Interesting article about 401K fees.

[Christian321]

Interesting article regarding 401K fees.


Hidden fees are eating up your 401(k)s - CNN.com

[disneysteve]

"The crash showed one serious downside to 401(k)s: their complete exposure to the wild swings of the market."

I hate when they make statements like this. A 401k is just a type of account. What you put into that account is entirely up to you. If you don't want to be subjected to the "wild swings of the market" then don't put all of your money into the market. Diversify. Have money in a variety of asset classes within the 401k: stocks both large, small, domestic and foreign, bonds of different types, real estate, commodities, etc.

If workers close to retirement saw their balances wiped out by the crash, they were most likely invested too aggressively for their age and risk tolerance.

[GrimJack]

Maybe I am just different but I have known about 401k/403b fees since I started using them (thanks fool.com - you were fun when you were free). All my funds are one form of index fund or another have fees under .5%. Vanguard is the leader in this area; check out their cost comparison tool

[kv968]

Although I don't disagree that most people don't realize how much they're paying for their investments, I find the "hypothetical model" they use for illustrating it to be a bit opaque. It doesn't specifically tell you what the input numbers are, just a "lifetime fee" number which could be way on the high side. Not saying the numbers aren't possible, I'd just like the ability to do the math myself and see exactly what type of fees they're talking about.

Also, with his proposal of "pooling all retirement accounts" and letting managers invest that since, in his opinion, 401k's have become too "individualized". I imagine this wouldn't be too bad of an idea if it were an alternative to people who may want it but to take away all the individual choices available to someone who may want them instead (i.e. me) is ridiculous. I'm not sure if he's advocating everything go this way or just offer the option but if it's the former he's way off.

And one other thing on the "pooling of all retirement accounts". If you were to do that, who would the managers be and wouldn't some be overwhelmed with the amount of money under management and start investing in things they may not really want to but have to do something just because they have the money?

It's kind of like a why a good small cap fund will close if it gets too much money. The manager may not have any real good ideas for the money coming in so instead of just adding to positions he/she already has or investing in securities that they don't really want to, they just close the fund and manage with what they have. I could see an enormous pool of retirement money being invested in the same way...invested just for the sake of investing.

[jpg7n16]

From: Hidden fees are eating up your 401(k)s - CNN.com

What are these fees, then, that are taking such a big bite out of your retirement account? There are four kinds: administrative fees, marketing fees (sometimes called 12-b1 fees), investment management fees and trading costs.

So by "401k fees" he means "mutual fund expense ratios."

Always good to take advice from an author who has no idea what he's talking about - especially around basic terminology.

[jpg7n16]

Also, with his proposal of "pooling all retirement accounts" and letting managers invest that since, in his opinion, 401k's have become too "individualized". I imagine this wouldn't be too bad of an idea if it were an alternative to people who may want it but to take away all the individual choices available to someone who may want them instead (i.e. me) is ridiculous. I'm not sure if he's advocating everything go this way or just offer the option but if it's the former he's way off.

And one other thing on the "pooling of all retirement accounts". If you were to do that, who would the managers be and wouldn't some be overwhelmed with the amount of money under management and start investing in things they may not really want to but have to do something just because they have the money?

Even if they pooled together all the retirement funds, they'd have to invest those funds somehow, and would likely charge a fee to do so. Either that or the pool would be invested into mutual funds, and be subject to the same expenses he's griping about.

In other words, pooling the assets does absolutely nothing about the fees he posted the article to complain about.


Even better, there actually are pooled amounts of money that are invested towards a common purpose, such as retirement - they're called mutual funds. So in essence, he's all for the thing he's against.

I am comfortable saying he has no idea what he's talking about.

[jIM_Ohio]

JPG hit this...

401k have layers of fees. they might be as bad as some variable annuities, so please know that fees for 401ks go way beyond expense ratios of the mutual funds.

There are about 7 roles and responsibilities within the 401k landscape

Named Fiduciary -could be 3(21)
Plan Administrator
Trustee
Investment Manager 3(38) fiduciary
Non Named fiduciaries defined in ERISA 3(21)
record keeper
custodian


There might also be an auditor, attorney or other person

If you think those people/companies above work for free, then your only fees are the expense ratios of the mutual funds.

