Hidden 401(k) Fees: No Such Thing as a Free Lunch

I was assisting a small employer with the completion of a Form 5500 for a 401(k) plan the other day. The plan’s trust account holds roughly a million dollars. The plan’s trust account statements (produced by the mutual fund company where the plan’s assets are invested) did not indicate a single dollar in investment management or other fees. That’s right−zero dollars in fees. I asked the employer if he is paying the investment manager with company assets. The employer told me that the investment manager does not charge anything for its services.

Such (mis)perceptions are not uncommon. The reality is that many of the plans I work with are invested in funds that appear to be fee free. We’ve all heard the cliché, there is no such thing as a free lunch. 401(k) plans are no exception.

Fortunately (depending on whose side you are on), new regulations will take effect soon requiring many service providers to unveil fees to employers that, up until now, they have been able to keep secret. Furthermore, by 2012, all plans with participant directed 401(k) accounts will have to provide quarterly expense statements to employees. As noted in this NY Times article, these expense statements will highlight mutual fund costs that up until now have been kept secret from both employers and employees.

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