Retirement plan expenses can be hard to pinpoint. One problem is that few workers know how much their plans charge in expenses, and those who want to find out have a hard time. It's not that their bosses are being secretive; most bosses don't know, either.
Many business owners, especially those of small- to medium-sized operations, are blind to administrative or investment costs. They often lack the knowledge and experience to ask the right questions. Facing complex regulations and fiduciary requirements, they want a well-known company to take the responsibility, and they're not too fussy about the fine print. As plan providers, insurance companies have thrived in this ask-no-questions environment.
The situation can get really murky. While the Securities and Exchange Commission requires mutual funds to file annual disclosure statements that include investment fees, banks and insurance companies have no similar obligation. And no plan has to tell participants how much they're paying for record-keeping, statement preparation, legal costs and other nuts-and-bolts expenses.
The growing cost gap
Reports indicate that the cost gap between the lowest- and highest-cost plans is widening. The most likely reason: Information and fees are often hidden, and few but the smartest players know where to look. And because disclosure is so scanty, companies can't easily compare the fees charged by competing providers.
This means many investors will miss out on big bucks, especially as the impact of compounding grows over several decades. The overall average fee is probably around 1 percent, but for many plans, the number can be as high as 3 percent.
For the plan participant, the dollars-and-cents difference can be dramatic. As the chart below shows, assuming an annual return of 10 percent over 30 years, a person who saves $1,000 a year would have $149,579 in the end-assuming a 1 percent annual fee, but only $102,093 with a 3 percent annual fee.
It's clear that high expenses can be confiscatory, whether in 401(k) plans or in any other investment vehicles. The number of load mutual funds, for example, has increased recently. The most common explanation seems to be that, as a large segment of investors has grown older-and richer, courtesy of the extended bull market, they feel the need for advice.
Some are being led to believe that buying load funds from a stock broker will do the trick. Not likely. Every dollar invested incurs a tariff as high as 5.75 percent. And not all are front-end loads. Some charge a load when you sell; many have 12b-1 fees, annual so-called "marketing" charges that are piled on top of a fund's management and administrative expenses.
What's truly astonishing is that some investors will buy load funds from a financial adviser who also charges an annual management fee, or opt for a broker's wrap account with a yearly toll in the 3 percent neighborhood.
Good times mask high expenses
Because expenses and loads are asset-based, their effect is somewhat blunted during periods of high total return. In the 1980s, for example, the S&P 500 grew at an annualized rate of 17.5 percent. In the 1990s, the S&P's growth rate has been 16.6 percent. The S&P's 30-year average, however, is closer to 12.2 percent, and at that rate of return, two percentage points makes a marked difference.
None of the high-expense routes makes any sense. Equal or better retirement plans and investment vehicles with significantly lower fees can be found. All it takes is homework and respect for a hard-earned buck.
Harvey Zeve is president of H.L. Zeve Associates, Investment Counselors, a Pittsburgh-based investment counseling firm.