Although the Department of Labor now requires employers to tell you how much your 401(k) is costing you, not everything is disclosed -- or understood by employees.
For years I've been recommending that employees approach their boss to ask for an independent audit of their plan to obtain lower-cost funds with more diversification. I'd like to take that one step further: Ask them to hire a fiduciary consultant, who can identify unnecessary expenses and recommend lower-cost alternatives.
Why a fiduciary? Because they're not in the business of selling retirement plans, mutual funds or insurance. They are legally bound to get the best deal for their clients. That means finding cheaper funds and putting more money in your pocket.
Greg Carpenter, who is a fiduciary for Employee Fiduciary, LLC, in Mobile, Alabama, and a source on past articles, contacted me recently and enlightened me on how to identify hidden expenses. Here's some of the advice that you can use when talking to your employer:
* Are you getting the least-expensive share class? Mutual fund companies play this game where they offer a range of share classes from "A" to "R." Some are obnoxiously onerous while others a much better deal. Why the confusion? They are structured to compensate middlemen, but each share class takes money out of your pocket every year.
"Participants only see the total (annual percentage expense) charge and are not required to be told that what class of shares they own," says Carpenter. "This lack of disclosure puts the burden on the employee to find out if a lower cost class is available and to whom their fee is being paid."
* How much are middlemen getting paid? This is a critical question because it depends on the share class.
"The DOL rules allow providers to disclose to participants only the amount charged against plan assets, expressed as a percentage of assets. They are not required to disclose how those fees are divvied up to various vendors, nor are they required to disclose that they charge different amounts for the same investment mandate (i.e., the share class)," Carpenter adds.
"American Funds is a very clear example. They offer six different share classes for each of their funds used in retirement plans – "R1" through "R6" – all with exactly the same investment mandate and managers. The only difference between the share classes is the fee charged to investors. For example, the Growth Fund of America "R6" shares charge 0.34% annually and pay nothing to third-party administrators or financial advisors. "R1" shares cost 1.44 %. "R2" = 1.37%. "R3" = 0.98%. "R4" = 0.68%. "R5" = 0.39%. In each class, American Funds gets paid 0.34% and the additional fees are paid to third parties – some affiliated with American Funds and some not – typically administrators and brokers.
* What Can You Do? Get Informed, Get Angry, Get Active. In the 401(k) world, ignorance on the part of employers and employees is bliss for third parties, brokers and fund companies. Here's the nasty part, according to Carpenter:
"Different share classes are available so that financial advisers and/or brokers can pass along their fees directly to participants and have those fees deducted as part of the net return of the investment. The game is people won’t protest if they don’t know what they are paying – or even if a better deal is available. What can employees do?
Unfortunately, employers are generally complicit in these arrangements. High-fee share classes allow employers to pass along company costs to employees. Employers pay reduced or zero fees to brokers and TPAs who use the higher cost classes. To get a better deal, employees must confront the employer and demand an accounting and change – IF they can figure out what is going on.
Retire (Photo credit: Philip Taylor PT)
Of course, not all fund companies play the share class game and I'm not picking on American Funds, which is Carpenter's example, not mine. Many fund companies strive to offer the best deal to 401(k) participants.
A qualified fiduciary can find them for your employer -- or you can shop for them yourself. I would start with a service like Brightscope to find the best plans for your company's size. Print out some sample plans and hand them to executives and your 401(k) plan administrator.
If you're not getting traction on reforming your retirement plan, here's another selling point: Ask executives if they have money in the plan (most of them do). Show them in dollars how much more they can build their wealth over time with a cheaper plan.
There's a decent 401(k) cost analyzer at Personal Capital. You don't even have to do the math and there are brightly colored charts that illustrate the savings. Now, more than ever, you can boost your retirement contribution by simply changing funds. The savings are much more vivid than black and white: They're in living color.
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John F. Wasik is an investor advocate, journalist, speaker and the author of Keynes's Way to Wealth: Timeless Investment Lessons from the Great Economist and 13 other books.
