401(k) questions

By Linda Stern

WASHINGTON (Reuters) - It's time to shine some light into the mysterious dark corners of your 401(k) plan.

Congress is working on that -- lawmakers are mulling legislation that would require greater disclosures of the fees that are tucked inside these plans.

But why wait for those slowpokes? Within the next couple of months, your company will be asking you for guidance on how much you want to invest in your 401(k) for 2008. But you should ask some pointed questions of your own, before deciding that.

The vast majority -- some 83 percent -- of 401(k) participants don't know what they are paying in fees and expenses, according to a recent survey by AARP. And that's not good because the fees you pay on these accounts now can really restrain your retirement later.

Here's an example from the Department of Labor: An employee with $25,000 riding in a retirement plan earning 7 percent for 35 years will end up with $227,000 if his fees are 0.5 percent a year. If fees are increased by only 1 percent (reducing his average returns by 1.5 percent), his lump sum will be reduced to $163,000. That's a 28 percent drop in retirement benefits because of the extra 1 percent in fees. It would mean the difference, to that retiree, between being able to spend $851 a month for the rest of his life, or $611. The more money you contribute, the more that discrepancy is magnified.

So, ask away. Your company's benefits department should have all the facts, and it owes you the answers to these questions. Whittle down the fees that you have control over, and press your employer to cut the costs that he can manage. Here's a checklist of questions that can help you manage your 401(k) fees. If you determine, after your fact-finding, that you're in an overly expensive plan, you may not want to keep contributing the max. You can put in enough to capture the company's matching contribution and put the rest in your own low-cost individual retirement account.

• Who is paying the administrative expenses? The administrative costs typically account for between 0.01 percent and 0.2 percent of the assets in the account, with smaller company plans costing more, according to HR Investment Consultants, a Baltimore research firm. But that figure may be deceptive, because many investment companies that manage retirement plans have curtailed the administrative expenses (which employers traditionally paid) and added more fees to the investment part of the equation (which workers pay). Furthermore, some employers have put the burden for paying all of the administrative expenses on the employee.
• Am I paying commissions for my 401(k) investments? How much? What about marketing fees? Employers who hire full service brokers and insurance companies to run their company retirement funds subject their workers to paying as much as 5 percent -- or more -- in sales charges every time they invest in a new fund in their account. No-load funds, which investors buy directly, don't charge these fees. There is a substantial body of research that says that no-load funds perform better than funds that have commissions.
• Am I offered (and am I using) low-cost funds? The average annual cost (called an expense ratio) of a no-load mutual fund holding large-cap stocks (often the centerpiece investment in a 401(k) portfolio) is around 0.84 percent, according to Morningstar. Many index funds in that category charge 0.15 percent. Actively managed funds charge more than index funds, and some charge quite a bit more.

Decide if you want to pay extra for management and if the fund management you're getting is really worth the expenses you are paying for it. If not, make sure your employer offers a low-cost index fund. Ask your company's benefits guru to tell you how the expense ratios of the funds offered in your plan compare to the average expenses of other funds in their category. If you're offered a broad list of funds with varying expenses, think seriously about moving to the lower-cost funds on the list.

• Am I spending too much on services? The third category of 401(k) expenses might be considered nuisance costs. Are you charged fees for borrowing against your account? For getting extra statements? For trading more often, or for getting investment advice? You may find some of these fees necessary or unavoidable. But you should at least know how much they are. And curtail them on your own, if possible, by trading less frequently.
  

    (Linda Stern is a freelance writer. Any opinions in the column are solely those of Ms. Stern. You can e-mail her at lindastern@aol.com.)