Although workers have not been receiving itemized bills for fees they pay in their 401(k) retirement plans, those hidden costs may be chipping away at the growth of their nest eggs.
Thanks to new rules set by the U.S. Department of Labor, employees with 401(k) plans will be able to get detailed information about how much they pay in fees as of next July 16.
"Buried fees are like high blood pressure," said Jeff Acheson, a partner at Schneider Downs Wealth Management in Columbus. "You don't see it, but it will kill you.
"This new legislation will force full disclosure of what fees are embedded in a retirement plan. Once you know what they are, you can compare if they are reasonable or not and if you are getting value."
The laundry list of direct and indirect fees that are often buried in fine print or not disclosed at all may come as a shock to retirement savers.
Labor Department officials list 17 distinct 401(k) fees being charged to retirement accounts, including fees for record keeping, legal services, and toll-free telephone numbers.
It is estimated that hidden fees of 1 percent can reduce a 401(k) plan's retirement returns by about 15 percent over 30 years. For an account of $1 million, that is $150,000.
The new rules also require disclosure of indirect fees. An example of an indirect fee would be a company sending people to a conference put on by a 401(k) vendor.
Vendors allocate those costs to all of their clients' customers, which are reflected in the fees each client pays to the vendor.
"With the new regulations and disclosure, people will find there were a lot of pigs at the trough," Mr. Acheson said.
In addition, the rules require that financial advisers who work with companies on the 401(k) spell out any possible conflicts of interest.
One example would be when an investment adviser is able to recommend two funds that are comparable but chooses the fund that pays a higher commission even though the other may have lower fees for the client.
Art Hazen, director of retirement plans for BPU Investment Management in Pittsburgh, said the new regulations would spur radical changes within the financial services industry in terms of how major players do business.
“It will bring to light all the layers of compensation. There are a lot of different ways advisers are compensated,” he said, adding that some fees have been disclosed in mutual fund prospectuses, but that most investors don't bother to read the complicated documents.
“You'll have to do a lot less digging,” Mr. Hazen said. “Those numbers will now be on the first page in black and white as opposed to a footnote on page 26.”
Running 401(k) plans has been a money maker for big insurers and brokers because plans were layered with many hidden fees, said Jonathan Bergman, vice president of Palisades Hudson Financial Group in Scarsdale, N.Y.
He said that began to change when Caterpillar Inc. employees sued their employer in 2006, alleging it failed to fulfill its fiduciary duty because of a fee-heavy 401(k).
“That suit, which was settled for $16.5 million, was a wake-up call,” Mr. Bergman said. “Many plan fiduciaries quickly re-evaluated their plans. Soon, big employers were winning fee reductions from major 401(k) vendors.”
Small businesses, however, don't have the same clout, and most are stuck with high-cost plans.
According to a Deloitte Consulting survey, plans with fewer than 100 participants paid 2.03 percent in total fees on average.
Block News Alliances consists of The Blade and the Pittsburgh Post-Gazette. Tim Grant is a reporter for the Post-Gazette.
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