bmcper 
CEO/Auditor
Posts: 58
(12/20/00 2:17 am)
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Know Your 401K !!!
Is your employer shortchanging your 401(k)?
The Labor Department is investigating whether companies across the country are unfairly passing on 401(k) fees to their employees -- a change that could cost you tens of thousands of dollars by the time you retire.
Labor Department offices across the country are currently auditing pension and 401(k) plans because of a trend they think violates current pension laws: companies are shifting more of those plans' administrative expenses onto employees. This means that 401(k) account balances could be tens of thousands of dollars smaller at the end of a worker’s career.
Since these audits are being conducted from regional offices -- and not being directed by Labor Department headquarters in Washington -- they are likely to continue through next year.
Here’s why the Labor Department is concerned. According to a survey by Hewitt Associates, 38% of companies with 401(k) plans charged participants for record-keeping fees in 1999, an increase from 22% in 1991. And 41% charged participants a trustee fee to keep custody of the plan assets in 1999, up from 27%.
401(k) plans seem to cost around 1% to 2% of assets to manage, including record keeping, loan administration and fund management. A more precise number isn’t available because there are so many plans now in place. What’s less clear are charges passed directly on to employees.
The Labor Department's Kansas City, Mo., regional office, which covers the upper Midwest, began focusing on fees last year. While Deputy Assistant Labor Secretary Alan Lebowitz says the Kansas City office started its audits on its own, they’ve spread to offices in New York, Atlanta and San Francisco.
According to Lebowitz, the Kansas City office found that 65 of the100 companies investigated for fee-related infractions violated the Employee Retirement Income Security Act of 1974 (ERISA), the nation’s governing pension law. While Lebowitz wouldn’t release names, companies agreed to pay money back to the plans. Payments ranged from $20,000 to nearly $1 million.
The issue in question is that some companies are not only beginning to shift legitimate plan expenses to workers, but are shifting expenses that, in the Labor Department’s reading of the pension laws, should be paid by the companies. These expenses include any IRS penalties due by the pension plan, costs of changing plan features and costs of collective bargaining over pension issues. And the Labor Department’s regional auditors are saying companies should pay all, or some of, even routine, ongoing plan expenses that are required by either federal law or the IRS.
Some pension experts are crying foul, saying the Labor Department hasn’t issued guidelines on what expenses may nor may not be charged to a 401(k) plan.
The American Benefits Council, which represents organizations involved in setting up and managing 401(k) plans, has been leading the charge. James Klein, the council’s president, argues that companies should be able to pass on the costs of regular, ongoing plan expenses such as record-keeping fees, non-discrimination testing and other expenses that plans incur to comply with federal law.
Council members have been in ongoing discussions with the Labor Department, says John Scott, manager of retirement policy, to clarify which fees companies can pass on and which ones they cannot. Scott believes that the regional audits will continue even under a Bush administration, since the auditors in the regional offices are rarely influenced by changes in the party running the executive branch.
Why employers are shifting costs
One reason companies are shifting administrative costs to employees is that they haven’t gotten much “mileage” out of paying these hidden costs, says Ted Benna, president of the 401(k) Association and the person credited with creating the 401(k) plan. Employers would rather spend their money on other employee benefits or improve the matching formula for the 401(k) plan, he says.
Shifting administrative costs is also part of a larger trend of transferring responsibility for retirement from employers to employees. The termination of traditional defined-benefit pension plans, conversion of these plans to so-called cash-balance plans (see “Keep your pension benefits from shrinking”) and the growth of 401(k) and similar plans are indicators of this trend. Now, employers want to transfer part of the cost of offering 401(k)-type plans as well.
Ironically, one reason that costs can be shifted now is the enormous success of 401(k) plans. David Wray, president of the Profit Sharing/401(k) Council of America, says, “With a new plan, there are no assets, so the company must pay the fees.” Now that these plans have grown and individual account balances are larger, employees can afford to pay more costs, Wray says.
Why fees are important
In addition to performing audits of plans, the Labor Department is trying to educate employees about the fees in their plans. (Click on link to “A look at Pension Plan Fees” at left.)
The problem with paying higher fees in your 401(k) plan is the same problem that you face in investing in mutual funds: small differences in annual asset-based fees, compounded over many years, can really add up.
Here’s one illustration that the Labor Department gives to show how important your plan fees are: Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7% and fees and expenses reduce your average returns by 0.5% a year, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5%, however, your account balance will grow to only $163,000. The 1% difference in fees and expenses would reduce your account balance at retirement by 28%.
So what can you do? Here are some tips from the Labor Department:
Check your quarterly plan statement carefully. Look especially for fees charged to your account. If you see something you don’t understand, ask your plan administrator or look at the Summary Plan Description for an explanation.
Push your employer to bring in a new 401(k) sponsor. The Internet and new technology are lowering the administrative costs for 401(k) plans, so if you think your plan’s costs are too high, you might ask your company to check out these new offerings. The biggest vendors of 401(k) plans are mutual fund companies and brokerages, including such well-known names as Charles Schwab, Fidelity Investments and the Vanguard Group, as well as banks.
Talk to the Labor Department. If your employer will not pay expenses that you think the employer should be paying, contact your regional Labor Department office (See link at left) and have it look into the situation.
Tax update
We’ve been writing about Congress’ efforts to pass tax cuts. Bills to repeal the estate tax and modify the marriage penalty were vetoed by President Clinton last summer as too costly. Lawmakers tried again in the fall, but adjourned before the Nov. 7 election without passing any major legislation. They came back on Dec. 5 to consider pension and tax legislation. This time, they decided to hold off until after the new Congress is sworn in on Jan. 3 and President-elect Bush’s priorities are clear. So far, the President-elect has indicated he wants to push his $1.3 trillion tax cut proposal. So, yes, we expect a big tax bill next year.
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