Employers scrutinize cost of running 401(k)

By Hank Ezell - COX NEWS SERVICE

ATLANTA-- SOMETIMES A FLOWER grows out of the slime.
One example: More than 70 percent of large employers are worrying about how much they and their employees have to pay the managers of their retirement savings accounts.

That factoid is the flower. It comes from Hewitt Associates, a human resources consultant, which surveyed more than 140 companies with 1.9 million employees in their 401(k) plans.

The slime is the 9-month-old mutual fund scandal, which scared companies into paying attention.

"Managing fees and ensuring they are reasonable is a key fiduciary duty for employers," said Pamela Hess, a defined contribution consultant for Hewitt.

It is encouraging, she added, that more companies are paying attention to investment costs and taking steps to bring them down.

Reduced costs could increase the value of an employee's account by hundreds of thousands of dollars over time, according to Hewitt.

Suppose you have a balance of $50,000 and 30 years to retirement. If your investment expenses are 0.5 percent, you would end up with $437,748. If your expenses are at the high end, 1.5 percent, you will have only $330,718. The example, provided by Hewitt, assumes that your investment earns 8 percent a year and that you make no further contributions.

Investment costs are invisible to most employees. They usually get quarterly statements showing the value of their accounts, but those statements rarely give any details about the money deducted for management expenses, administrative costs or trustee costs. Nor do they show what portion of those costs was paid by the boss and what portion came out of each individual account.

Check with your company's human resources or employee benefits department to find out the expenses on your company's 401(k). Ask about the fees charged by the mutual fund manager, administration fees and any other expenses associated with the plan. For detailed information, check out www.dol.gov/ebsa/publications/401k--employee .html.

It's your money, for the most part, and you deserve to know what you're paying someone to manage it. Besides, when you raise the questions, you let the boss know that somebody cares.

The Hewitt survey makes it clear that major employers already have plan expenses on their minds.

Sixty percent of the surveyed companies said they have reduced or plan to reduce investment management expenses, which make up about 70 percent of total operating costs.

The main way an employer can do that is by switching to lower-cost funds. The cheapest are institutional funds, which are set up to manage huge amounts of money.

Don't let uncertainties about expenses drive you away from 401(k) investment. For one thing, you can deduct your contributions from your taxable income, with some limits. For another, many companies make a matching contribution, usually topping out at 3 percent of your salary. That's free money.

Here are some other steps to help get the most from a 401(k):

Decide how much risk you can stand. Stocks usually have a higher return than bonds or money market funds, but they are more volatile. The younger you are, the longer you have to ride out down cycles in the stock market. If you dump everything into really safe funds -- the equivalent of a bank savings account -- inflation could match or overpower your otherwise safe returns.

Control costs. A 401(k) plan usually offers five to 15 mutual funds to select from. Once you decide on stocks, bonds or other investment classes, look for the funds with the lowest expense levels.

If you don't like the choices, ask your employer to consider offering others.

Do your homework. Employers frequently offer investment information, as do mutual fund managers. You can get a good rundown at www.quicken.com/retirement/401k

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