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Retirement-plan fees still too confusing

Complicated disclosures by employers and 401(k) managers make it hard for workers to understand what they are being charged.

WASHINGTON - Like 47 million other U.S. workers, software engineer Don Sengpiehl is counting on retirement money invested in a company-sponsored 401(k) savings plan.

But ask Sengpiehl how much that plan costs, and the 54-year-old Loudoun County, Va., resident - who studied math at Massachusetts Institute of Technology - won't be able to do much more than guess. Disclosures about 401(k) fees bewilder him, and he says he doesn't have the time or know-how to figure out what he's being charged, much less to monitor whether his employer is pushing for the lowest possible fees.

"I basically set it up, put it in motion, and hope for the best," he said.

Many workers share Sengpiehl's ignorance about retirement-plan fees, even as 401(k)s have become the dominant retirement-savings vehicle offered by corporate America. Financial-industry executives, consumer groups, and federal regulators say that confusing and often fragmentary disclosures by employers and 401(k) managers make it hard for most workers to understand what they are being charged.

Unlike traditional pension plans, in which companies make all the investment decisions and promise a set amount upon retirement, 401(k)s require employees to take more responsibility for how the money is invested - and therefore how much they will have at retirement. Increasingly, workers and regulators are asking how people can be expected to make wise choices without easier-to-understand, more complete information, especially about fees.

In recent months, class-action lawsuits have been filed against about a dozen big companies - including Boeing Co., International Paper Co. and Lockheed Martin Corp. - claiming that these employers have allowed financial managers of their 401(k) plans to charge excessive fees. In many cases, the lawsuits say, the companies simply have not fully understood which fees were being charged. Federal law requires employers that sponsor 401(k) plans to protect employees' interests, and the lawsuits claim that the companies have failed to seek the best price possible given the services provided.

The companies dispute the allegations, and even some retirement experts who favor more disclosure say the suits exaggerate the issue. Thomas Greer, a spokesman for Lockheed Martin, based in Bethesda, Md., said: "We believe the suit to be without merit. We intend to defend against it vigorously. We do not feel our fees are excessive or out of whack, and we believe that the investment management and administrative expenses associated with the company 401(k) plans are appropriate, fair, reasonable, and in line with other major companies'."

The lawsuits have helped focus public attention on the fee issue, as have recent congressional hearings. But the impetus behind both is the large and growing number of people affected. There are more than two workers invested in a 401(k) for every one covered by a traditional pension, the mirror-opposite of 35 years ago, and the Pension Protection Act enacted last summer is expected to accelerate the trend. Designed to encourage Americans to save more for retirement, the new law allows employers to automatically enroll new hires in 401(k)s.

At a recent hearing before the House Education and Labor Committee, several retirement consultants testified that workers were being overcharged billions of dollars each year through questionable and often hidden fees. Disclosure forms are so complicated and incomplete, they said, that even experts have trouble computing all the costs 401(k) investors pay.

The consultants said many 401(k) plans were charging from 1 to several percentage points too much. While that may not seem like a lot, even a slightly higher fee can deeply erode savings over time. The Department of Labor, which regulates 401(k) plans, posts this example on its Web site: If you have $25,000 in savings earning an average of 7 percent annually, with a 0.5 percent fee, your investment will grow to $227,000 over 35 years. Raising that fee by 1 percentage point, to 1.5 percent, will reduce the investment's final value to $163,000.

Retirement experts say you should not expect to get a hard-and-fast number showing exactly how many pennies you pay for every dollar of investment gain or loss. That said, based on a fund's performance and the disclosed costs, you can get a ballpark idea of how much you are paying and decide whether that is acceptable. Your employer's benefits office can provide written material about the company's 401(k) plan and direct you to information about specific 401(k) investments.

Mutual fund companies manage more than half of the $2.7 trillion now estimated to be invested in 401(k) plans, far more than banks and insurance companies, which also operate these plans. The Investment Company Institute, the mutual fund industry's main lobby group, says most costs are disclosed through what are called expense ratios and turnover rates, which can be found in the fee table in a fund's prospectus. While turnover rates give investors a sense of whether a fund's trading costs have been high or low, some trading costs, namely brokers' commissions, are listed in a separate document called a Statement of Additional Information, which investment companies provide to plan participants upon request.

The expense ratio - also known as operating fees - typically ranges from 0.5 percent in a low-cost fund to more than 1.5 percent in a more expensive one. That means an investor is charged from half a penny to 11/2 cents for every dollar invested. The expense ratio includes fees for management, marketing and some other costs. It does not include most trading costs, which are one of the biggest additional expenses 401(k) investors pay and typically range from half to twice the operating fees, depending on how often a fund trades, according to retirement consultants.

ICI spokesman Gregory Ahern said putting the numbers in different documents could be confusing to consumers. Nonetheless, he said, the numbers are public and, if taken together, provide a nearly complete picture of the total costs an investor pays in a 401(k).

He and others say that though trading costs are important, they need to be viewed in the context of a fund's performance - high trading costs might be worth paying in exchange for a 15 percent return, for example, but not for a bad performance.

Matthew Hutcheson, an independent pension consultant affiliated with G Fiduciary near Portland, Ore., challenges the industry's claim that costs are clear and complete. He and others say that besides operational costs, a fund company might impose extra charges to be part of a 401(k) plan, including auditing, legal and education fees. These costs can significantly increase the total amount investors pay, sometimes by 1 or more percentage points over and above a fund's basic charges, retirement consultants say.

Dallas Salisbury, head of the Employee Benefit Research Institute, a nonprofit group in Washington that focuses on retirement and economic-security issues, said he worried that publicity surrounding 401(k) fees might discourage some workers from participating in plans by making them sound as if they were riddled with problems, when, he said, they were not.

"Would people be better off if they read all the stuff, looked at everything on the Web sites, and fully informed themselves? Yes," he said, even though he said he thought few workers would use additional pricing information. "But the important thing is that people join the 401(k) in the first place as soon as possible."