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CCH® PENSION — 04/16/10

High 401(k) fees an obstacle to preserving retirement savings: Hewitt

Despite the U.S. stock market's recovery, Americans are still struggling to make up for the historic losses sustained in their 401(k) plans over the past two years. One main obstacle employees face as they struggle to save is hidden, high 401(k) plan fees, according to an analysis by Hewitt Associates. Even with increased legislative and legal scrutiny of plan fees over the past few years, Hewitt believes that federal action is needed to help plan sponsors and individuals receive better information from investment managers and other service providers on these fees. Such transparency will enable employers to better protect and enhance employees' retirement savings by providing a better climate for negotiating lower fees and offering competitively priced, best in class investments in their 401(k) plans.

Monitoring 401(k) fees

Closely monitoring 401(k) fees is a critical component in helping Americans reach their retirement goals, according to Hewitt. Even a small reduction in 401(k) plan fees can increase a 401(k) participant's overall retirement earnings without requiring any additional action on their behalf. As an example, a 30-year-old employee making $50,000 per year, with a plan balance of $50,000 and a typical matching and savings rate, would have $115,000 more in savings at retirement simply because his or her 401(k) plan had fees of 0.6 percent versus 0.9 percent. Hewitt notes that this difference, over time, could help fill the gap caused by the recent market downturn.

Hewitt contends that millions of employees who participate in 401(k) plans may currently be paying unnecessarily high fees because of how their company's service provider charges administrative fees. In many cases, service providers set these fees based on the amount of money (assets) in the plan, rather than through a fee-for-service model, where they charge fees on a per participant basis. These asset-based fees increase as plan assets increase with stock market growth and contributions, even though the underlying costs these fees cover do not. Because administrative fees are usually paid for by the employee, Hewitt notes, this model can end up significantly eroding their retirement savings over time as their plan balances grow.

Legislative action urged

Hewitt believes that requiring complete fee transparency and uniform disclosure of service provider fees to 401(k) plans will help employers more accurately compare and contrast fees across providers and add to their negotiating leverage. Legislation moving in the House would achieve the improved disclosure, according to Hewitt, as would pending legislation in the Senate on which no Senate action has yet been taken.

"Plan fees are eating up thousands of dollars of employees' retirement savings without them even knowing it," said Alison Borland, Retirement Strategy Leader at Hewitt Associates. "As concern over employees' retirement income adequacy levels continues to grow, it's more important than ever for Congress to enact legislation that will provide employers and employees with an apples-to-apples comparison of the fees in their 401(k) plan," she added.

Source: Hewitt press release, March 16, 2010.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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