Friday, October 17, 2008

401(k) Fees Rant

In addition to my recent angst regarding stock market volatility, I have just discovered one of the reasons why my 401(k) fund returns were always lower than I anticipated. My company has our plan pay for expenses such as our plan audit, which can run as high as $8,000 annually, plus the cost to transfer employee payroll files to the plan each pay period. Our payroll service provider tells me it is common for companies to have their 401(k) plans pay for these types of expenses.

What is included in 401(k) plan administration fees:
According to the U.S. Department of Labor, the day-to-day operation of a 401(k) plan involves expenses for basic administrative services -- such as plan record keeping, accounting, legal and trustee services -- that are necessary for administering the plan as a whole.

As an employee whose benefit package includes fewer benefits each year, I was upset that my company would require our 401(k) plan to pay for expenses such as the ones I mentioned above. Aren’t these expenses a tax-deductible cost of doing business? Can’t companies pay for anything anymore? My lousy benefit package and measly company match, 50% of the first 2% of salary deferment, suddenly seems even worse.

High 401(k) plan fees is not news to me:
I have read in the past, over time 401(k) plans may earn a lower rate of return than other types of investments due to high fees. A good fund should have a total expense ratio of 1% or less. My 401(k)'s funds typically earned lower rates of return than the funds in my IRA. I did try to determine the expense ratio for each fund, but was unable to find any mention of expense ratios in the fund literature provided by our 401(k) provider. I now realize these fees are usually hidden.

In the Kiplinger article, “The High Cost of 401(k) Fees: How Much Are You Paying,” Mary Beth Franklin writes:
Mutual fund returns in 401(k) plans are normally reported as net returns, meaning that fees for managing your investments are subtracted from your gains or added to your losses before calculating the annual return. Other costs, such as administrative and record-keeping fees, are often divvied up among plan participants but are not explicitly listed on individual investment statements.

You can read Mary Beth Franklin’s informative article in its entirety here.

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