Why are you paying for your boss's 401(k)?

by Will Chen on 28 February 2008 comments
Photo: Delgoff

Do you know how to find all the hidden fees in your 401(k) plan? Did you know your boss might be getting a kickback from those fees? This is how it works:

  • More than half of all 401(k) plans offered through employers are charging participants excessive fees, which are sometimes as high as ten to twenty times the actual cost of administrating the plans.
  • 90% of the time, these 401(k) plans will return a portion of these fees through a scheme called "revenue sharing" -- which is basically a "kickback" to your 401(k) plan administrator.
  • While many times these kickbacks are pocketed by the 401(k) administrators, at other times, these kickbacks are so large that they actually get credited back to each employee's 401(k) accounts.

So, you're getting a refund from the excessive fees you were paying. Good news right? Not quite. According to David Loeper, author of Stop the 401(k) Rip-off:

The problem here is they are not usually credited back in proportion to what you paid, normally they are credited back to participant accounts based on account balance.

 

The net result here is if your CEO with a large balance uses an index fund with no kickbacks for his 401k, and other participants use expensive funds, they are in essence making a contribution to their CEO's 401k because his higher account balance gets the brunt of the revenue share "kickback." read more

Is this happening to me?

According to Loeper, if the company you work for has less than 1,000 employees, the odds are high that you are paying excessive fees on your 401(k) plan.

Why should I care?

Because increasing 401(k) fees by just 1% can result in you having 17% less money when you retire. As the Consumerist explains:

Put $20,000 in a 401(k) for 20 years and you end up with $58,000 if the fees are 1.5%. But if they were .5%, you would have $70,500. That's a lot of money. Increase the time to 35 years and what would be $220,000 drops to $163,000....

 

How is this possible? Well we all know how great compounding interest is, right? This is the same thing in reverse, the costs are compounding. Quietly. Rapaciously.

If your boss is getting a kickback from those fees, do you think he will work diligently to help you find a 401(k) with reasonable fees?

What can I do?

For the next two weeks, author David B. Loeper will be answering your 401(k) questions in our forum. He is an expert at identifying hidden fees in 401(k) accounts. If you have any questions about your 401(k), here's a great time to get some free expert advice from a top expert.

Tagged: Investment
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