Tip of the Week: Feds Watch 401(k) Fees

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	Feds Watch 401(k) Fees Financial Tip of the Week by Deloitte & Touche OnLine October 19, 1998

Excessive fees will hurt you at retirement.

A new booklet by the Department of Labor aims to help consumers do some digging. A Look at 401(k) Plan Fees is a 17-page pamphlet intended to help consumers wade through the returns reported by many retirement funds to understand the hidden costs that underlie them.

As the booklet describes, plan fees, which can run as much as 2% of assets, can have a significant bearing on a retirement portfolio's performance.

In addition to defining a lot of relatively common terms, such as front- and back-end loads, as well as some arcane ones, such as surrender and transfer charges, the booklet provides consumers with some cautionary, behind-the-scenes guidance. For example, it points out the higher costs of actively managed funds versus passive ones and warns participants that "brand name" funds sold to individuals tend to charge higher fees than accounts that are separately managed for an employer's plan.

Perhaps most importantly, the booklet illustrates just how devastating the effects of excess fees can be. For example, it describes two hypothetical clients, both of whom have 35 years until retirement and $25,000 invested in a 401(k). Each employee averages a 7% annual return on his investment and makes no additional contributions tot he plan. One investor pays fees and expenses averaging 0.5% a year and retires with a nest egg of $227,000. The second pays fees and expenses averaging 1.5% a year and ends up with only $163,000. In other words, a one-percentage-point difference in fees represents $64,000 less in savings come retirement day.