Just Plain Talk: Feb. 16

President Bush's supporters gleefully point out that the Democratic Congress has lower approval ratings than he does. Hard to figure that one out since Congress has given Mr. Bush at least 85 percent of what he wanted.

However the current Congress has a singular point of light (not to be confused with a thousand). The ray of hope that our federal legislators hopefully are addressing is the obscenely high and well-hidden fees in defined contribution (401K) retirement plans. The sad truth is that you don't have a clue what fees are being charged in your 401K plan.

What is all the hoopla about? The good folks administering your plan deserve to get paid and besides the company is putting in a match; why should I worry?

401K plans were never designed to be your primary source of retirement income but they have morphed into the major source of income for many retirees. Suze Orman urges her listeners to make maximum contributions to their 401K plans.

Good for her, but what she fails to mention is that the only way the 401K game will work is for costs to be low. Sadly very few workers have plans with low annual costs. In fact, according to National Public Radio the average 401K plan participants pay between 3 and 3.5 percent in annual costs.

And it gets worse.

According to Mathew Hutcheson in a recent interview on Marketplace Money from Minnesota Public Radio, plans from insurance companies have annual fees "as high as 5 percent."

What does this cost you in spending money? Mr. Hutcheson calculates that a 1 percent excess fee costs "over a regular working lifetime ... about $80,000."

Another way to look at it is that you may have to work three to four years longer to make up that shortfall. Are we starting to get your attention?

Don't get me wrong, Congress doesn't want to abolish 401K plans. Rather the hearings are on why the plans refuse to disclose the fees to the participants. After all it is the participant's money.

Did you know there are probably a dozen or more individuals or companies that are paid from your account? Just because you don't write a check doesn't mean you don't pay. There are mutual fund companies with annual costs along with salespeople who often work on commission or trail fees. Then there are record keepers, accountants, actuaries and attorneys of the company administering the plan.

Very little of this is disclosed to participants.

In Mr. Hutcheson's recently updated report, Uncovering and Understanding Hidden Fees in Qualified Retirement Plans he writes, "The profitability of the 401K industry depends on the magnitude of the fees it can extract from plan assets and plan sponsors - not on how well it protects and enhances the retirement income security of plan participants."

Nobel Prize winner Milton Freidman wrote that when you spend someone else's money on yourself you have a good lunch. Don't be a sucker. The 401K industry is doing better than lunch. They are having dinner at Ruth Chris' Steakhouse and you are paying for it.

How would you feel if your cell phone provider just deducted monthly charges from your checking account without sending you a bill? Unless you are a moron you would be outraged. But when it comes to one most important investment decisions you will make - funding your 401K - the industry keeps you in the dark.

The 401K industry claims their fees are reasonable but I disagree. Don't forget that this is the same bunch that brought us the sub-prime crisis. They should stop stonewalling on disclosure.

There are three things you can do. First, lobby management at your company. Remind them that companies have been successfully sued because of inappropriate 401K plan arrangements.

Next, do an IRA rollover with any former employer's 401K plan. Any rollover should always be a "trustee-to-trustee transfer." Unless you have a low-cost plan like the Thrift Savings Plan or you have employer stock inside your 401K, an IRA rollover is a no-brainer.

Finally, this is an election year, so speak up.

For more information:

Building 401K Wealth One Fee at a Time http://www.americanprogress.org/issues/2007/03/401k.html

Interview with Matt Hutcheson

http://www.401khelpcenter.com/401k/meigs_mdh_interview.html

Buz Livingston is a certified financial planner. He operates Livingston Financial Planning Inc. focusing on hourly financial planning and investment management. Listen to his radio program, Money and Music, every Wednesday at 7 a.m. on 107.1FM, 30A Radio or www.30Aradio.org. Contact him directly at (850) 267-1068 or at LivingstonFinancial.net.