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Losing track of 401(k) plan fees -- Page 2

In addition to the annual expense ratio, plan participants may be buying fund-share classes with front-end or back-end loads. Such loads reduce the actual amount invested when fund shares are purchased or, in the case of back-end loads, are paid when shares are sold.

On top of that, 12b-1 fees are commonly assessed, and they serve one of three functions: They compensate a broker or registered rep for selling funds within a plan, pay for a fund's advertising or marketing costs or help defray costs related to account services. The 12b-1 fee is generally paid out of fund assets and typically ranges from 0.25 percent to 1 percent.

Plan administration requires payment one way or another and involves record keeping, accounting, trustee/custodian, legal and auditing services. These may be offered separately from several providers, or may be "bundled" together and made available through one source, such as the investment adviser.

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And communication services -- such as customer service assistance, educational seminars, investment advice, retirement-planning software, online access to account information and online transactions -- all cost money. The idea is that employees need help in making investment decisions, but the effort to educate them isn't free. This can be paid for as part of the 12b-1 fee, as a portion of the expense ratio, or as a separate add-on fee, explains Meigs of 401khelpcenter.

The hidden layers of fees
It's hard enough to get a breakdown of the fees for the services mentioned above. Yet there are other more subtle forms of compensation going on in the retirement-plan industry.

Mutual fund firms have come under attack lately for revenue-sharing agreements struck with brokerage firms. In these arrangements, fund firms pay higher fees, more than the usual sales commission, to brokerage firms, who in turn place the funds on a preferred list. You thought the funds in 401(k) plan lineups were selected on the basis of merit? Sometimes, but not always.

Also, fund firms buy and sell securities all day long as part of their daily operations. Some direct their trade-execution business to brokerage houses in exchange for favored status among the sales force. In return, they may also get investment research from the brokerage firm. These "soft-dollar" arrangements have been going on for years, but only recently have come under the glare of regulatory scrutiny. And these fees are particularly difficult to uncover by plan sponsors.

Prod your fiduciary
In its brochure, "Understanding retirement plan fees and expenses," the Labor Department states that plan sponsors "have a responsibility to ensure that the services provided to their plan are necessary and that the cost of those services is reasonable." In fact, federal law requires that fiduciaries follow this mandate.

That brochure provides general information to plan sponsors about stuff they should already know. But another brochure would help plan sponsors enormously in their efforts to uncover fees and expenses that are not readily transparent. Called the "Intermediary and service provider annual disclosure statement," it demands a complete inventory of all fees and expenses associated with a plan by the plan provider. The Revere Coalition, a consortium of fee-based independent retirement-plan consultants, designed the disclosure statement.

Does the plan sponsor at your place of employment know about this relatively new disclosure form? If you're concerned about 401(k) expenses, try sending it to the attention of the human resources department, and ask your contact there to forward it to the person who oversees the 401(k) plan at your workplace. Include a nice note that explains your concerns about plan fees and how difficult it is to get a handle on them. If you want to give your memo a little edge, say that it is your understanding that exorbitant plan fees can pose a huge liability risk to employers who don't pay close attention to them. Then, politely ask to see a copy of the disclosure form after the plan provider has had a chance to fill it out.

While your plan sponsor likely won't share the results of the completed questionnaire, there's a good chance that it will get sent to and filled out by the 401(k) plan provider. And if you're stuck in a high-expense plan that is not serving the best interests of plan participants, then it would behoove the plan sponsor to oversee a change, such as a renegotiation of fees or perhaps the unveiling of a whole new plan.

Such changes may make a huge difference in how much you accumulate for your retirement -- the difference between livin' lean and livin' large.

-- Posted: May 11, 2005




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