Meeting Your Fiduciary Responsibilities

Fees are just one of several factors fiduciaries need to consider in deciding on service providers and plan investments. When the fees for services are paid out of plan assets, fiduciaries will want to understand the fees and expenses charged and the services provided. While the law does not specify a permissible level of fees, it does require that fees charged to a plan be "reasonable." After careful evaluation during the initial selection, the plan's fees and expenses should be monitored to determine whether they continue to be reasonable.

Who pays the fees? Plan expenses may be paid by the employer, the plan, or both. In addition, for expenses paid by the plan, they may be allocated to participants’ accounts in a variety of ways. (See Resources for further information.) In any case, the plan document should specify how fees are paid.

[kork13]

JPG hit this...

401k have layers of fees. they might be as bad as some variable annuities, so please know that fees for 401ks go way beyond expense ratios of the mutual funds.

There are about 7 roles and responsibilities within the 401k landscape

Named Fiduciary -could be 3(21)
Plan Administrator
Trustee
Investment Manager 3(38) fiduciary
Non Named fiduciaries defined in ERISA 3(21)
record keeper
custodian


There might also be an auditor, attorney or other person

If you think those people/companies above work for free, then your only fees are the expense ratios of the mutual funds.

Meeting Your Fiduciary Responsibilities

I honestly don't know anything about this... So is it correct, the costs for employing these people are NOT included in the normally reported expenses that all go into the "expense ratio"?

Looking back into some of my investment account documents, I've got some stuff talking about a "sub-advisory fee", but that is paid for by the investment company itself (not directly from investment assets)... From my reading of it, the company pays for these costs out of the normal (expense ratio) fees from the various mutual funds it manages.

Then in the fund's prosectus, it breaks down the fund's expenses, and identifies them as "Management fees", "12b-1 fees", or "Other Expenses" (further defined in the prospectus: “Other Expenses” include expenses such as custodian, administration and servicing, and transfer agent fees). The "Management fees", "12b-1 fees", and "Other Expenses" are added together to show the "Total operating expenses" (the expense ratio).

Sooooo..... am I just crazy? It seems to me like these "sub-advisory fees" and such like you're talking about are included in the expense ratio. And if so, what are the "extra fees" that people keep mentioning?

[jIM_Ohio]

I honestly don't know anything about this... So is it correct, the costs for employing these people are NOT included in the normally reported expenses that all go into the "expense ratio"?

Looking back into some of my investment account documents, I've got some stuff talking about a "sub-advisory fee", but that is paid for by the investment company itself (not directly from investment assets)... From my reading of it, the company pays for these costs out of the normal (expense ratio) fees from the various mutual funds it manages.

Then in the fund's prosectus, it breaks down the fund's expenses, and identifies them as "Management fees", "12b-1 fees", or "Other Expenses" (further defined in the prospectus: “Other Expenses” include expenses such as custodian, administration and servicing, and transfer agent fees). The "Management fees", "12b-1 fees", and "Other Expenses" are added together to show the "Total operating expenses" (the expense ratio).

Sooooo..... am I just crazy? It seems to me like these "sub-advisory fees" and such like you're talking about are included in the expense ratio. And if so, what are the "extra fees" that people keep mentioning?

Short answer depends on the plan

medium answer- someone is receiving the 12b1 fee you are paying, the question is who? Does this fee cover all the expenses? (the fee is probably .25%). This is a common technique for companies to pay 401k fees to various parties from plan assets.

Returns for mutual funds are reported net of expenses. If these are A shares, then maybe a 1% expenses ratio + a .25% 12b1 fee, and maybe other fees too.


I worked for an employer whose 401k funds did not have ticker symbols- probably means the fees were deducted from the fund, and I would have no idea what they are.

July 1 these fees are required to be disclosed to plan participants.

[Slug]

.

July 1 these fees are required to be disclosed to plan participants.

I thought I read somewhere we wouldn't see a full disclosure until the next report. That is, we wouldn't actually see the disclosure until our Q3 statement was available. Correct?

[green_goblin12]

So by "401k fees" he means "mutual fund expense ratios."

Some of these fees may not be exclusive to the mutual fund. There can certainly be an administrative fee for the plan. I think his point is that there is little transparency. Most mutual fund fees and expenses can be found in the prospectus. Unfortunately most people don't look at those.

