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Hidden 401(k) fees taking big bite out of returns

Steve Lansing has found that the service providers of many 401(k)-like plans overcharge participants and employers, some by 100 percent or more.

As president and founder of Sentinel Fiduciary Services Inc. in Orlando, Lansing works for employers and their investment committees to trim mutual fund and administration expenses from large 401(k) and 403(b) plans.

"It's pretty easy to find plans that have been charging excessive fees," says Lansing. He says he has seen numerous examples of third parties claiming their services are "free" or "negligible" when they are simply passing along their fees to participants in the form of higher annual expenses on funds within the 401(k)s.

When a new wave of lawsuits recently alleged that large employers were paying too much for plan expenses, Lansing wasn't surprised, saying the lack of transparency has given middlemen cover for the fees. As a result, the suits are now forcing employers to take a hard look at how much their 401(k)s are being charged.

"I was auditing an $820-million 401(k) for a manufacturing company with about 10,000 participants," Lansing adds, "and the administrative costs alone were more than $250 per person when they could have gotten the same services for $60 to $80 a head."

While Lansing wouldn't disclose the name of his client because it could make the company vulnerable to legal action, it's clear that companies are keen to avoid liability for the ravaging impact that middlemen's fees have on retirement funds.

St. Louis lawyer Jerome Schlichter is spearheading litigation that could force some much-needed sunlight on the opaque world of 401(k) fees.

Schlichter's firm filed civil suits on behalf of employees within the retirement plans of Boeing Co., Caterpillar Inc., Exelon Corp., General Dynamics Corp., International Paper Co., Kraft Foods Inc., Lockheed Martin Corp., Northrop Grumman Corp. and United Technologies Corp. All told, the complaints cover at least 400,000 workers, a small piece of the more than 45-million Americans who have about $2.4-trillion invested in 401(k) plans.

Calling the fees "the big secret of the retirement industry," the suits claim that employees had no knowledge of the "excessive and unreasonable fees" or how much these costs were diminishing their retirement funds. Schlichter said the object of the suits was to make "the plans and participants whole and to make the plan fiduciaries protect the participants."

What is a legal and prevalent practice in the industry - splitting and sharing lucrative revenue from retirement plans - is a little-known and largely hidden transaction.

FAST FACTS

Plan fees too high?

Are you paying too much for your 401(k)-type plan, which includes 457s and 403(b)s? Here's how to tell:

* An independent audit of your plan by a fiduciary - who legally only represents you and your employer - is essential. This person works for a flat fee and receives no commission from fund managers or administrators.

* The consultant can benchmark your plan and tell your employer how to save money. In most cases, the savings can be rebated to your account.

* Does your employer provide institutionally priced index- or exchange-traded funds or trusts? They should, because you may be paying individual management expenses of 0.10 percent annually or less. Recordkeeping and other administrative costs could add as little as 0.17 percent a year. What are you paying?

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