You may not realize it, but you could be paying thousands of dollars a year in fees on your 401(k) retirement account, hidden expenses that affect how your savings will grow. The government is now trying to expose those charges so you can make better investment decisions.
Under regulations proposed by the Department of Labor, 401(k) plans every year will have to disclose each investment's annual expense ratio -- the percentage that goes to management and other costs -- along with more detailed performance data. In addition, any administrative or other fees deducted from your account will have to be spelled out. New regulations may go into effect as soon as Jan. 1.
The fees and other costs we pay are hard to find because they're taken out before we see investment results. But they are significant because they nibble into our returns now, and, over decades, they can take a huge bite out of our future savings tally. Perhaps more important, expense ratios -- even more than an investment's past performance -- turn out to be a strong indicator of how a mutual fund will fare down the road.
About three weeks ago I wrote about the proposed regulations from the DOL calling for a better, standardized fee disclosure. The effective date is January 1, 2009 mentioned by Ms. Blumenthal above.
Most of the rest of Ms. Blumenthal's piece focuses on her quest to decipher her burden of costs in her own 401(k) account (presumably through her employer the Wall Street Journal Companies or NEWS Corp the parent company). Some interesting tidbits:
My plan is managed by Fidelity Investments, which provides lots of information on a fairly user-friendly Web site. It was easy to find the expense-ratio link for the Spartan International Index fund, for instance. But once there, the numbers were confounding: There were three separate expense ratios -- 0.2% as of April, 0.1% after reductions as of February and 0.1% after a cap on expenses in 2005. It took conversations with three people at Fidelity to confirm that the expenses are capped at $10 for every $10,000 invested. Finding the fund's prospectus -- which contained details on the expenses -- required a few extra clicks.
My funds don't come with any "loads," the sales charges assessed when you buy or sell a fund. Neither do they assess so-called 12b-1 sales and marketing fees. But your funds might. Some of mine do assess penalties for short-term trading, but I'm way too lazy to move into and out of funds frequently.
To find out who pays my 401(k) plan's administrative expenses -- those outside of individual funds -- I needed to locate something called the Summary Plan Description. That required a call to my employer's benefits department to get a copy. I learned on page 87 that the company picks up the modest legal and accounting fees, and the rest of the expenses appear to be paid from what Fidelity already charges. That's good news: Some plans actually charge participants for all or part of the administrative cost.
It is interesting to note that Ms. Blumenthal (probably like millions of 401(k) account holders) had to call her benefits department to get a copy of the Summary Plan Description (SPD). Each 401(k) plan sponsor/employer is required by law to provide a copy of the most current SPD at the time of enrollment (many provide at the time of employment), and any changes (via Summary of Material Modifications or SMM) must be provided on a timely basis (typically no later than 7 months in the year following the year of the changes).
Ms. Blumenthal, like many 401(k) participants in general probably misplaced her original copy through many years of employment. I am somewhat surprised that she did not find a copy of it posted online through the provider's (Fidelity's) website - many providers now have this as a core feature of their participant service website.
Moving along...
How cheap is it? Knowing that the Fidelity Growth fund charges $94 in expenses for every $10,000 invested still didn't tell me if those expenses were reasonable. Fred Reish, a Los Angeles lawyer specializing in employee benefits, cautions against looking at the average expense ratios for, say, large growth funds, since those averages include high-cost retail funds that wouldn't normally be in a 401(k). Instead, he suggests a better comparison would be the funds with the lowest expenses in their category.
At the Morningstar.com site, I put in the fund's ticker symbol (FDGRX) and clicked on a little "i" next to the expenses number. That showed me the fund's expenses were well below the category average of $137 per $10,000 invested, but still fell into the second quartile. In other words, this fund was more department store than Target, cost-wise.
Michael Callahan, of pension consultant Pentec Inc., says he would consider expensive any U.S. stock fund with an expense ratio over 1.5%, or an international fund with a ratio of 2% or more.
Using another free Morningstar tool called Xray, I entered all my stock funds and found that my average expense ratio was 0.36%, or $36 per $10,000 invested, mostly because I lean toward index funds and Fidelity's are among the cheapest.
I was feeling pretty smug -- but there was a catch. I couldn't find the expense ratio for one of my favorite investments, a company-sponsored "guaranteed investment contract" fund, which functions as sort of a low-volatility intermediate bond fund. The new Labor Department rules will require disclosure of expense ratios for these types of funds, as well as for collective trusts, which operate like mutual funds but aren't subject to regulation.
Gina Mitchell, president of the Stable Value Investment Association, a trade group, says the typical guaranteed-investment-contract fund has an expense ratio that ranges from about 0.4% to about 0.8%, depending on whether administrative fees are included. The higher end of the range is more than the bond-fund offerings in my plan charge. If it applies to my account, it would raise my average overall cost to about half a percentage point, or around $2,500 a year in expenses on a $500,000 portfolio.
Figuring out your overall cost is especially important if you are deciding whether to keep your 401(k) with a former employer. Hewitt Associates compared the expenses of a typical 401(k) and the retail costs of an individual retirement account, and found that a 35-year-old saver who chose the IRA could end up with 9% to 18% less in her retirement account at age 70 than if she stayed in the original plan. If your plan charges high expenses, you may also want to consider how much of your income you want to invest in it, beyond capturing the full employer match.
[emphasis added]You can find out more about the proposed disclosure changes at the Labor Department's Employee Benefits Security Administration site (www.dol.gov/ebsa). Comments are due this week; you can email yours to e-ORI@dol.gov, with the subject line "Participant fee disclosure project."
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