A 2006 special report examined practices that put Americans' retirement savings at risk.
John Fuchs was checking his 401(k) account online one afternoon when he saw something that seemed amiss. Listed along with his regular contributions was a $48 charge, in red.
That's odd, he thought.
Why would anyone be taking money out of his account?
After a flurry of phone calls and e-mails, Fuchs learned that the $48 deduction was no mistake. The money was paid to an outside firm that enrolls employees in his company's 401(k) plan, mails quarterly account statements and handles other administrative tasks.
Fuchs knew the mutual funds he'd chosen charged fees for investing his money. He didn't know that overhead costs were also being taken out of his account. They now cost him about $500 a year.
Because the administrative fee is a percentage of his balance, he will pay more and more as his savings grow. Fuchs figures that by the time he retires, it will have cost him more than $316,000 in direct charges and lost investment returns.
"I think a lot of people out there pay this fee but don't know it," said Fuchs, 38, an information technology manager for an engineering firm in Exton, Pa. "To the average employee, it's totally invisible."
As many employers scrap their traditional pensions and doubts grow about the future of Social Security, Americans' hopes for a secure retirement depend more than ever on their 401(k)s. About 44 million workers have more than $2 trillion invested in these accounts.
Yet unknown to many of them, obscure fees and deductions are quietly eroding the value of their nest eggs. In many cases, employers could bargain for lower charges, but don't.
Mutual fund management fees are the biggest expense. But they are prominently disclosed, have attracted wide publicity and have been declining as fund providers compete for customers.
Administrative fees are another matter. They usually don't show up on quarterly or annual statements. Brochures touting the benefits of 401(k) investing rarely mention them. Employees have to work hard to find out how much they're paying -- for instance, by scouring their plan's website for a record of all activity in their accounts.
Plan consultants and providers collect their cut in varied ways. Some receive a fraction of each employee's savings. That's the charge Fuchs stumbled upon. Others collect a commission from insurance companies that run 401(k) plans.
When mutual fund companies manage 401(k)s, they often absorb overhead costs in return for the chance to give most of the "shelf space" to their own funds. They get their money back through fund management fees.
What's more, fund providers frequently offer 401(k) participants the same retail mutual funds they sell to the general public, not the low-fee alternatives designed for big groups of customers.
Employees tenacious enough to demand information about fees from benefits departments or 401(k) administrators often complain that they can't get straight answers.
Because of outdated federal disclosure rules, publicly available records on fees often reveal only a fraction of the money leaking out of retirement accounts.
"It's very difficult for the average participant to determine what the total expenses are, how those expenses measure up, and who exactly is getting paid and how much," said Bud Green, a principal at Fortress Wealth Management Inc., a 401(k) consulting firm in Santa Monica.
Workers who save conscientiously suffer a disproportionate hit because fees are typically taken as a percentage of their account balances. Someone with $100,000 pays 10 times as much as a co-worker with $10,000, even though it costs about the same to administer the two accounts.
The structure of 401(k)s leaves employees with little or no voice. Employers sponsor the plans and hire the providers and administrators. But workers pay most of the fees.
Employees can raise a stink about the charges -- if they happen to learn about them. But they can't take their business elsewhere; they're stuck with whatever plan their company offers.
"People can be paying thousands of dollars in fees if they've been in their 401(k) plans for years," said John Turner, a senior policy advisor at the AARP Public Policy Institute. "They can be paying thousands of dollars more than they need to be paying."
Fee Is All but Invisible
Fuchs works for Groundwater & Environmental Services, which cleans up contaminated groundwater at gas stations and other sites. The company, which has 600 employees, selected Benefits Sources & Solutions, a consulting firm in Bound Brook, N.J., to run its 401(k).
The consultant advises Groundwater on which mutual funds to include, processes employees' payroll deductions and holds educational workshops, among other tasks.
Benefits Sources does not bill Groundwater for these services. Instead, it collects a percentage of employees' total savings every three months.
