Fees slice into 401(k)s – Omaha World

This summer, 401(k) participants will receive a statement that shows, for the first time, retirement account fees. After you get the statement and read it, you should:

Call or email the company that manages your plan if you have questions, or look at the plan’s website for more information.

Decide whether the fees are proper or you should choose another option in the 401(k) plan. Beyond fees, other factors in choosing an option include return on your investment and each option’s risk.

Ask the person at work who’s in charge of your retirement plan whether your company plan is competitive with other plans.

Ask whether your company has “benchmarked” its plan in the past three years. If not, when is the next benchmarking?

Remember that you’re saving for your retirement with pre-tax dollars and, most likely, matching dollars from your employer.

See if you can find a better way to save for retirement before deciding to leave your 401(k) plan. For most people, that’s difficult to find.

Click here for a U.S. Department of Labor Model 401(k) comparison chart

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If you’ve got a 401(k) retirement account, you may be used to watching stock market numbers rise and fall. But later this summer, your statement will include a new set of numbers to watch.

New Labor Department rules are requiring fuller disclosure about the fees you’re paying to maintain that account.

And, if recent surveys are any indication, you’ll probably be shocked to learn that those fees can make a difference of tens or even hundreds of thousands of dollars for your retirement.

One study estimated that an average-income working couple will pay $154,000 in fees and lost investment returns over their working lives. Another study reported a 1 percentage point increase in fees cuts 20 percent from retirement savings over a 35-year career.

Yet an AARP survey found that 71 percent of those polled believed they didn’t pay fees on their 401(k)s.

The federal General Accountability Office found that even many employers do not understand some of the fees being paid. In most cases, employees pay most or all of the fees, reducing the money they will have for retirement.

As a result, the U.S. Department of Labor is requiring 401(k) account managers to disclose fees customers are being charged. Some in the retirement savings industry say the issues are complex and question whether the disclosures will be useful to the average employee.

The goal is for wage earners “to have as much available for retirement as they can possibly have,” with less money eaten up by fees, said Michael Davis, deputy assistant secretary for the department’s Employee Benefits Security Administration in Washington, D.C.

“It’s important to get what you pay for,” he said. “The rule is going to create a lot more focus on that very question.”

We’re talking about a rule that requires transparency and disclosure, backed by the force of law.

The rule follows more than five years of discussion, through Republican and Democratic admini-strations and Congresses. The first disclosures start July 1 for employers, followed by Aug. 31 for employees.

Section 401(k) of the federal income tax code allows people to put aside pre-tax money for retirement, and employers can contribute, too. The plans have replaced most traditional employer-paid pension plans. Today, 72 million people have about $3 trillion in their 401(k) accounts, the Labor Department says.

Employees and employers have been paying fees all along, but some of those fees have been hidden. Financial firms sometimes split fees through complex “revenue-sharing” agreements that aren’t spelled out. The GAO found that fees for small plans average six times higher than for large plans.

Financial services companies were not required to disclose the fees — until now.

The federal agency designed a model disclosure chart, although 401(k) managers can use their own formats. The model chart is posted with this story on Omaha.com. Davis said the chart is designed so the average person can understand and use the information.

Using figures from 401(k) managers, employers will be required to report expense ratios for the investments offered in a plan, showing participants the charges per $1,000 invested. A Deloitte/Investment Company Institute study late last year said the median 401(k) expense ratio was 0.78 percent per year. But the range reported was wide: from 0.28 percent to 1.38 percent.

Employers say they are preparing for the disclosures and hope employees look at the new information.

“It’s my understanding that it’s going to be an open book,” said Dave Hanus, chief financial officer for Lueder Construction Co. The company’s plan is considered small — 40 members and about $2 million. He plans to meet with employees to tell them what’s coming, and there’s also information online and coming in the mail. “We’ll tell them it’s important to review.”

Allan Harry, controller for Jensen Tire Auto in Omaha, said the company’s 110-member plan contains about $3 million.

“You hate to see your principal getting eaten up in fees,” Harry said. “But the most important thing is if you trust the people you’re dealing with. There are fees, but are they reasonable? …

“If they’re giving solid advice, I think that’s more important than trying to get down to zero fees. They’re going to get fees from somewhere.”

