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401(k) Cost-Shifting Could Imperil Your Retirement


A legal though costly practice that shifts certain 401(k) expenses from your employer to you bears scrutiny because it may be depleting your retirement funds.

The cost-shifting involves a broker or fund company offering to pick up administrative and other 401(k) plan expenses “for free” when, in fact, they are shifting these costs to employees in the form of higher annual fund expenses and sales charges.

No estimates are available for how many retirement plan sponsors in the $1 trillion 401(k) market engage in this cost- shifting. Your plan may be among them, particularly if it was offered through a broker or insurance company.

Stephen Lansing, president of Sentinel Fiduciary Services, Inc., a fee-only 401(k) consultant in Orlando, Florida, says such fees add up to 0.60 percent per year to employees’ plan costs, although few employees are aware of this exchange and few employers examine it.

“I had a client with a $250 million 401(k) plan with 10,000 participants and they didn’t even question this practice,” said Lansing. “This is like politics and hot dogs. If everyone knew what was going on, they wouldn’t like it.”

How It Works

Employers cut their expenses when employees pay more of the administrative costs of 401(k)s.

“The 401(k) plan sponsor is happy because it just offloaded thousands of dollars of plan fees that the employees indirectly pay for,” said Sherman Doll, a certified public accountant who analyzes plan expenses for Capital Performance Advisors, LLC in Walnut Creek, California. “Remember, nothing is free.”

Stephen Butler, the president of Pension Dynamics Corporation in Lafayette, California, a pension consultant, says funds and brokers often incorporate the higher fees into “R” or “B” class shares of funds they sell, for example. “It’s a marketing exercise to get more commission dollars into the food chain for broker dealers,” he said.

“Most plan sponsors (employers) don’t know how this works and there’s no industry oversight,” said Brent Glading, a consultant with Glading Group, LLC in Montclair, New Jersey, who works with employers to reduce plan costs. “This is the industry’s best-kept secret.”

Costs Add Up

Should you be outraged over your plan’s expenses? Employers are already saving 50 percent on the cost of providing a pension in a 401(k)-type plan over the old-style defined-benefit program, according to Teresa Ghilarducci, a finance professor at Notre Dame University. So is it fair that they shift more costs to you?

Say you have $500,000 in an actively managed stock mutual fund in your retirement plan, earning 8 percent annual return over 30 years.

Since your employer bought the fund through a broker, for example, you’re paying a 4.5 percent, one-time sales charge and 2.7 percent in total annual expenses, which includes the turnover costs of active trading. According the U.S. Securities and Exchange Commission (SEC) Mutual Fund Cost Calculator at , you’d have $2,113,835 after three decades.

What if your employer avoided the broker-sold funds and bought a no-commission, low-turnover stock fund with 0.70 percent in annual expenses? Over 30 years, you would have nearly twice as much in your kitty — $4,075,305.00. The more expensive fund ate up almost $3 million through fees and foregone earnings.

You Can Save

Edward Siedle, a securities attorney who represents retirement plans for Benchmark Advisory Services, Inc. in Lighthouse, Florida, said he has found that “in the 401(k) area, everyone’s getting hosed. Participants are paying 10 times in a 401(k) plan fund what they would pay for the same manager in an institutional fund.”

Employees can save money on fee exchanges once the additional costs are discovered.

Case in point: Frank Armstrong, a fee-only investment adviser managing $175 million in Coconut Grove, Florida, was approached by an Oklahoma hospital that wanted to reduce its retirement plan costs for its 150 employees.

The hospital’s 401(k) provider, an insurance company, had marked up its annual expenses an extra 0.60 percent per fund — they were already paying at least 1 percent annually — to cover administrative expenses.

“The insurance company lied to them and said they didn’t charge them anything extra,” Armstrong said, who noted that this is a common problem in 401(k) plans. “Participants aren’t aware they are being gouged. It’s an absolute scandal and a national disgrace.”

Examine Fund Expenses

Armstrong then negotiated for the hospital to transfer its funds into a group of low-cost, passively managed mutual funds — a return-enhancing option for any 401(k) plan. As a result, the employees were paying less than 1 percent for fund expenses. That money automatically improved employees’ net returns.

In many cases, saving money on 401(k) plan expenses involves asking a broker to move into a lower-cost class of fund shares. No savings are possible, though, unless you press your employer to audit and compare fund expenses.

State and federal regulators and the fund industry said they are all investigating mutual fund trading and sales practices. The Investment Company Institute, the fund industry’s trade association, said it has formed two task forces and will “explore options for the SEC’s consideration.” In addition, the New York Stock Exchange and the National Association of Securities Dealers said last week it is examining broker-dealer involvement in funds.

Pinch Now, Not Later

Don’t wait for the regulators to move. You can act on retirement plan expenses now. Here’s a start:

– Ask your employer how much is being paid per employee for plan administrative expenses. How does your plan compare to plans of the same size?

– Urge your employer to review costs yearly and reduce expenses where possible. Excessive costs can even be recaptured, with the savings credited to your plan account if they discover overpricing. Glading said he was able to save $300,000 a year, or $500 per employee, for example, on a client’s $120 million 401(k) plan.

– Tell the SEC you want better fund disclosure that includes the costs to investors of sales practices. Let them know what’s going on if your plan has excessive expenses. Send them an e-mail at

Keep in mind that since most plan expenses come out of your pocket, it’s in your best interest to pinch dollars now so you won’t have to do it in retirement.