In 2004, this fee averaged 0.51% -- $51 on a $10,000 account. Overall, the company took in $48,185 from Groundwater employees that year, the most recent for which figures are available.
The payments do not appear as line items on employees' quarterly statements. Rather, Benefits Sources takes a cut of the mutual fund shares in each account. That makes the fee all but invisible.
Most employees focus on their dollar balance, not the number of shares. The share balance changes constantly as fresh contributions are added and dividends are reinvested. To detect the deductions, an employee would have to track his or her shares rigorously enough to notice that the number isn't climbing as fast as it would otherwise.
"I think it's pretty sneaky," Fuchs said. "The fees should be reported in a forthright manner, but they're not. All these companies do it. A lot of human resources people don't even know what's taken out of their own funds."
Fuchs said he learned about the administrative fee by chance: He happened to check his balance online the day the $48 was withdrawn.
"The 'pending transaction' in red got my attention," he said.
Fuchs said his employer wouldn't reveal details of Benefits Sources' fee. From Internet research, he learned that he could ask Groundwater for a copy of its Form 5500, which employers must file annually with the Labor Department, listing certain expenses paid from retirement savings plans. With the document in hand, Fuchs was able to calculate the size of the fee and how much he was being charged: about $500 a year.
That might not seem like much, but over time the effect of such charges can be huge. In addition to the direct cost, workers lose out on the interest, dividends and other returns that would pile up if the money had been left in their accounts to grow and compound.
Fuchs used calculators on the Securities and Exchange Commission website (www.sec.govunder "investor information") to arrive at his $316,000 estimate of how much administrative expenses will cost him by the time he retires in 2030.
John Zelechoski, Groundwater's manager of human resources, said that Benefits Sources had done a good job selecting mutual funds and that he had gotten few employee complaints about the plan.
Scott Rappoport, president of Benefits Sources, said its fee was in line with what other 401(k) administrators charged. He said the firm earned its money by researching investment choices, educating workers and providing other services. But he declined to detail the cost of those services or explain how the fee was determined.
Employees Lose Out
Although they have become the main retirement savings vehicle for millions of Americans, 401(k)s were not created as part of a grand plan. They were an accidental byproduct of a 1978 tax law.
Shortly after the law took effect, a few benefits consultants realized that subsection 401(k) -- intended to clarify the tax status of corporate profit-sharing plans -- allowed workers to accumulate tax-deferred savings through payroll deductions.
In the early days, employers picked up most of the administrative costs of the plans. That changed as mutual fund companies and insurers sought a larger share of 401(k) business.
Those firms offered to handle every aspect of the retirement plans, including administration. In exchange, they would have a captive audience for their investment products.
Employers liked the new arrangement because it greatly reduced their costs. The losers were employees.
In 1988, 87% of U.S. employers paid all 401(k) administrative costs. Today, only about 25% do. The rest have shifted some or all of those expenses to workers, said Pam Hess, a 401(k) expert at Hewitt Associates, a benefits consulting firm that also administers retirement plans.
As a result, employers have little incentive to hold down 401(k) costs. A 2004 Hewitt survey found that about half of employers haven't even tried to figure out what their workers are paying in fees.
"If the company doesn't have to write a check, many times they're not interested in what the participants have to pay," said Ted Benna, a Pennsylvania benefits consultant who created one of the first 401(k)s.
Moreover, because fees are usually a percentage of employees' savings, providers and administrators get paid progressively more as a plan's assets grow -- even if the amount of work they do remains the same.
The net effect, retirement experts say, is that the fees paid by 401(k) investors have become divorced from the cost of the services provided.
The work involved in running a plan -- such as enrolling employees and offering a menu of investment choices -- has "become very much a commodity," said Doug Foster, senior vice president of Denali Fiduciary Management Corp., a Seattle-based consulting firm. "There just isn't much difference anymore between Vendor A and Vendor B."
Yet there are wide variations in fees.
