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How do I find out all the hidden fees & expenses I am paying in my employer sponsored 401K plan?

Feb 16, 2013 by Nick from Alpena, MI in  |  Flag
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On August 30th, the major new 401K Disclosure federal law goes into effect. For the first time, employers will be required to disclose information about fees and costs their employees are paying, to their determent! This new law will affect both companies who offer 401Ks and employees who have accounts.” Please read disclosures from your company and 401k provider...

Comment   |  Flag   |  Feb 16, 2013 from Springfield, MO

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Kevin J. McNab Level 19

The simple answer is your employer (or fiduciary) of your plan should be providing a Fee Disclosure Statement. The Fee Disclosure Statement does exactly what you describe - it creates transparency and provides all of the fees of your plan including internal expense ratios along with the cost per $1000 of the funds. I would either ask your employer for this or call your 401(k) provider/administrator and ask for this disclosure. I hope this helps.

Comment   |  Flag   |  Feb 18, 2013 from Westminster, CO

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Jason Hull Level 20

The Department of Labor has a pretty good pamphlet on what to look for: http://www.dol.gov/ebsa/pdf/401kFeesEmployee.pdf

If you're not getting the answers you want, call up the plan administrator and ask them to explain every fee until you're happy. If you aren't happy, go visit HR. It's amazing what a little jumping up and down on someone's desk will do to get their attention.

Here's a good reference point to determine where your fees compare to the average: http://money.cnn.com/2012/07/25/retirement/401k-fees.moneymag/index.htm

Comment   |  Flag   |  Feb 16, 2013 from Fort Worth, TX

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James Holland Level 18

Nick there have been some good answers here however I believe the simpliest way to get the answers you are looking for is to walk into HR and DEMAND them. Tell them you would like a break down of every Covered Service Provider and the exact dollar amount they got paid. You would also like to see ALL of the Services agreements from these providers to see what SERVICES you recieved for the fees you paid. Let HR know that according to ERISA fees not only need to be reasonable the need to be NECCESSARY. Also that it is your understanding that under ERISA the plan is to be operated in the SOLE interest of the participant ( YOU) and your beneficiaries and if you cannot see to the penny what the cost are, how can you determine if that is the case. When HR looks at you like you have 3 heads, go to a few follow co workers and ask them if they know what they are actually paying.. Then go back to HR and demand answers and if you do not get them demand changes. This is YOUR $$$ they are playing with demand accountability.

3 Comments   |  Flag   |  Feb 19, 2013 from Charlotte, NC
Nick

Thank you everybody for the great advice. I did send an email to HR last night & all they said was to ask our plan provider rep at Edward Jones. I was very disappointed with that response. I feel that our rep acts more like a salesman than an advisor & is only concerned about his commission. Can somebody please clarify exactly what our plan provider is obligated to disclose as far as fees are concerned & point me to where this is spelled out? I just fear that when I do ask him about fees he will just find a way to skirt the issue. I just want to be well informed about the new disclosure law & dont want to look like an idiot by demanding something that I might not have a right to know. Also, I compared what is being deducted from my check each week vs. what is being deposited into my 401K account & it looks like about 14% is being deducted, which seems totally unreasonable to me. What should be my next course of action?

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Flag |  Feb 19, 2013 near Alpena, MI
James Holland

Nick as I stated earlier your HR person is not very well informed when it comes to ERISA, your employer is the Plan Sponsor or Responsible Plan Fiduciary they are responsible to monitor ALL of the Service Providers they hire i.e. the Edward Jones rep. odds are the Edward Jones rep will give you some nonsense about how he is a limited scope 3 (21) so all the discretion for decision are left with your employer. I suggest you google Ellis v. Rycenga Homes. Ask the Jones rep. for his Service Agreement or Contract. Go back to HR and demand to know who selected the Service Providers and a copy of all of their contracts. If you are not satisfied with the answers you receive you can always contact the Dept. of Labor or feel free to reach out. jamesh@miracenter.com

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Flag |  Feb 19, 2013 near Charlotte, NC
Michael Steven Greenberg, CFP®

Nick

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Flag |  Feb 25, 2013 near Delray Beach, FL

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Hi - You said: "Can somebody please clarify exactly what our plan provider is obligated to disclose as far as fees are concerned & point me to where this is spelled out?"

