Lawsuits focus attention on 401(k) fees

Your 401(k) plan may be costing you more than you think.

Many consumers don't realize it, but businesses and employees pay fees for the investment, maintenance and marketing of their retirement plans. People frequently overlook the charges because they're often hard to identify, but even slightly higher fees could mean thousands of dollars lost in savings when you retire.

Now, 10 lawsuits against some major companies have focused more attention on the issue of retirement plan fees and put businesses on notice.

And Nov. 30, a Government Accountability Office report recommended that Congress amend rules governing 401(k) plans because the "piecemeal" disclosure of fees is hurting investors.

"You want to know what kind of returns an investment has historically had, what kind of risk it represents and what kind of fees you're paying," said Barbara Bovbjerg, GAO director for education, work force and income security and an author of the study. "If people have to go looking for something and put it together themselves, how many people are going to do that?"

According to the GAO report, about 47 million Americans had more than $2 trillion in assets in 401(k) plans as of 2005. But 80 percent of plan participants don't know how much they are paying in fees.

Most of the fees in question are investment fees, paid for selecting and managing a fund's portfolio, marketing the fund and compensating brokers. This report did not look to the question of the appropriate level of fees, which typically are less than 1 percent of assets per year but are often as high as 2 percent to 3 percent, especially in smaller plans. These expenses routinely are deducted from returns earned by investors in the plans.

It's difficult to find those fees because investors must search through multiple sources and throughout the retirement plan's prospectus, said Bovbjerg. That's why the GAO has asked Congress to amend laws governing pensions so that Department of Labor documentation makes the information more detailed and easily accessible.

The report was the first of what is expected to be several by the GAO on 401(k) plans.

"I think the genie is out of the bottle, and there will be a movement to make the expenses more transparent," said Alicia Munnell, director of Boston College's Center for Retirement Research.

Earlier this fall, lawsuits were filed by Schlichter Bogard & Denton, a law firm in St. Louis, against 10 major U.S. companies, including Lockheed Martin Corp., General Dynamics Corp. and International Paper Co.

The suits contend that 401(k) fees and expenses paid by the plans _ and largely borne by employees _ are too high, and that the companies didn't disclose them properly. While the Labor Department is working on several measures to increase fee transparency, additional lawsuits are expected.

At issue in the suits are rules under the Employee Retirement Income Security Act of 1974, a federal law that sets standards for private pension plans. ERISA requires that pension fees be reasonable and fully disclosed and that they be charged solely for the benefit of the people in those plans.

"Now that 401(k) plans are rapidly supplanting (defined benefit) plans, which have a guaranteed benefit, the investment performance of 401(k) plans is crucial," said Ron Kilgard, an attorney with Keller Rohrback in Phoenix, which may bring additional suits.

Robyn Credico, national director of defined contribution consulting for management consulting firm Watson Wyatt, said: "The good news is that the suits will drive employers to pay attention."

The fees, she said, are often overlooked because "there's no apparent out-of-pocket expense, and if it's all outsourced and it's going well, they don't think there's a need to look."

That was the case in the 1990s, when investors were enjoying double-digit percentage returns. But when investment returns drop, as they have since the end of the 1990s, the issue of fees gets more attention. High fees take a bigger bite out of lower investment returns.

According to Hewitt, a $100,000 balance growing at 8 percent a year and paying 0.5 percent in annual fees would grow to $875,496 over 30 years. In comparison, that $100,000 investment would grow to only $661,437 with a 1.5 percent fee _ a $214,000 difference.