HR Investment Consultants of Baltimore surveyed about 80 401(k) providers, asking what they charge for plans of varying sizes. For a medium-sized plan with 500 participants and $20 million in assets, the fees ranged from $205 to $818 per employee each year.
Investors should benefit from economies of scale as 401(k) plans grow, allowing overhead costs to be spread over a bigger pool. Yet the HR Investment survey, released in 2004, found that employees realized little savings.
The average fee for a 500-employee plan was $482 per person. For a plan 10 times as large -- 5,000 participants and $200 million in assets -- it was $450 per person, just 6.6% less.
The figures partly reflect the industry custom of charging fees as a fixed percentage of assets.
Chris McNickle, a 401(k) specialist at Greenwich Associates, a Connecticut consulting firm, says this is necessary because small accounts are unprofitable. The entire mutual fund industry relies on the largest 10% to 20% of accounts for all its profit, he said.
Marcy Supovitz, a retirement plan consultant in Worcester, Mass., suspects that people with large 401(k) holdings would object to this system -- if they were aware of it.
"What's made this acceptable historically," she said, "is that they simply don't know it."
Leading 401(k) providers contend that their fees are reasonable and that competition holds costs in check.
"If we take on a client and we were to charge fees that were too high, do you actually think that client is going to stay with us?" asked Stephen Malbasa, head of retirement-plan sales and marketing at American Funds in Los Angeles. "Every 401(k) plan out there probably gets inundated at least once a week with calls from other providers who tell them they can bring their fees down."
In addition to basic services such as staffing call centers and keeping account records, 401(k) firms shoulder the cost of complying with federal tax laws. For example, they must perform complex statistical analyses to ensure that highly paid employees do not benefit disproportionately from matching contributions and other plan features.
Employees move money around in their 401(k) accounts more frequently than they do with outside investments, Malbasa said. That adds to overhead costs.
At American Funds, only 1 dollar in 10 is pulled out of a fund each year, compared with 1 dollar in 3 in 401(k) plans, he said.
"This isn't a business where everyone is making a lot of money," said Peter Demmer, chairman of Sterling Resources Inc. of Paramus, N.J., a consultant to 401(k) providers.
Demmer acknowledged that it could be hard for 401(k) participants to figure out what they pay in fees. But he questioned whether more disclosure would be beneficial.
Employees might stop contributing to their 401(k)s if they knew too much about expenses, he said.
"If you single out retirement plans to do that sort of detailed disclosure, you're doing providers of those plans a disservice. But at the end of the day, you might do the participants a disservice."
Amgen Inc. has been lauded for having one of the best 401(k) plans in the country. The biotech company, based in Thousand Oaks, matches employees' contributions up to 10% of their pay. Even if an employee puts in nothing, the company kicks in 5%.
The generous terms led Fortune magazine in 2005 to include Amgen on a list of nine companies with "the best match for 401(k)s."
Fidelity Investments of Boston provides the mutual fund offerings. It also administers the plan.
Because Fidelity's fund management fees are lower than the industry average, Amgen employees might assume they're getting a bargain.
Most of the investment choices are the same funds that Fidelity retails to the public. The funds, including Fidelity's flagship Magellan Fund, have built-in expenses for marketing and advertising.
Those charges are hard to justify for participants in a 401(k) plan, who can't shop around, said Dennis Lynch, vice president at Advisors Capital Resource in Manchester, N.H.
A plan of Amgen's size -- with more than 13,000 participants and $1.2 billion in assets -- has the clout to demand cheaper institutional funds.
"For the average investor with small amounts to invest, Fidelity is an excellent choice," Lynch said. "On the other hand, a large retirement plan such as Amgen is in a position to negotiate for institutional prices, which on average might be 30% to 60% lower than some of the funds they are currently using."
Fees for one of the offerings, the Fidelity Growth & Income Fund, total 0.69% per year. An institutional fund with a similar investment style charges 0.47% -- nearly one-third less, according to a survey by EVestment Alliance, a Web-based financial research firm.
An Amgen employee with $100,000 in the Fidelity fund would pay $690 a year in fees, compared with $470 for the institutional alternative.
