Highlighting Excessive Fees on Retirement Bottom Line - Book & Mystery

Agreed. The S&P fund in my 401(k) has a .05% expense ratio. Can't beat that. I don't understand why the concerned employee just doesn't ask what the expenses are, it's illegal not to disclose the numbers. Last I read, for plans of 5,000 participants, the average cost was 1.12% (and it went up from there, to 1.4% for 50 participants). So looking into the expenses is always good advice. JOE

Yes, people should always know what expenses they are paying in all of their investment & savings plans. It always amazes me, however, how many people seem to think that all these plan companies should be taking care of their money for free or next to nothing--that any expense that a company (nsurance, brokerage firm, 401K firm, etc.) charges is unfair. For example, I have a friend who is endlessly complaining about the commission her broker charges to buy & sell her securities. I finally asked her if the broker makes recommendations and are they generally good. She says "yes." So I told her that she can move her money into some online trading company & pay really low commissions. However she needs to be prepared to do her own research. My broker's company charges commissions, but the broker is worth every penny because he constantly keeps track of my portfolio and regularly calls me with recommendations based on solid research/ knowledge. Yes, I pay more, but I get more profits too. Same thing with paying taxes--do you NOT take a huge short-term profit because you're going to have to pay taxes on it? I also have a couple funds in my portfolio that have quite high expense ratios, but they are doing very well so, again, I think it is worth it. I know it's a cliche--but there's NO SUCH THING AS A FREE LUNCH! SandyBeth

In the case of the 401(k), many larger companies (employers) pick up any overhead, and the employee is paying only the fund's expense, the .05% for the S&P index in my case. On a few hundred million dollars in assets, that still adds up to a fair profit for the firm. I don't claim that any expense is evil, but that the benefits of a

401(k) quickly evaporate once those expenses exceed the non-401(k) by a certain amount, and in that case, it may be better to fund the 401(k) up to the matching funds level and no more. I wrote about this some months back on my site at suggest you follow the link to the Jack Bogle interview he did with PBS regarding this topic.JOE

It is a matter of degree -- whether or not the charge is fair for the services rendered. We all know that many business concerns profit excessively at the expense of consumers when they can get away with it. Investors should not assume that fees and expenses in the financial services industry are always fair, any more than they assume that the charges of car salesmen, roof repairmen, lawyers, dentists, or whatever, are always fair. True, you should not expect a car salesman to work for free. But that does not mean you should pay the sticker price.

The "free lunch principal" applies here too though. Whether those fees are absorbed by the company or expensed to the participant, the participant will eventually be on the short end of the stick. More than once I've sat in a business-owner's office while he counter- balanced the match % (or profit sharing projections) against the plan expenses. Often they've already decided how much they are willing to spend. Whether its spent on expenses or whether its given to the employees (by way of match) doesn't always matter to the employer. In cases where plans are top heavy, the business owner is even motivated to pass on the expenses.

By the way, that doesn't mean I'm anti 401k by any means. I think we pretty much share the same point of view on their benefits and potential limits. I just want everyone to understand that just because they don't see the expenses doesn't mean they don't pay them indirectly.

Unfortunately, if any of you have a very expensive plan, there is little the employee can do about it. It's expensive and painful to change a 401k plan for even a medium-sized business. As Joe said, at that point I would evaluate only contributing up to the match.

With the internet age, there are a lot of good, cheap plans available now. For example, my company is in the process of switching our 401k to Employee Fiduciary. Their fee is a flat yearly $50 per participant with a $1500 minimum. Open architecture where you can choose any fund where you meet the fund/plan requirements. 0.06% asset fee passed on by the custodian when plan assets exceed 1M but offset since 1M can get you into institutional/admiral shares. ETFs also available but only cost effective at the 25M asset amounts. All fund loads and 12b-1 fees are refunded to participants which let's you pick unique funds at costs lower than retail. Our new plan will be almost all Vanguard index funds -- the average E/R is will be dropping from 1.25% to

0.25%. And the fees will be lower for the employer also. The effort in switching? $1000 conversion fee, $500 exit fee from old plan -- the extra $1500 cost is paid off by the lower employer fees in a year.

Doing this switch is not really painful at all. What stops most companies is just inertia, ennui and lack of understanding why another plan might be better. The people who make decisions on company retirement plans (whether business owners or HR) come from the same general public who are clueless about finances and investing. They have no idea how bad their plans nor are they willing to do any research on their own for alternatives.

wrote On 401(k) managers--

Funny but this has been my impression from general reading, too. Perhaps it bears more frequent mentioning here so company employees know to question, tactfully, how well the company 401(k) plan benefits them.

I would say that the larger companies likely have the resources to do a better job managing 401(k)'s, and so getting the better mutual fund rates, etc.