Not sure who the provider is, but most of the providers either mailed this information last year around August/September or it can be found online on your account's website. All vendors needed to provide it last year and it's called the 404(a) Participant Fee Disclosure. It will show: 1) what are the investment expenses per $1000 for each fund, 2) are there any hard dollar fees that you pay for account administration and 3) what are the fees for certain transactions (like taking a loan, for example).

What is referenced above (408(b)(2) plan level disclosures) may not give you as much insight to how fees affect your account because it's for the entire plan and context is important. You can definitely check Brightscope's rating of the fees on the plan by Googling your plan's name. I will say this - if it seems high, ask HR to ask the provider or Ed Jones if there are cheaper shareclasses available. (Those are typically dictated by how much commission a rep wants to receive -- more commission = higher investment expense.)

You also asked: "Also, I compared what is being deducted from my check each week vs. what is being deposited into my 401K account & it looks like about 14% is being deducted, which seems totally unreasonable to me. What should be my next course of action?"

This seems odd and I'd definitely inquire at your human resources about it, or call the plan provider and see if they can explain. It has not been my experience that fees are deducted per paycheck.

Comment   |  Flag   |  Mar 06, 2013 from Alexandria, VA

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Hello Nick,

Much has been made of the fees associated with 401k's. The fact is that most larger employers have 401k plans in place whose fees are not extraordinarily out of line with the actual cost to put the 401k in place. The highest fees in 401k's are typically associated with smaller employers who use the older annuity (insurance-based) platforms to run their plans. Unfortunately, this is often because small companies to not have the assets in their plans to negotiate lower prices - so "jumping up and down" on someone's desk wouldn't make any difference at all if the company simply CAN'T negotiate lower fees. And... the HR department typically doesn't make plan decisions anyway; those are usually made by the owners of the company - or the investment committee if the company has a board of directors.

The fees that you pay are typically divided into 2 areas - 1) the fees of the plan itself (third party administrator fees), and 2) the internal costs of the mutual funds themselves, known as "expense ratios."

1) The administrator fees of the plan may be borne by the employer itself (in our firm - our company pays the cost of the plan fees), or they may be passed on to employees through "reductions." Because plans can be constructed to benefit higher-compensated employees, it usually makes more sense for the company to pay the fees because of tax deductibility and "top heavy" participation calculations. As a result, most companies pay the fees outright as an accounting fee - so in many cases, a great deal of hooplah has been raised over "plan costs" when the employees don't pay a dime of them anyway. I admit that in some cases, it is possible that these costs are passed on to employees, but in most cases the employer foots the bill for that fee. Your annual 401k Fee Disclosure statement will disclose what those fees are but it may not clearly disclose WHO pays those fees. In that instance, discussing this with your HR department may answer the question for you.

2) Expense ratios of the funds. Typically this will be available online when you log into your retirement plan's website. Look for information on the investments. Part of the information that is disclosed is the costs of teh investments themselves. Keep in mid that different types of inveestments usually have different costs - international investments are typically more expensive then domestic investments because of trading costs; bond funds are typically cheaper than stock funds because of trading costs and they way bonds are bought, etc. Also, cheaper is not always better; sometimes funds deserve their higher fees because of consistent high performance (admittedly, this is rare).

As an aside, BrightScope has a cost disclosure tool that lets you look up your 401k costs and compare them with the costs of of other plans. Just fill in your company name in the "Retirement Plan Search" box on the home page.

So the next question is "What do I do with this information?" Well, if you feel that your plan's cost is unfairly high, and this will impact your retirement - then it might make sense to bring this to the company's attention and suggest they review their plan provider and seek a lower cost plan. If, on the other hand, you find that the plan is fairly priced, AND has adequate investment options, then my suggestion is that you focus your efforts on building a properly designed portfolio that focuses on creating the highest possible returns WITHIN your risk tolerance - and focus on making maximum contributions and getting maximum matching dollars into your plan - as that will make a far larger impact upon your future wealth than will a minor reduction in fees.