Institutional funds have some drawbacks. They are not publicly traded, so their share prices are not readily available. They aren't required to send out prospectuses and aren't always rated by independent firms such as Morningstar Inc. But a major advantage is that their fees are on a sliding scale: As assets grow, the percentage taken out for expenses declines.
Fidelity says that about 19% of the assets in all the employee-funded retirement plans it runs are in institutional funds. A Fidelity spokesman, Vin Loporchio, declined to explain why such funds were not included in the Amgen plan.
Brent Glading, head of Glading Group, a 401(k) consulting firm in Montclair, N.J., analyzed public records and other information about the Amgen plan for the Los Angeles Times. He estimated that employees paid total fees of more than $5.1 million in 2003, or an average of $410 each.
Of that, he said, Fidelity received more than $4.7 million; the rest was paid to non-Fidelity funds included in the plan.
Glading estimated Fidelity's cost of managing the investments and administering the 401(k) at $2.1 million. That would mean Fidelity cleared about $208 per employee -- a profit margin of 55%.
Amgen probably could lower the fees if it negotiated with Fidelity or solicited bids from other providers, Glading said.
"Potentially there could be significant opportunities to reduce costs," he said.
After The Times asked questions about the 401(k) plan, Amgen last year substituted lower-cost versions for three of the mutual funds, spokeswoman Mary Klem said. She said the move was in the works before The Times' inquiries.
Chip Bell, Amgen's vice president of compensation and benefits, declined to say why the company didn't ask Fidelity to include institutional funds. Bell did say that Amgen sought to offer the best possible plan, with a reputable fund provider, sound investment choices and excellent customer service.
"It's pretty obvious that this is a company that wants its employees to have a good deal," he said.
Bell said the fees -- a weighted average of 0.59% of assets -- were cheaper than the average for 401(k)s.
But they aren't as cheap as those at Alcon Laboratories Inc. of Fort Worth, a maker of eye-care products.
Alcon's 401(k) is similar in size to Amgen's but relies almost entirely on institutional funds. As a result, employees pay just 0.43% of their assets each year in fees.
The institutional funds "are exceedingly inexpensive, which we really push for," said John Batton, the company's manager of investments. "Why give it to Wall Street when you can give it to your participants?"
T Rowe Price Group Inc., a big mutual fund company in Baltimore, sells institutional funds to some of its 401(k) clients. But the firm does not make those low-cost options available to its own employees for their retirement plan. All the choices in T. Rowe's 401(k) are the company's own retail mutual funds.
Why? T. Rowe Vice Chairman James Riepe said it was important to show customers that "we eat our own cooking." He also said employees preferred retail funds, in part because their share prices are publicly available.
"If your theory is that our plan and a lot of other plans would have a lower cost if everybody used institutional funds ... that would be true," Riepe said. "But people for a lot of reasons don't want to use institutional funds."
Supovitz, the retirement consultant, reviewed regulatory filings for the T. Rowe plan and estimated that employees paid an average of $721 in 401(k) fees in 2003.
T. Rowe executives contend that figure is skewed by a relatively small number of employees who have high account balances.
"The firm would not offer a plan that is unfair or unreasonably expensive," spokesman Steve Norwitz said.
Tina Bognet said she would have liked lower-priced options when she worked for T. Rowe.
Bognet, a computer analyst, thought she was getting a good deal on her 401(k) because of the firm's reputation for moderately priced funds.
Bognet said she discovered how much she had been paying when she moved to another financial services company in late 1999.
"I realized how high it was," said Bognet, who quickly switched the money in her T. Rowe plan to an individual retirement account with lower fees. She described herself as "just shocked."
'A Fair Plan'
Spectris Inc., a Chicago-area maker of precision instruments, needed a 401(k) expert. The company had separate 401(k) plans at 15 business units scattered across the country and wanted to consolidate them. It could have hired a consultant to do the job on a fee-for-service basis. But that would have cost the company money.
