By Darrell Preston and Gary Matsumoto
Sunday, February 3, 2008; F03
For the 12 years Jerry Schneider has invested in the 401(k) retirement plan offered by his employer, Portland, Ore.-based engineering firm Elcon Associates, he has battled to learn how much he pays in fees and then has tried to get Elcon to reduce them.
Every time Schneider, 62, thought he had succeeded, he found more charges, he said.
The latest blow came in September. Schneider found that undisclosed expenses for securities trades, administration and advisory services were driving the cost of Elcon's plan to at least 3.5 percent of the amount he invested. He said he was furious because Elcon's vice president, Kinh Pham, had told workers in a February 2007 memo that Elcon had cut fees to 0.10 percent. Pham declined to comment for this article.
"We're getting bamboozled," said Schneider, who hoped to save $1.5 million for retirement when he joined Elcon's Seattle office in 1995. He now has about $450,000. "To let people willy-nilly take out fees without knowing it is not what I want to do."
Since its introduction 30 years ago, the 401(k) has become the fastest-growing form of retirement savings plan for U.S. workers, who can no longer count on employer-provided pensions. Congress added Section 401(k) to the tax code to establish the plans, which let employees invest in tax-sheltered savings accounts and then withdraw cash when they quit working.
From 1985 to 2006, the number of active 401(k) participants climbed five-fold, to 50 million. Assets in the plans soared more than 19-fold, to $2.97 trillion as of June 30, according to the Investment Company Institute, a District-based association for companies that offer mutual funds and other investment vehicles.
What most of these workers don't know is that fees, rebates and revenue-sharing agreements among employers, 401(k) administrators and mutual funds, many of them buried in the fine print or not disclosed at all, are slowing the growth of their nest eggs. The Labor Department lists 17 401(k) fees, including ones for record keeping, legal services and toll-free telephone numbers.
Hidden fees amounting to 1 percent can reduce a worker's 401(k) returns by about 15 percent over 30 years, said Stephen J. Butler, president and founder of Pension Dynamics in Pleasant Hill, Calif., a 30-year-old retirement plan consulting firm.
"These are expenses that investors never receive a bill for and they never write a check for and they have no say in when the plan is set up," he said. "It's a loss to their accounts that happens with 100 percent certainty."
The most an investor should pay for a mutual fund-based 401(k) is 1 percent, said Gregory Kasten, a financial planner at Unified Trust in Lexington, Ky., who advises wealthy individuals on investments. "If the fees in a plan are costing more than 1 full percentage point, the extra money sloshing around is profit," he said.
Schneider said he was shocked to learn that in addition to the 0.10 percent management fee on his Elcon account, he pays at least seven other charges to companies that provide 401(k) services. A 0.5 percent fee goes to the providers of the mutual funds in his plan. Then John Hancock Financial Services, the Boston-based unit of Manulife Financial hired to administer the plan, takes 1.32 percent for those duties and a 0.75 percent advisory fee. Melissa Berczuk, spokeswoman for John Hancock, declined to comment.
On top of that, 401(k)s pay commissions to traders who buy and sell securities in a plan's mutual funds. Schneider said he is charged 0.76 percent for these fees, which, like the others, come out of his returns. With trading commissions, a 401(k) may then pay a portion back to the mutual fund in what are called "soft-dollar transactions." Such payments have gone for office rent, theater tickets, trips and fancy meals for money managers, Securities and Exchange Commission Chairman Christopher Cox said in a speech last May to the National Italian American Foundation in New York. "This witch's brew of hidden fees, conflicts of interest and complexity in applications is at odds with investors' best interests," Cox said.
In another maneuver known as revenue sharing, mutual funds may rebate fees to 401(k) administrators. In this way, a company running the retirement plan uses employees' own money to offset costs -- often without the workers' knowledge.
"The way some of these fees are hidden is that they're blended into the fabric of the fund so that they're almost impossible to discover," said Matthew D. Hutcheson, a pension consultant in Portland. Hutcheson crunched numbers and reviewed the fine print in hundreds of pages of Elcon's 401(k) documents to uncover fees not disclosed to employees.
At least five reform proposals are circulating on Capitol Hill. None of these changes may do much good for Schneider. He said he would like to retire in September or October. He is not sure that will happen.
"It depends on how everything works out," he said. "Trying to figure out the fees is not a full-time job, but it could be."
Post a Comment