One of the large local 401(k) plans is HDR Inc.’s $1.25 billion, 9,160-member plan. Dennis Austin, chairman of the HDR committee that oversees the fund, said the committee already watches the fees closely. He said both employers and plan managers have a “fiduciary duty” to act in the participants’ best interests, not only in complying with the new fee-reporting rule but also in managing the employees’ money.

The company has an education program for employees, with online seminars, fliers and a website full of information.

“Sometimes people don’t take enough advantage of that,” Austin said. HDR’s advisers tell the committee that the plan’s fees are below other plans of similar size. “These plans don’t run themselves. It does take money to run these plans.”

But you can’t simply say that the lowest-fee plan will yield the most retirement money, or that a higher-fee plan will yield less, said Jeff Sharp, a principal with the Silverstone Group employee benefits company of Omaha. Silverstone receives fees for advising 401(k) plans.

“There’s a limited amount of money that an employer is willing to contribute to a plan,” Sharp said, and if the employer pays more of the fees, there’s less money for matching employees’ contributions. If the employer’s match is bigger, the fees fall on the employee.

Bottom line: Employees shouldn’t let fees discourage them from having 401(k) accounts and should remember that they are benefiting by making investments with pre-tax money and often by receiving matching funds from employers.

Employees also will need to be the ones who press their employers to compare fees with those charged by other companies or to negotiate lower fees from current providers, said Brent Glading, founder of the Glading Group, a consulting firm that analyzes 401(k)s.

Companies say, “It doesn’t save money for the company, so why do I care?” Glading said. “There has to a be a groundswell from the employees.”

Another company receiving fees for 401(k) accounts in the Omaha area is Milliman Inc. of Seattle. Gerald Erickson, a Milliman principal, estimated that 10 percent of employers are overpaying for 401(k) services, mostly because they have not compared plans “for years and years” to make sure the fees are reasonable.

Erickson said the disclosure process is costly, and many employees will lack the context to use the information. “They’re just going to throw it in the trash, or put it in a drawer and never look at it,” he said. In that case, the employee is simply relying on the employer to have the best plan.

Jim Raabe, chief financial officer for Lindsay Manufacturing Co. of Columbus, Neb., said it remains to be seen how valuable the disclosure will be to employees.

“There’s definitely some good information in there,” he said, giving employers better information when they shop for plans. Until now, fees often are not disclosed or are listed in a way that makes apples-to-apples comparisons difficult.

But new rules “always tend to be a little bit more complicated and a little harder to predict the final outcomes,” Raabe said. “With any regulation, there’s usually a very good intention. It doesn’t always turn out the way it’s expected.”

This report includes material from the New York Times.

Contact the writer:

402-444-1080, steve.jordon@owh.com

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How revenue-sharing fees can reduce earnings by 401(k) retirement plans

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How world’s small luxury firms are surviving downturn

Poupie Cadolle’s family has been making handmade lingerie in a workshop on Rue Saint Honore for five generations, with Qatari royals, American actresses and Swiss bankers’ wives all crossing her doorstep in search of the perfect bra or corset.

 

Now, with times tough and sales to French and American women sluggish, Cadolle, like many small French luxury firms, finds itself struggling to tap into a $191 billion global boom driven by customers from emerging markets.

 

“The last four months have been difficult,” said Poupie Cadolle, a small woman with a warm smile who spends her days fitting 5,000 euro bustiers and 600 euro bras.

 

“We thought hard about how to get clients, beyond word of mouth. It is not easy. We decided on going into Brazil, not China.”

 

Unable to wield the financial firepower of conglomerates such as LVMH, Richemont, or PPR, small family-owned enterprises are finding modest and innovative ways to attract new customers.

 

Some, like Cadolle, are choosing one country over another and relying on invitation-only trunk shows and other private events.

 

Others are opening stores in Hong Kong but not Shanghai, while for a few the focus is on still rich markets in Japan and the United States.

 

All are choosing carefully. The internet is not seen as a route to market – few small luxury companies feel comfortable selling goods online given the luxury experience is one where items need to be handled to judge the quality and design.