By hiring Vincent J. Giovinazzo, Spectris shifted the cost to the 401(k) provider -- and ultimately to its employees.
Giovinazzo, a securities broker in Laguna Hills who runs a company called 401(k) Advisors, helped choose a new provider and select a menu of investment options. His team also flew around the country to explain the new plan to Spectris' 1,400 employees.
For his services, Giovinazzo was paid $356,168 in 2003, records show.
Massachusetts Mutual Life Insurance Co., the new provider, paid Giovinazzo that sum as a commission. The insurer will recoup the money from the fees it charges 401(k) participants.
"All I could say is, 'Phew, he certainly did well by us,' " recalled Howard Zyburt, Spectris' controller.
Two experts consulted by The Times said Giovinazzo's commission seemed high for a plan of that size.
"In absolute terms, that's a ridiculous amount of money," said Green, the retirement plan consultant in Santa Monica.
He said a more appropriate fee would have been about $93,000: $20,000 to select a provider, $30,000 for continuing oversight of the plan and $43,000 for traveling to employee meetings.
The Spectris plan had about $44 million in assets. An advisor working for a flat fee would charge no more than $60,000 for a plan that size, said Gary Caine, president of IFC Retirement Advisors Inc. in El Segundo, who also reviewed the plan.
"More than that amount could be justified, but it would require explanation," he said.
Broker commissions, Caine said, often bear no relation to the amount of work performed. Insurance companies base commissions on the total assets in a 401(k) plan and how much money employees are expected to add each year, he said. They build the cost into the fees collected from employees.
Commissions create an inherent conflict of interest because brokers offer 401(k) guidance to employers while getting paid by providers. Brokers could be tempted to recommend providers that pay the biggest commissions rather than those that offer the best investments at the lowest cost.
"You've got people that are essentially looking to make some easy money," said Jeff Wallace, a senior consultant at IFC Retirement Advisors.
Giovinazzo says he is not one of them. He says he recommends the best provider and investment options without regard to commissions and fully discloses what he makes.
"The most important requirement in our business, and the mantra that we live by, is full disclosure of fees and compensation," he said.
His Spectris commission was reasonable, Giovinazzo said, given the work involved in consolidating the 401(k) plans and traveling to Spectris' far-flung business units.
"It's definitely a fair plan," he said. "The total plan costs are fair. And based on the services that we're delivering, I believe that it is a very reasonable and competitive plan for participants."
In a statement, Mass Mutual said its compensation to brokers fell within standard industry practice.
"Intermediaries deliver a broad range of important services to plan sponsors, participants and providers," the statement said.
Giovinazzo said the total 401(k) expenses paid by Spectris employees, including fund management fees, were lower than the fund fees alone in comparable plans. But he and Spectris declined to reveal the total fees paid by plan participants, making it impossible to test that assertion.
Giovinazzo continues to collect an annual commission from Mass Mutual for serving as Spectris' plan advisor. The employer must disclose the amount annually on Form 5500.
In 2004, Giovinazzo's company and another firm received a total of $169,686, records show. Spectris has yet to file a disclosure for 2005.
Spectris is focused on giving employees a solid investment lineup and dependable 401(k) service, not on Giovinazzo's compensation, said Zyburt, the company controller.
"If everything is in line with what we want to accomplish, which it is, am I concerned with what they make? No."
Federal law requires employers to evaluate 401(k) providers and investment choices and make sure that costs paid by participants are reasonable. But determining what's reasonable is subjective, and the law doesn't spell out what constitutes a fair fee.
The Labor Department, which has oversight of 401(k) plans, concentrates on investigating wrongdoing, such as when employers take money from 401(k) accounts to pay unrelated business expenses, Assistant Labor Secretary Ann Combs said. Fees aren't a high priority.
Combs said some employers "may not have done enough probing of their service providers and probably could negotiate those fees down." But the law does not require employers to get the best price.