I thought I read somewhere we wouldn't see a full disclosure until the next report. That is, we wouldn't actually see the disclosure until our Q3 statement was available. Correct?

Yes, it depends on your provider. Most probably won't send out any info until Q3 statements. The deadline is the end of September.

I think for many people this will be an eye-opener. For those of us who are already aware of the fees, it will be underwhelming. There will still be a level of fees that are unavailable. Less transparency, but not 100%. There are still lots of fees beyond the mutual fund expenses.

401k providers (salesmen) are shaking in their boots and scheming up other ways to screw us over.

Unfortunately, it looks like the ruling opens up the door for salesmen to push more annuities, which may or may not be appropriate but salesmen love to sell them.

EBSA News Release: US Labor, Treasury Departments act to enhance retirement security for an America built to last [02/02/2012]

[jpg7n16]

Some of these fees may not be exclusive to the mutual fund. There can certainly be an administrative fee for the plan. I think his point is that there is little transparency.

No. His point is that expense ratio eats away at your returns, therefore 401ks are bad ideas.

From: Hidden fees are eating up your 401(k)s - CNN.com

What are these fees, then, that are taking such a big bite out of your retirement account? There are four kinds: administrative fees, marketing fees (sometimes called 12-b1 fees), investment management fees and trading costs.

The first three types of fees are shown, as an aggregate total, in each mutual fund's expense ratio, and are generally reported in your 401(k)'s "summary documents" as a percentage of assets.

For example, if you had $50,000 invested in a mutual fund that has an expense ratio of 1%, it means that you pay 1%, or $500, of the total balance you have invested in the fund in fees. This 1% is charged each year regardless of the mutual fund's performance.

...

There's no way around it: the mutual fund system we have can't be fixed, and must be replaced. Why?

Because everything about the 401(k) is too individualized: investment management, risk and fees. We need a new type of retirement account that is somewhere between a traditional pension and a 401(k) that combines some of the best features of each.

He also likes to throw out numbers to shock people

From: Hidden fees are eating up your 401(k)s - CNN.com

So how much do these fees really cost you?

The answer may shock you. Fees can, on average, reduce your 401(k) balance by up to 30%, regardless of whether you have $1 or $1 million in your retirement account.

But let me ask you a simple math question. If you invest for 30 years with an expense ratio around 1%, how much would you expect to pay over those 30 years?

Well let's see, 30 * 1% = 30% as a rough estimate.

Or for the mathmatically inclined, (1-.01)^30 = 0.7397 = loss of 26%. Conveniently, at 35 years, the math works to a loss of right at 30%. So if you start investing at 30, retire at 65, you'll "lose" 30% to expense ratio "fees."

Those "fees" actually saved you the hassle of having to research and select your own investments, and gave you a diversified portfolio for the past 30 years.


But the real point of my post is - those are related to the mutual funds, not the 401k. Sure there are extra fees to run the 401k itself (as with all employer plans), but that's not at all what he's talking about.

Besides, his answer is to go back to pensions? Pensions are MUCH more costly to administer than 401k plans are. Every employer plan has costs to run, so what's the solution - remove all employer plans??

[green_goblin12]

But the real point of my post is - those are related to the mutual funds, not the 401k. Sure there are extra fees to run the 401k itself (as with all employer plans), but that's not at all what he's talking about.

You're right. The writer is complaining mostly about mutual fund fees. Which is kind of ironic because most of those fees are readily available to the employee.

Those "fees" actually saved you the hassle of having to research and select your own investments, and gave you a diversified portfolio for the past 30 years.

Well most people still have to pick their funds unless they default to a age-appropriate lifetime fund.

Why, in my 401k, does a Vanguard fund have an ER of over 1% when I can buy it for 0.20% ER in my IRA? Why the inflated price? It goes to the 401k manager. I don't have access to them. They offer me no personal assistance. Plus they charge around 1% administrative fees. And who knows what else. I know it takes money to run, but a lot of these are major rip-offs. Hopefully this new legislation will open some eyes.

The author mentions a hybrid of 401k/pension. This is intriguing, except for the fact that it would likely involve some sort of annuity. And we all know financial salesmen would love to get their hands on something like that. Talk about high fees and incomprehensible lack of transparency and confusion.