 

“China is definitely the big prize and, by and large, the customer there only wants big, recognizable brands,” said Pierre Mallevays, a managing partner at Savigny Partners, a corporate finance boutique specialising in luxury and retail.

 

“You cannot have a China-only market. For your brand to be credible, the travelling Chinese will expect to see your stores in Paris, Milan or New York.”

 

That kind of reach is difficult for smaller brands unable to afford a presence in several European cities and major Chinese cities where real estate prices are high, salespeople increasingly scarce and the best distributors already engaged.

 

LVMH and other luxury giants, meanwhile, are tapping into the Chinese market by scaling back in department stores and, instead, opening giant flagship stores in large and mid-size cities across the country.

 

Smaller European brands hope Chinese customers, as well as the newly rich from Russia and central Asia, see the appeal of a tasteful shop in Paris with an elite clientele in the French tradition of discretion and craftsmanship.

 

Many are bringing design inhouse, eliminating suppliers and ensuring clients know everything is handmade by French artisans.

 

“BIG, BIG, BIG”

 

This type of branding is vital to the appeal of French luxury, yet it is not always easy to convince emerging market clients that handmade is better. Many live in countries where goods are only made in small shops out of necessity.

 

Corthay is a bespoke men’s shoe shop in the 2nd arrondissement where Pierre Corthay works in the front room making crocodile and elephant skin shoes that take six months to complete and cost upwards of 3,000 euros.

 

It recently teamed up with Groupe Edmond de Rothschild to sponsor a road trip for select clients through the Alps in high-end sports cars. Chief executive Xavier de Royere said the event was expensive for Corthay but worth it because it created a sense of glamour around the brand.

 

“The Chinese do not always understand our store,” said Royere, who joined from Louis Vuitton. “Small is not good there. They want a big shop. Lots of options. Big prices. Big, big, big.”

 

Royere, planning to open shops in Dubai and Hong Kong in coming months, said he was in less of a hurry to go to China and will not open there until 2013 at the earliest.

 

In the United States, the brand is confining itself to department stores in New York, San Francisco and Beverly Hills for the moment.

 

“We counsel companies to go to Hong Kong first. Learn about the customer. Then go to mainland China,” said Ponsolle des Portes, head of Comite Colbert, a luxury industry lobbying group.

 

Chinese customers need to become acquainted with the notion of truly high-end luxury, and smaller brands can still make a lot of money from established markets, she said.

 

“It is hard to convince some Chinese women that she should have wonderful undergarments,” said Poupie Cadolle. “This is not a culture that even has nightgowns.”

 

Asia makes up 19 percent of the luxury market but is growing faster than any other region, Bain research showed. By 2014, it will be on a par with the Americas in size.

 

PRESENT BUT PRUDENT

 

Yet it will still lag Europe, the largest luxury market. And while many customers in European shops may be tourists, small companies still see money in established markets.

 

Luxury brand Camille Fournet began with watch straps and has recently broadened out into handbags, wallets and pouches.

 

CEO Jean-Luc Dechery said opening a big store on stylish Avenue Montaigne in Paris would lend the brand instant credibility, but the cost was prohibitive.

 

Instead, he has invited well-heeled clients to a private showing at the George V hotel at the end of June. Items sold there, including a 34,000 euro alligator handbag, will not be available in the store.

 

“We are hitting that good time during fashion week but before Ramadan,” he said.

 

He remained mindful that half the brand’s clients in the Paris store were French, and that a Chinese business will be slow to start up. He is opening a store in Beijing this October.

 

“We want to be present,” said Dechery. “But also prudent.”

 

The advice is sound, say industry analysts, who note that any change to the tax regime in China or Hong Kong could quickly alter the dynamic and that the luxury market may be in a bubble that could burst if the Asian market ever slowed down.

 

“Whenever companies tell me they are going abroad I ask one question,” said Joelle de Montgolfier, a director in consultancy Bain Co’s luxury practice. “Are you absolutely convinced that French women have nothing more to spend?”

 

copyright @ Thomson-Reuters 2012

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