Fees Take Toll on Employer Sponsored Retirement Plans
by Mark Stinson, CPA, CFP®, MBA /
Winter 2005 / Financial & Estate Planning
A common mistake people make is to leave their retirement plans (401(k),
403(b), 457, etc.) with their previous employer. When they do this, they incur
costs which they can avoid by moving the funds to a Rollover IRA. There are
several reasons we recommend a rollover to an IRA:
- IRAs have lower fees.
- IRAs provide more investment options.
- IRAs provide more estate planning flexibility.
- IRAs allow consolidation of accounts to simplify and improve management of
the money.
An article in the October 21, 2004 Wall Street Journal (WSJ) explains the
high cost of employer sponsored retirement plans. In the article "High Fees Hit
Small Plans" the WSJ reports that the "retirement savings of millions of
Americans are being seriously eroded because of the high fees charged to
administer their 401(k) plans."
The WSJ cites findings from a study by HR Investment Consultants in
Baltimore. According to the study, investors in employer plans with 50
participants or less pay an average of 1.4% of their assets annually in fees.
Investors in 1000-person plans pay an average of 1.17%. However, many investors
in small plans pay as much as 3% or more. Over time that can make a significant
difference. Over 20 years a 1% increase in fees on a $100,000 investment can
reduce the gain by $66,254 (assuming a 7% return).
There are three types of retirement plan fees:
- Plan Administration Fees. These are day-to-day expenses for administrative
services such as plan record keeping and legal and trustee services that are
necessary to administer the plan.
- Investment Fees. These are the largest component of plan fees and
expenses. Fees for investment management and investment related services are
generally assessed as a percentage of assets. The fees are deducted from your investment returns and include sales
charges (commissions), management fees (investment advisory fees) and other
fees for record keeping.
- Individual Service Fees. These are individual service fees associated with
optional features (such as loans) offered by the plan.
The WSJ article goes on to report that small plans are more vulnerable to
high fees for several reasons:
- Small plans are unable to spread fees, including legal compliance,
shareholder communication and record keeping fees, across as many
participants.
- Small plans have a less attractive choice of investment options.
- Many plans are built around pricey group-annuity contracts issued by
insurance companies.
- Mutual fund companies which generate profits from assets invested in
mutual funds tend to shun small plans. For this reason, small business owners
turn to stock brokers and insurance agents to set up plans. These brokers and
agents often charge higher fees.
You can obtain information about the fees in your plan by contacting the plan
administrator and requesting the following:
- Prospectus. The prospectus describes the investment management fees and
other fees associated with each investment alternative. The plan administrator
should also provide a description of any transaction fees and expenses that
are charged against your account balance in connection with the investments.
- Account Statement. Your account statement may show administrative and
individual expenses charged to your account.
- Summary Plan Description (SPD). The SPD will tell you how the plan
operates. It may tell you how expenses are allocated among plan participants.
- Annual Report. The annual report (Form 5500) contains information
regarding the plan assets, liabilities, income and expenses and shows the
aggregate administrative fees and other expenses paid.
In conclusion, you can avoid retirement plan fees by rolling over your old
retirement plans to an IRA. In addition, talk to the plan administrator in your
current retirement plan and let the administrator know you are concerned with
fees. BWFA can help you set up a Rollover IRA and move the funds from your old
retirement plans.
