What Is Your 401(k) Costing You?

As Congress, Regulators Scrutinize Hidden Charges, Employers Begin to Ditch High-Cost Plans, Negotiate Lower Fees

The dollars you're salting away in your company-sponsored 401(k) plan will someday help fund a well-earned retirement. Meantime, the company managing your retirement-savings account may be whittling away at that money to pay for all sorts of stuff -- even a telephone help line.

401(k) plans aren't required to make clear how much participants are being charged in fees. And there can be a lot of them, including charges to cover independent audits; tracking and maintaining accounts; advisory services; as well as help lines, and of course the basic expense of managing funds in a plan. In fact, investing in a fund through a 401(k) often can be more expensive than buying it through a retail brokerage account.

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Now, as Congress and federal regulators look into whether the plans' expenses are justified and whether fund firms should be required to disclose more information, employers are taking steps on their own to cut costs for their workers. Some companies are ditching high-cost funds and replacing them with cheaper investment options. Some are getting more aggressive about negotiating lower fees. And many are taking extra steps to make sure their employees understand the fees they are paying.

Employers often help pay the bill. But a survey by consulting firm Hewitt Associates showed workers have been shouldering a growing share of many plan fees in recent years. Participants can find fund expense ratios in a prospectus. But there's typically no clear breakdown of how much each participant is paying for various plan services like accounting or custody of plan assets.

Fees in 401(k)s are becoming increasingly important as the plans become the primary retirement-savings vehicle for many Americans. Even a small reduction in fees can result in huge additional savings when an employee retires decades later. At the end of 2005, about 61 million individuals participated in 401(k) plans, with assets totaling $2.44 trillion.

Companies running the plans say fees are adequately disclosed, and that too much disclosure can be detrimental. If participants can easily compare the costs, some in the industry argue, employees might plow all their money into cheap but low-return investment options like a money-market fund. Others say that if employees saw all plan expenses, they might not want to participate at all, which would be a "worst-case scenario," says Pamela Hess, director of retirement research at Hewitt Associates.

The growing tension over 401(k) expenses spurred federal lawmakers at a congressional hearing last week to probe whether spotty disclosure of fees makes it difficult for employees to know if they are getting a good deal in their 401(k) plans. And the Labor Department, which oversees 401(k) plans, is drawing up new disclosure rules on fees. Some employee groups also have filed lawsuits against their employers for offering plans that allegedly charge excessive fees.

Funds in a 401(k) can come with many layers of fees. For instance, a retail investor can buy Class A shares in the American Balanced fund, which invests in both stocks and bonds, for a 5.75% sales charge, and pay annual expenses of 0.59%. But the same fund's R2 share class, which is designed for retirement plans, carries an annual expense of 1.45%. This breaks down to 0.46% for services like plan administration and record-keeping, 0.24% for management expenses, and 0.75% in so-called 12b-1 fees, which are intended to compensate the 401(k) plan's financial adviser.

Chuck Freadhoff, American Funds' spokesman, says the ongoing costs in the retirement share class are higher because "the retirement-plan business is inherently more complicated and slightly more expensive."

To cut costs for its employees, I&I Sling Inc., an Aston, Pa., manufacturing company, plans to move the $2.7 million invested in its 401(k) plan out of actively managed stock mutual funds and into cheaper index-tracking funds. Robert Capone, the company's chief financial officer, says the move will cut the plan's annual fees to 0.7% of assets invested from about 1.6% currently, saving about 70 participants a total of about $24,000 a year.

Other employers are switching from mutual funds, the traditional 401(k) investment, to cheaper exchange-traded funds, which are similar to mutual funds but trade on an exchange like a stock. The average expense ratio for an ETF is about 0.4%, compared with 1.4% for the average diversified U.S. stock mutual fund.

"It's like somebody opened up the floodgates," says Darwin Abrahamson, head of Invest N Retire LLC, a firm that provides ETF-based 401(k) plans. He estimates his company will end the year with $500 million to $1 billion in assets, up from $50 million at the end of last year.

Many employers are trying to learn more about their plan expenses. Traditionally, employers haven't fully understood these, because they're too complicated and because some fees are hidden. "The providers in some cases are not totally forthcoming with all the fees," says David Wray, president of the Profit Sharing/401k Council of America.

Now, some employers are hiring outside consultants just to help them understand the fees. One retirement-plan consulting firm, Plan Sponsor Advisors, says it has seen demand pick up for in-depth fee reviews for large 401(k) plans. A number of companies are posting tables on their Web sites, or emailing them to employees, that show total expenses attached to each of the 401(k) investment options.

Some companies are saving by shopping around. Nordam Group, a Tulsa, Okla., aerospace company, purchased all of its 401(k) services from one provider until early last year, when it began shopping for services separately. Now, different firms provide record-keeping, custody of plan assets and investment advice, and the plan's expenses are "substantially less" than they were under the bundled arrangement, says Jon Day, Nordam's vice president of finance.

One area of concern are the high fees, complexity and potential conflicts of interest associated with so-called revenue-sharing agreements. These often involve payments by a mutual-fund company to a 401(k) plan provider to compensate the provider for services such as account maintenance. These costs are often built into the expenses of the funds offered in the plans, and help to increase the cost to plan participants. A 12b-1 fee, for example, is often used to make revenue-sharing payments and to pay commissions to people who sell funds to 401(k) plans.

But critics say the revenue-sharing payments can exceed the value of the services provided. Since fund fees are typically asset-based charges, longer-term employees who have more money in a plan must pay a greater share of these expenses. And since different funds have different amounts of revenue sharing built into their expenses, certain participants may pay a greater chunk of plan administration costs just because they chose to invest in a particular fund. Yet revenue-sharing arrangements are rarely explained to participants.

Some 401(k) plans are seeking to save participants money and address potential conflicts of interest by dropping plan providers that accept payments from funds inside the plan. Candace Walters, president of HR Works, a Fairport, N.Y., human resources firm, was concerned that her 401(k) plan provider was pushing participants into funds that paid higher commissions. So late last year, she moved her plan to a provider that doesn't accept commissions from funds. The move cut her plan's investment management fees to 0.64%, from 0.75%, she says.

Write to Eleanor Laise at eleanor.laise@wsj.com