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401(k) Checkup

Smart Money Magazine

Your biggest stock market holdings are probably in your retirement account. We'll help you choose the best funds and make sure you have the right mix of stocks and bonds. And we'll explain how a fee crusader can put money back in your pocket.

Over the past two decades, 401(k) plans have become the largest engine for savings known to man, with more than $1.9 trillion in assets. But that number could, and should, be higher: And with some careful attention to the basics, it can be. Our three-step 401(k) checkup on the pages that follow looks at the most common mistakes and misunderstandings about managing your nest egg and tells you how to correct them.

Another area in need of a checkup is the 401(k) industry itself. As the 401(k) phenomenon has grown ever larger, vast economies of scale have been created, pushing down costs to the companies that do the nuts-and-bolts work of administering the plans. But those cost savings, which can be quite substantial, haven't always been passed down to you. Consider that the firms that administer 401(k) plans–who keep the complex legal and accounting records behind every move you make–sometimes collect fees that are as much as five times what it costs them to do the job. Those windfall profits are coming straight out of your pocket.

The bad news is that there's not much that you alone can do right now to change this. The good news is that there are people out there working to return some of that money to you. Brent Glading, for example, spent 15 years selling 401(k) plans on behalf of Merrill Lynch and Dreyfus Funds. Now he's working the other side of the street, negotiating lower investment and administrative fees, generating a rebate to the employer, much of which usually gets deposited back into the accounts of plan participants. And while it's up to an employer to hire a firm such as the New Jersey-based Glading Group, fear of law suits and regulators has made companies more responsive on the issue.

To understand the fees, you have to understand how your plan is run and how much it costs–and Glading says that's something many employers don't even know. Other experts agree. If you ask most companies how much they'll pay for their plan, they'll say, "We don't pay anything," says Tim Murphy, founder of TPC Advisors, a consulting group that helps employers find the most cost-effective plan. "But they're not really paying nothing; somebody is paying something. That somebody is you.

How did this confusion come about? Just as most employers outsource the money-management part of your plan, they also outsource the administrative duties. But even though your employer hires the administrator, it doesn't actually pay the bill. The expense ratio on the funds in your plan includes a record-keeping fee, which goes to the administrator. (In some cases, the fund company and the administrator are both part of the same firm.) And those fees can add up to millions more than the actual cost .

Glading essentially audits a company's plan and negotiates a rebate with the administrator, aIlowing it to keep a "reasonable profit-30 percent more than it costs to run the plan is typical for the industry. The remaining profit is then returned to the employer. Often the rebate exceeds the company's internal costs, which are usually borne by the human resources department. When this happens, Glading says, "most companies put the money back into participant accounts." The thousands of plans and fund combinations make it difficult to arrive at an average rebate, but Glading says it's not uncommon to recoup 0.3 percent of assets, or $1 million a year on a $300 million plan. Individual employees with lots of savings have gotten rebates as high as $15,000.

Negotiating a rebate isn't as tough as one might expect. Record keepers are willing to accept less profit, Glading explains, knowing the alternative is to lose the business altogether. "They still make, a profit, but the participants get a fair deal," he says, Glading isn't the only person casting a cold eye on the " 401 (k) industry. New York State: Attorney General Eliot Spitzer and the Securities and Exchange Commission are also investigating the industry's practices. Right now they're focused on "revenue sharing," a legal but questionable practice that involves mostly smaller plans, which are often sold by brokers. When brokers collect a portion of a fund's marketing fee, there's potential for a conflict of interest. Rather than recommending the best plan for the company, the broker might be inclined to advocate the plan that agrees to pay him the most, It would not be surprising if Spitzer and the SEC broadened their investigations to include administrative fees.

Of course, the single most important step you can make to increase your nest egg is to save more. And that's truer than ever now, given that many Wall Street prognosticators expect returns in the coming decade to be lower than what we became accustomed to in the 1990s.