http://www.smartmoney.com/spending/rip-offs/10-things-your-401k-provider-wont-tell-you-20365/10 Things 401(k) Providers Won't Tell You
Published June 21, 2010
1. “We’re making money on your 401(k) — even if you’re not.”
With a growing awareness of the importance of preparing for retirement, the number of 401(k) investors has soared in recent years, peaking at 60.6 million in 2007, according to Cerulli Associates, an asset management research firm. But that torrid growth also left millions of investors in the lurch when the market crashed in 2008 and the value of their plans sank, in some cases dramatically. In fact, following the market downturn, the number of 401(k) investors dropped, settling at an estimated 50.5 million this year.
Regardless of a 401(k)’s performance, most providers still get a cut of the expense ratio on the funds. In this practice, known as revenue sharing, there can be money left over after certain costs — for recordkeeping, administration and marketing — are covered. In most cases, this excess revenue stays with the plan providers and at times is used to market their investments to other companies rather than going back into investors’ 401(k) plans, says Matt Gnabasik, managing director at Blue Prairie Group, an institutional retirement and investment consulting firm.
2. “You may not have full disclosure about where all your money is going.”
By the end of 2009, 401(k) plans, IRAs and pension plans had more than $15 trillion in assets under management, says Yannis Koumantaros, principal and director at Spectrum Pension Consultants. With most of these plans charging participants fees, a lot of money is at stake.
It’s often difficult for an investor to know the exact fee breakdown of their 401(k) plan. That could soon change. In May, the House passed the American Jobs and Closing Tax Loopholes Act, which could provide additional fee disclosure to participants in defined-contribution plans, including administration and recordkeeping fees and investment management fees.
“Plan costs will continue to become more transparent,” says Gnabasik. And, “anytime you have more transparency, it tends to lower fees.” Up until five years ago, “record keepers rarely divulged their cost structure to the plan sponsors; they now, for the most part – especially with larger plans – tell the plan sponsor how much they need to make in order to pay for day-to-day administrative costs.”
Still, even if an investor knows the fee breakdown of his or her 401(k) plan, it can be very difficult to know what portion of that is left over as excess revenue. “Nobody is saying that people shouldn’t be paid; all we’re saying is they should be paid fairly and consumers should know what they’re paying for,” says Koumantaros. Also, consumers should keep in mind that you can’t tell how much revenue is shared simply by looking at the expense ratio of a mutual fund .
3. “You’re buying wholesale, but we’re charging you retail.”
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