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Smart Money Magazine
February 2005
Beverly
Goodman with Nicole Bullock
401(k) Checkup
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 windfalI 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
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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' pay for
their plan, they'lI 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
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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 $1million a year on
a $300 million plan. Individual employees with lots of
savings have gotten rebates as high as $15,000
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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 confIict 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
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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
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