You can't know how much your 401(k)-type plan is costing you until you and your employer understand a hide-and-seek game by third parties that often cloaks expenses.

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You can’t know how much your 401(k)-type plan is costing you until you and your employer understand a hide-and-seek game by third parties that often cloaks expenses.

Since most of the expenses of your 401(k), 403(b) and 457 programs come out of your pocket, you should know how much you are paying. Unfortunately, many expenses are buried, not disclosed and disguise costly conflicts.

“Employers often have no way of determining third-party 401(k) compensation,” says Matthew Hutcheson, a Portland-based certified pension consultant and independent fiduciary. “Those costs are not fully disclosed.”

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“I’m just finishing a fee audit on a $100 million-plus 401(k). When I asked the consultant/adviser (to the plan) about certain fees, he replied, ‘I don’t even know what those types of fees are.’ Even the experts don’t understand these expenses.”

Taking full ownership of your 401(k)-type plan — and improving returns — is impossible without isolating and reducing unnecessary expenses. Yet you can start by asking the right questions.

Know your plan

Before you can dig into fund expenses, you need to know how your program is structured, which can make a huge difference in expenses. Here are the three major types:

Mutual funds. Most plans have mutual funds within them, which carry individual expense ratios. This is the percentage of your money that’s tapped each year to run the funds and compensate third parties.

Group annuity contracts. Generally found in small 401(k), 403(b) and 457 plans, annuity contracts sold by insurers usually charge the highest expenses, often 2 percent a year or more. They are the bane of employees working for small companies and the toughest when it comes to true cost disclosure.

Commingled trusts/separate accounts. Often found in large plans ($10 million-plus in assets), these programs may involve individually managed accounts and offer some of the lowest expenses available. Watch out for accounts packaged by brokers, who may add another layer of expense to compensate themselves.

Ask to benchmark

It’s fair game to have your employer benchmark plan costs, that is, to compare them with industry averages to see if you are getting a good deal.

According to Keir Oxley, a fee-only retirement-plan consultant and financial planner with Double Bay Management and Planning in San Francisco, your employer should be spending about $100 per employee for record-keeping and legal requirements.

You are also billed for the costs of individual funds. The average expense ratio for large- and mid-sized company stock funds ranges from 0.67 percent to 1.99 percent, Oxley has found. For bond and balanced (stock-and-bond) funds, it ranges from 0.40 percent to 1.16 percent a year.

You can find even lower expenses for institutional class or exchange-traded funds, often 0.20 percent annually or less.

How do you know if you’re paying too much for your retirement funds? Here are some guidelines:

What are you paying?

Are you paying “wrap, administrative or contract” fees? How much you pay depends upon the size of your plan.

Wrap fees are larded on by brokers and insurance agents, often as part of group annuity contracts. They are a needless layer of expense that your employer can eliminate by dealing with a fund company directly.

Your employer should tell you exactly how much you are paying for brokerage commissions, finder’s fees, shareholder services, sub-transfer agency expenses or any practices that reward third parties. These expenses often come out of your pocket in some form.

There’s no free lunch in the 401(k) world. David Huntley, who has been examining 401(k) programs since 1993 as a principal for HR Investment Consultants of Towson, Md., advises, “If you’re working with a responsible vendor (fund provider) and ask about fees, they will tell you.”

“If they say, ‘You’re not paying anything,’ that’s a reason to dig deeper.”

There’s a reward for your trouble. Not only can you enhance plan services by adding better funds, you can directly increase your retirement kitty.

Ask questions

Let’s say you have $250,000 in your present plan, which charges you an average 1.5 percent a year for all expenses, which is fairly typical.

Reduce the plan cost by 1 percentage point (assuming an 8 percent annual return in mostly stock-based funds), and you will have about $566,000 more after 30 years.

How? Expenses and forgone earnings eat up the difference in the costlier program.

Don’t assume that your employer has obtained the best deal for you. Ask questions. Get involved in ad hoc employee committees. Ask for a forensic audit by an independent consultant or accountant if expenses appear to be higher than average and your employer makes no attempt to lower them.

“Most plan sponsors (employers) spend less time evaluating their 401(k) than they did in purchasing a new car,” says Lane Wright, a consultant with Benefit Investment Group in Dallas. “The average employer will listen to two 401(k) sales presentations before buying.”

Take ownership

Your employer can engage the services of an independent fiduciary, a specialist who will take legal responsibility for the setting up and maintenance of the plan and receive no compensation from fund companies, brokers or third parties.

Hutcheson recommends inserting an “independent fiduciary policy statement” to document the guidelines and duties of this specialist.

While you own and manage your 401(k) assets, your employer controls the cost and design of the plan. Since you are virtually renting the structure of your retirement program, you need to compel your employer to be a good landlord. Many want to do the right thing.

Assert your rights. Welcome to a brave new world of an ownership society.