Robbing You Slowly: How Your 401(k) Gets Drained Away

Last Updated Jul 24, 2009 10:51 AM EDT

Roughly $392 disappeared from my 401(k) account, and it wasn't because of investment returns. Your 401(k) is being whittled away too, but it's hard to spot.

In fact, everyone with a 401(k) is getting hit with nearly invisible fees that have been the topic of legislation that continues to languish in Congress. Without individual uproar, these fees will remain invisible and you will be robbed blind by the people who administer your retirement account.

What are these fees for? The ones that are invisible are to "administer" your plan. Most 401(k) providers pay a third-party to tell you your balance, check to make sure the plan complies with IRS rules and provide participants with bells and whistles such as 401(k) loans. In years gone by, the companies that offered 401(k) plans paid these fees as an employee benefit. Today, your employer is far more likely to pass the fees on to you. Because the fee is invisible to the person paying it, and the people negotiating the fee don't have a lot of skin in the game, the fees are sometimes outrageously high. You, the hapless consumer, get robbed silently.

It's worth mentioning that you also pay "management" fees to the mutual funds that are offered within your plan. However, those fees are likely to be disclosed clearly in a prospectus offered by the fund company, should you choose to read it. These fees reduce your investment returns (or increase your losses) and become part of the annual profit or loss on your account.

How much do fees matter? If you have $10,000 saved now and add $500 a month to it, a 1 percentage point fee will cost you $300,000 over 30 years, assuming historic average annual investment returns. That fee, which is about average, causes you to give up about $1,800 a month in retirement income. Some 401(k)s charge about half that much in fees; others charge twice as much. You, unfortunately, probably don't know how much you're paying.

The Fair Disclosure for Retirement Security Act of 2009, sponsored by Rep. George Miller, D-California, aims to change that by demanding that all fees--management, administrative and transactional--be disclosed in quarterly account statements. it would also require that any company that doesn't want to be held liable for worker retirement security offer at least one low-cost index fund.

The purveyors of retirement accounts ranging from sponsoring companies to insurance companies and mutual fund firms that administer the plans have been fighting these disclosures, saying that consumers will not understand them and they'll discourage people from contributing to retirement plans.

That is, however, a little like saying that if you disclose crime statistics, it will discourage people from wandering aimlessly in bad areas. That's not necessarily a bad thing. In reality, suppliers are worried about their profits and companies are worried that they'll get sued for failing to negotiate lower fees.

But those of us who hope to retire some day really need to be concerned about the fees. They are silent killers of your retirement fund. And as things stand, they're largely hidden.

The first inkling I got of the nearly $400 draining out of my account (which, incidentally, doesn't include the investment management fees) came from a mismatch. Earlier this year, I had fed my 401(k) information into a third-party web site that would compile all of my investment information in one spot. One day last week I noticed that the balance at that aggregator site was higher than the actual balance reported by the 401(k). After a more careful look, I realized that I suddenly had fewer shares in my 401(k) than I'd had a few weeks before.

How does this happen? If you are not actively contributing to a 401(k), and I wasn't because this is a former employer's plan, the administrative fees are collected by selling a portion of your shares. In one week, I lost roughly three shares.

But, I knew that wasn't the extent of it, so I continued to search the 401(k) site to find an account statement. If you're lucky, your employer will disclose the administrative fees on these statements as a line item, as did my former employer. Otherwise, I would have had to estimate the fees by figuring out how many shares I'd lost to fees and how many I'd gained from dividends since the beginning of the year. That's not easy. And if you're actively contributing to the plan, it's practically impossible because while they're deducting shares to account for the fees, you're buying shares with your monthly contributions. That math can be a nightmare.

I don't begrudge anyone for making a living and recognize that fees are a natural consequence of investing. After all, investment managers have to eat too. But when the fees are hidden, it's pretty easy to get robbed.

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