is quite a lot of variation. Not to say they're right or wrong, just different."

What You Can Do

As an employee, what are your options for effecting changes in your plan? Not many. Your main recourse is to talk to your human-resources department or plan fiduciary.

*Ask about fees. "Ask questions," Hess said, including what your fees are and who pays what.

*Request other investment options. "Some plans will be less likely to offer something that's not being requested by employees," Hess said. "A TIPS fund, for example: If people are asking for it, their employer is more likely to take a look at that as an option," she said. "They're going to focus on the things that are valued by more people, and if they don't hear anything, it might not get as high of a priority."

*Talk to colleagues to encourage them to get active. The more requests an employer gets, the more likely the company is to respond.

*Put your money where it counts. If you're a married, working couple, each with a 401(k) plan at work, compare the plans on BrightScope.com or on your own. "It might make sense to fund the higher-rated plan at a higher level," Alfred said. That is, put more money into the better plan. If you're single and stuck with a bad plan--the wrong investment options or high fees--contribute to an IRA or Roth IRA outside of work. But invest enough in your 401(k) to collect your employer's match, if there is one. Free money is free money, after all.