"This 'out-of-sight, out-of-mind' mentality of some [employers] is particularly dangerous," a Labor Department advisory panel said in a 2004 report, "because as the account balances grow so do the fees regardless of whether additional services are provided."
One problem is obsolete disclosure rules. Form 5500, for example, often does not fully reflect the administrative costs paid from employees' accounts. When a mutual fund company runs a 401(k) plan, only a fraction of overhead expenses are disclosed.
"The Form 5500 as currently structured is outdated and simply no longer reflects the way fee structures work in the industry," the Labor Department panel said. "Many explicit fees have all but disappeared and many very large plans have little or no explicit fees whatsoever."
The Labor Department is expected to propose new disclosure rules this year.
Even employers can find 401(k) fees baffling.
Gabriel Horvath, director of engineering at OPI Products, a North Hollywood cosmetics maker, was checking his quarterly statement one day and noticed that his shares in two mutual funds had been inexplicably reduced. He asked benefits director Gina Hagen for an explanation. She was equally puzzled.
Hagen called Manulife Financial, the investment provider, and learned that the plan administrator, Goldberg, Swedelson & Associates Inc. of Encino, was being paid a commission from employees' accounts.
The payments -- $10,000 in 2002 and $7,500 in 2003 -- were noticeable in a plan with just 100 participants and $1.5 million in assets.
Because OPI was paying Goldberg Swedelson for its services, Hagen couldn't figure out why the firm was also collecting money from employees.
When the plan was set up in 1997, Hagen said, she gave instructions that there would be no commission. OPI wanted to pay all the overhead expenses.
After Horvath's complaint, Hagen discovered that employees had been chipping in too, because of an apparent misunderstanding with the previous administrator.
This time, she succeeded in eliminating the commission and arranged for OPI to bear all the bureaucratic costs.
As a result, employees' 401(k) fees have dropped from an average of about $400 a year to $300.
"We've always wanted to keep the costs down for our employees saving for retirement," Hagen said.
"Now that the stock market has come to a bit of a standstill, all of a sudden the 401(k) expenses are in your face."
Cutting Company Costs
Brent Glading, the 401(k) consultant, used to sell retirement plans to employers. He switched sides in mid-2002 and now represents employers trying to reduce fees. He is paid either a flat fee or a percentage of any savings he obtains.
He estimates that costs could be slashed at 30% of all companies.
Playtex Products Inc. of Westport, Conn., says it shaved annual fees for its 1,500 employees by $250,000 by switching providers in 2004 on Glading's advice.
Employees with a $100,000 balance in their 401(k) and pension plans now pay an average of $370 in fees, compared with $580 before.
"It's a lot of money," said Julie Roe, Playtex's benefits director. "It's too much to overlook."
As he negotiates for better terms, Glading has two weapons at his disposal: his knowledge of the industry and the ability to put an employer's plan out to bid.
Despite the potential benefits to employees, Glading said, many employers spurn his services.
"One [chief financial officer] told me, 'I don't care. Why should I care? I'm here to save my company money. I don't care about my employees.' I was flabbergasted."
Times researchers Scott Wilson and John L. Jackson contributed to this report.
(BEGIN TEXT OF INFOBOX)
Are employers doing enough?
Many companies make no effort to reduce 401(k) costs or to disclose them, employer surveys from 2004 and 2005 show.
Firms that have tried to cut employees' 401(k) costs
Say they plan to do so: 10%
How employers disclose 401(k) administrative fees
Only if employee requests it: 38%
Included with account statement: 28%
Periodic written disclosures: 26%
Other methods: 8%
Source: Surveys by Hewitt Associates
A guide to a few common 401(k) terms.
Plan sponsor -- An employer.
Provider -- A financial services company that offers the mutual funds and other investment choices.
Advisor -- A firm that helps the employer choose a provider, select the investment options and make other decisions about the plan.
Administrator -- A company that processes employees' contributions, mails statements, ensures compliance with federal tax law and handles other bureaucratic chores.
Responsibilities vary from plan to plan. Sometimes companies play multiple roles.