Jon Castle http://www.WealthGuards.com

Comment   |  Flag   |  Feb 17, 2013 from Jacksonville, FL

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Hey Nick,

The simplest way to uncover the fees in your plan is to ask for the 408b2 disclosure for 2012. You should have received it from your employer, but you may not have realized what it was. As of 2012, the DOL requires all plans to breakdown and disclose the fees within the plan through this disclosure.

One additional thought is that many insurance or broker-based plans can also charge a heavy up-front fee when the plan first comes over. For example, we've seen brokers charge up-front 0.75%-1.00% fees that I would equate to a sales charge (load) on a mutual fund. You may want to also inquire about any starting fees your plan may have paid because, even though they may not have been charged last year, that fee was charged and should be allocated to future years so you can figure out your total cost.

Comment   |  Flag   |  Feb 18, 2013 from Orlando, FL

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Adi Benyishay Level 13

One of the simplest places to start would be the statement that should have been given to you after August 30th of last year. This statement is a result of the dept. of labor's newest ruling, and intends to show full transparency of all the fees deducted from your account.

As far as the amount deducted from your pay: if you meant to say that there is a difference of 14% between the deduction on your paystub, and the amount showing as contribution in the 401(k), it is very high. It looks like a 14% Load? If so, something is wrong.

I agree with your concern talking to the current plan representative. My problem is that it seems like the people in you place of work should have known the answers.

Employer and employees in groups that we advise to have all the information, and understand all the ins & outs of their plans, as the current iteration of disclosures are still either A) confusing or B) half-measures: disclosure is a necessary first step, but evaluation of whether the fees are both necessary and reasonable may be even more significant.

Comment   |  Flag   |  Mar 25, 2013 from Southampton, PA

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Ask for your plan's 401(k) fee disclosure document. That outlines all of the fees your would be subject to as a participant in the plan.

Comment   |  Flag   |  Apr 08, 2014 from Hooksett, NH

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Nick, I agree with Jonathan in that most 401(k) fees are not out of line, although some in the past were not fully transparent. Of course there is always the opportunity for abuse, so there is now 408(b)2, the new financial disclosure document that you can get from HR or your plan administrator. It is intended to show all fees.

As a financial advisor, here is how I look at the expenses. There are asset-based charges and there are billable expenses.

An asset-based charge could be the internal expense of a fund or ETF. Internal expenses include the cost of running the fund; research, rent, salaries for fund employees, and possible commissions or 12b1 fees. There are often several classes of the same fund, and every class would have a different internal expense. As an example, a plan with an average account balance of $3000 and $1,000,000 of assets might only be offered an R1 share, where another company with an average account balance of $30,000 and $35,000,000 in assets might be offered a hypothetical R6 share with a much lower internal expense ratio. That doesn’t make the first company’s plan bad; they could have the best plan they can get.

Expense ratios can vary widely. An index or passively managed fund will have a much lower expense ratio than an actively managed fund. There are those that swear that one or the other is the only way to invest. Many plans offer both types of choices, so you can make your own decision. Some plans, particularly smaller ones, will have an additional asset-based charge. This can be tricky, because some providers will add an asset-based charge, while others can just provide a share class with a higher expense ratio. If you are a smaller plan, it will cost one way or the other.

Billable expenses are specific dollar amounts that will show as a line item, typically per-participant charges and third party administrator fees. Per participant charges are typically minimal, and might show up annually on employees statement. The third party administrator charge is typically borne by the employer. But they can pass it on to employees. If you have several thousand employees, it would be spread pretty thin; if there are only 30 employees, it might sting a little.

I have found that you can move expenses from one column to another, but when you add everything, most good, comparable and competitive plans will be surprisingly close in total expenses.

Comment   |  Flag   |  Feb 25, 2013 from Delray Beach, FL

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