WSJ: Big Fees Take Toll On 401(k) Plans Of Small Employers

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Big Fees Take Toll On 401(k) Plans Of Small Employers

Costs Take Huge Toll on Retirement Accounts Of Firms With Fewer Than 50 Employees

By CHRISTOPHER OSTER and KAREN DAMATO
Staff Reporters of THE WALL STREET JOURNAL
October 21, 2004; Page D1

Two years ago, Brent Breaux became suspicious about his wife's 401(k) retirement plan: Account statements showed she was somehow losing money on an investment in a super-safe money-market fund. The culprit, the Houston technology consultant found, was the high fees associated with his wife's retirement plan. "I wish my wife could move her 401(k)," says Mr. Breaux.

The retirement savings of millions of Americans are being seriously eroded because of the high fees charged to administer their 401(k) plans. Most at risk are employees of small companies. Studies show that many participants in 401(k) plans sponsored by companies with fewer than 50 employees pay far more in fees than their large-company peers. Investors in 50-person plans pay an average of 1.4% of their assets annually in fees, or about $14 for every $1,000 invested -- assuming an average participant balance of $40,000 -- according to a new study by HR Investment Consultants in Baltimore. That compares with 1.17% for investors in 1,000-person plans. But many investors in small plans pay as much as 3% or more, according to HR. That could mean a significant difference to participants over time. Over 20 years, a 1% increase in fees on a $100,000 investment can reduce the portfolio's ultimate gain by $66,254, assuming annual investment returns of 7%. And fees can take a particularly large bite out of an investor's annual return when investment returns are low, as Mr. Breaux found out with his wife's money-market fund.

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The problem affects a significant percentage of the work force. Of the 400,000 companies with 401(k) plans, nearly three-quarters are plans with fewer than 50 participants, according to the Society of Professional Administrators and Recordkeepers. The 401(k) retirement plans sponsored by such firms hold $192 billion in assets.

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How can employees take action to fix their plans? The chief thing they can do is make their employers aware that fees are a concern. Once an employer is alerted to the issue, there are a growing number of consultants who will examine plans to see if participants are being overcharged. One such site, 401khelpcenter.com1, has a section devoted to fees, including a list of questions employers sponsoring plans should be asking about fees. In April, a company called Pension Tech Solutions launched a Web site (www.ptsolutionsllc.com2) where 401(k) plans, for a relatively small fee, have their plans' fees analyzed by filling out an online questionnaire. And the U.S. Labor Department, which regulates retirement plans, has created an online guide to 401(k) fees available at www.dol.gov/ebsa/publications/401k_employee.html3.

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Write to Christopher Oster at [e-mail]9 and Karen Damato at [e-mail]

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