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Do 401(k) fees really matter?

By Barbara Whelehan · Bankrate.com
Tuesday, May 25, 2010
Posted: 3 pm ET

The issue of 401(k) fees is in the spotlight again. A 401(k) fee disclosure provision has been added to the new stimulus bill, the $190 billion American Jobs and Closing Tax Loopholes Act that the House is supposed to vote on this week.

Among other things, the new jobs bill extends unemployment insurance to nearly two years and relaxes pension funding rules. The latter provision prevents companies that still offer old-fashioned pension plans from having "to choose between making forced cash contributions, freezing plans or cutting jobs," according to Rep. George Miller, D-Calif., chairman of the Committee on Education and Labor.

The new 401(k) fee disclosure provision is based on a bill Miller authored last year. Actually, this issue has been kicking around for several years. I wrote about it in 2005 and again in 2008. One problem: Many in the retirement industry think individual investors would be too confounded by fees.

Need-to-know basis

R. Bradford Huss, ERISA attorney and director of San Francisco-based law firm Trucker Huss, explained this phenomenon in a recent interview: "There's an issue regarding how to disclose fees to participants in an understandable manner. These communications should provide the information that participants need to make informed choices, yet not overwhelm them. Of course that's a fine line and there's a difference of opinion on how much detail participants actually need. Is it simply the total cost of the investment? Is that the only material factor to a participant's decision? Or do they need to know much more granular information about fees, such as who's receiving what, and how the various fees get divided up among the different investments and other service providers?"

There are a lot of fees involved in 401(k) plans. But participants consider fees a very important piece of information. A national study of investor statement preferences, released by Dalbar, found that investors say the rate of return is the most important part of their statement, followed by the total fees charged in their account, according to a report on Plansponsor.com.

If this jobs bill does pass and if the 401(k) fee provision remains intact, "A worker's quarterly statement would be required to list total contributions, earnings, closing account balance, net return and all fees subtracted from the account," according to Miller's website.

"We need to ensure that 401(k)s are run in the best interests of accountholders, not for the sake of boosting Wall Street's bottom line," Miller says on his website.

Fees make a huge difference in an investor's overall gains. Just a 1 percentage point increase in fees can reduce a worker's nest egg by 20 percent over the course of a career, Miller points out.

Indeed, that's true. Using Bankrate's compound interest calculator, you can see that if diligent saver Jackie contributes $250 per month for 35 years and earns an 8 percent annualized return, her account grows to $539,089. But if she has to pay an additional 1 percentage point toward fees, she ends up with just $430,272. There's your 20 percent difference, which amounts to nearly $109,000.

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