Our policy: No hidden fees & no asset-based fees & no commissions, ever!

Watch for Hidden Fees

The US Labor Department is currently auditing 401k plans of all sizes because of a trend that may violate current pension laws. Many companies, especially smaller businesses, are shifting plan administrative expenses to plan participants, knowingly or unknowingly. This shift of plan expenses comes in the form of hidden fees that are routinely deducted from each participants’ retirement savings by some plan providers and mutual funds. Because of lax reporting requirements, no one really knows how much money changes hands behind the scenes, but it is estimated that excessive fees may be as much as $1.5 billion per year, and growing.

In the 401k arena, expense fee disclosure, whether to plan participants or plan sponsors, has been notoriously confusing and unclear. The impact of these confusing hidden fees on plan participants’ retirement accounts can be very significant over time. As example, consider a hypothetical 401k investment such as a mutual fund, with deducted expense fees of 1.3 percent versus one with fees of just .3 percent. Applied to an initial 401k investment of $5,000, with regular annual investments of $5,000 returning 10 percent, and compounded over 15 years, the difference between the low-fee investment and the high-fee investment adds up to $15,398. That’s a significant sum deducted from a participant’s retirement savings.

Policymakers and plan sponsors seeking to structure well-managed 401ks for their aging workforces are beginning to acknowledge the negative impact hidden fees has on eroding pension accumulations for retirement. What might appear to be a small difference in deducted investment fees can result in substantial differences in eventual retirement benefits.

Our Policy Regarding All Asset-Based Fees

We at Pension Systems Corporation, distributor of 401k Easy and Run It Yourself 401k, has always worked hard to keep 401(k) plans as affordable as possible for our clients, many being small and very small companies.

Our policy is not to accept any rebates or revenue sharing of fees deducted from our clients’ plan assets unless those fees can be returned to the plan, or used by Pension Systems Corporation to offset plan expenses. Entities that provide and support 401(k) plan investments, include mutual funds managers, fund distributors, asset custodians, asset trustees, investment brokers and advisors, and plan administrators and record-keepers. These entities typically earn at least a portion of their compensation from asset-based fees deducted from plan assets.

401k Easy is an exception to the norm in that we do not earn any compensation, either directly or indirectly, from our clients 401(k) plan assets. If rebates are offered, we instead have the rebates returned to the client or directly applied to reducing our clients’ costs. Our published prices, available online for all to see, are the only net compensation we collect.

For more information on asset-based fees we recommend reading Study of 401(k) Plan Fees and Expenses by the US Department of Pension Welfare and Benefits.

Read what the press is saying about hidden 401(k) fees

According to Forbes Magazine . Retirement Plans From Hell 7/13/09 by Scott Woolley, hidden fees are a common occurrence in 401(k) plans offered by AIG, John Hancock, AXA Equitable, Lincoiln Financial. and other providers. The following are some excerpts from the article:

Early this year the woman overseeing the 401(k) plan for a rural Oregon company gathered her 25 colleagues together to hold an election. At stake: whether to continue paying AIG an annual 1.25% of assets to manage their 401(k) plan as part of an insurance contract, or switch to mutual funds costing a third less. No surprise that the proposal to convert passed easily.

Then the nasty surprises started popping up. As she sought to unwind the plan, the administrator discovered that AIG had been tacking on a variety of fees all along. One nicked employees for 2% annually when they borrowed money from their own 401(k) s—work the new plan was willing to do for a flat $50 a year.

To top it off, AIG said that many of the employees would have to wait five years to get back their entire nest eggs, with no choice but to keep paying the fees. AIG says such lockups are disclosed in its plan contracts and are shorter than the ones many other insurers impose.

The company’s frustrated administrator, who agreed to talk only anonymously, says she’s still baffled by the complex annuity contract. We still don’t have a good handle on what they’re charging us, she says.

Like the Oregon outfit, lots of mostly small companies are finding out the hard way that the 401(k) plans they bought from insurance companies, usually set up as group annuities, came with a variety of hard-to-find charges and lockups. Or, more aptly, the plans they were sold by people motivated by lavish commissions. Many hyped the product as a low- or no-cost proposition for employers while glossing over the fees charged to employees. A successful ruse it is. All told, insurers have lured 18,000 companies into parking $185 billion of 401(k) assets inside group annuities and similar insurance contracts, according to an analysis by Larkspur Data Resources of plans with under $250 million in assets.

Insurance companies cater to the smaller, less sophisticated part of the market , says Robert Prall, managing partner of Rx Investment Solutions, which advises companies on how to build low-cost 401(k) plans. Every time we’ve gone into a company that has a group variable annuity contract, no one has really understood how it worked.

One John Hancock group annuity contract allows it to skim off up to 5% of assets before the remains go to work for savers. That’s on top of trailer commissions of up to 1.4% of assets annually for as long as the plan exists and asset charges of up to 4%. John Hancock says those maximum fees provide a distorted picture and that it offers a variety of competitive rates. Why then, you might ask, does another piece of fine print state that John Hancock makes no claim that any expenses paid directly or indirectly by the plan are reasonable?

When it comes to fee abuse in retirement plans, you can put group annuities at the top of the list, says Daniel Maul, an investment advisor in Seattle, Wash. who helps small firms set up 401(k) programs.

Among 401(k) plans with assets of less than $250 million, group annuity-style menus account for 55% of the market and are sold by AXA Equitable, Lincoln Financial and other insurers. A few are like the deferred annuities sold outside retirement plans that combine some life insurance coverage with savings features. Those products typically offer investors a choice of mutual funds; the insurance takes the form of a pledge to pay their heirs what they put in if they meet with an untimely end at a point when the value of their assets has fallen. At the end of their careers, deferred annuity holders can receive their savings either as a lump sum or as annuity payments for life.

The annuity trappings do, however, mean that investors get hit up for higher fees. John Hancock’s group annuity offers the JH American Funds Growth Fund of America at a cost of 0.91% annually. Other 401(k) investors can get an identical fund at less than half the cost.

An accountant at a five-person Texas firm was shocked to discover while looking through his 401(k) statements recently that AXA Equitable’s group annuity was charging 1.69% annually to own its version of an S&P 500 index fund.

While insurance salesmen are free to present themselves as honest brokers, they are not required to regard themselves as fiduciaries with a legal obligation to put plan participants’ interests first. Often they don’t.

Among 401(k) plans designed for small companies, the total fees on some group annuities can top $1,000 per participant every year, or three times what low-cost 401(k) plans cost, according to data provider 401kSource. Have second thoughts after signing up and you’ll discover that buying a group annuity is like joining the Sopranos.

Surrender charges allow insurers to offer very generous commissions, explains Parker Payson of Employee Fiduciary, a Mobile, Ala. firm that sets up low-cost mutual-fund-based 401(k) plans for small companies. The annuity provider wants to make sure the client is there long enough to recoup the commission.

Customers, for the most part, haven’t evolved to the point where they know what’s going on. Two-thirds of workers are unaware that they’re paying anything for 401(k) plans, according to a 2007 survey by AARP.

Special 401k Census website for statistics-based insights into 401k participation

On an ongoing basis we blind sample live investment and contribution data generated from many thousands of 401k investor accounts. This raw data is analyzed and quantified, and the results posted in this special website (www.401kcensus.com ) in real time. Only blind sampling of data is performed; no personal identities or personal investment selections are accessed or included in the analysis and postings. 401k Census allows easy comparison of 401k investing profiles for various demographic groups, and visitors learn which classes of investments are the most popular with 401k participants.

You choose your plan’s investments — ‘Mix and Match’ as you please