What are the Hidden Fees in your 401(k)?

I came across a special report today entitled “Uncovering and Understanding Hidden Fees in Qualified Retirement Plans 2nd Edition” ­ Published February 1, 2007. (The download document is now in its 3rd Edition.)

It is written by Matthew D. Hutcheson a professional independent fiduciary expert and who is acclaimed for his determination and efforts to protect the retirement income of American workers. His firm claims that;

“Working closely with your team of existing service providers, I can increase your employee’s future retirement benefits by up to 40% and virtually eliminate your risk as Plan Sponsor, along with any significant probability of being sued in the future.
Ask me how.”

After reading his report you might want to talk to your employer and then talk to him. You will need someone like him in your corner. You can reach him at his firm Matthew D. Hutcheson LLC.

The report starts out by telling you the rising cost associated with 401(k)’s is becoming a major concern in the USA. Whilst it is quite detailed it is readable and all workers who are participating in a company 401(k) should read it and keep a copy handy.

A major problem with Employer sponsored 401(k) is the employers are really not equipped to manage them properly and the time it takes to do so distracts them from their own business. Nevertheless company executives have a fiduciary responsibility to be aware of all fees and charges on a 401(k) plan and to manage and control such fees.

“Even if there were no inherent conflict of interest between the needs of the business and the best interests of plan participants, the practical fact is that executives are occupied with running their businesses, and simply do not have the time or expertise required to serve as true fiduciaries to the plan participants.”

So given they have no time to manage the 401(k) they are an easy target for predatory would-be financial managers. But their goal is not in line with the Employers 401(k) objective.

“The profitability of the 401(k) industry depends upon the magnitude of the fees it can extract from plan assets and plan sponsors–not on how well it protects and enhances the retirement income security of plan participants”

The report quotes John Bogle, founder of Vanguard Investment Group who tells it like it is;

“The financial system put(s) up zero percent of the capital and (takes) zero percent of the risk and (gets) almost 80 percent of the return, and you, the investor in this long time period, an investment lifetime, put up 100 percent of the capital, (take) 100 percent of the risk, and (get) only a little bit over 20 percent of the return.

Specific fees that are considered to be “hidden” are:
· Trading costs, commissions between fund managers and brokerage firms
· Soft dollar “excess commissions” paid to brokerages pursuant to Securities
Exchange Commission (“SEC”) rule 28(e)
· Sub-shareholder (participant) servicing fees – called “sub-transfer agent fees”
· Account distribution (sales) based 12(b)-1 fees
· Account servicing based 12(b)-1 fees
· Unitized variable annuity wrap fees
· Variable annuity mortality costs
· “On-the-fly” pass through fees
· Retail versions of institutional funds (I.e. funds that could be purchased at a lower
price but are not, due to fiduciary ignorance)

The Report summarizes all these fees as “kickbacks” which is exactly what they are.

Most of these fees are hidden and so are not included in the published costs. The cost have increased substantially since the first release of this report in August 2004.

“The mutual fund industry is now the world’s largest skimming operation – a $7 trillion (now$12 trillion) trough from which fund managers, brokers, and other insiders are steadily siphoning off an excessive slice of the nation’s household, college, and retirement savings.”7 ($12 trillion update added)

This is why it is so important for you to get directly involved with your company 401(k) and question everything and do it regularly. If a financial services firm is managing the company 401(k) on behalf of the employer make sure they minute everything they do and fully disclose all fees and charges they levy against the fund.

The Report lists fourteen people, firms or institutions with a hand in your 401(k) taking out your hard earned money so they can maintain their lifestyle at your expense.

Towards the end of the report there are some tips on questions to ask the consultant, third party administrator, mutual fund company, investment advisor or broker or whomever is actually charged with the responsibility of protecting your 401(k). This is by far the most important part of the report to me. It gives you the tough questions you need to ask to put you in control.

You might want to go through this report with them and get them to provide you with the answers about your 401(k). The answers may mean there is a case to answer too so be prepared.

An excellent site for unbiased information on 401k is the 401k Help Center.

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