From the December 2007 issue of Investment Advisor • Subscribe!

Fighting the Good Fight on 401(k)s

David Loeper's MISSION is to keep 401(k) plan participants from getting ripped off. In his new book, Stop the 401(k) Rip Off, (Bridgeway Books, 2007), Loeper rails against the hidden fees in 401(k) plans and attempts to arm participants with the ability to uncover the fees and approach their employer about offering less expensive funds in their plans.

As Loeper argues in his book, total cost for administration, recordkeeping, government filings, statements, Web site, and the trimmings should be no more than $50 per employee a year for the company sponsoring the plan, and can easily be as little as $25 a year if the annual company-wide costs are a minimum of $1,500, according to Loeper, CEO of Richmond, Virginia-based Financeware, which provides advisors with sophisticated probability analysis tools and training through its Wealthcare system.

Loeper, 44, took up the mantle to rid the 401(k) industry of high fees after discovering the hefty fees levied by his own firm's DC plan. He sought a new, lower-priced plan for his 25-person company. "It's a personal passion--my associates and I have been ripped off," he says.

Exorbitant fees may be a thing of the past soon, however. The Department of Labor (DOL) and Congress are waging their own wars to make sure all fees levied in 401(k)s are disclosed. DOL's rules regarding 401(k) fee disclosure are expected soon, while the Senate's Special Committee on Aging held a hearing in late October on hidden 401(k) fees. Action by regulators and Congress follows a GAO report late last year advocating changes to ERISA by Congress and DOL which would require that plan providers disclose all fees paid out of plan assets in a way that allows comparison among investment options, provides expense ratios annually in a single document, and discloses to plan sponsors compensation received from other service providers.

He disagrees with the Investment Company Institute's position on fees in retirement plans. Mutual funds, represented by the ICI, manage more than half of the $4.1 trillion in assets in defined contribution retirement plans, including 401(k), 403(b), and 457 plans. The ICI states in testimony before Congress and in reports on its Web site that on an asset-weighted basis, the average expense ratio for 401(k) stock mutual fund investors was 0.74%, half of the simple average stock mutual fund expense ratio in 2006 (1.50%). A simple average gives each fund the same weighting, as opposed to a weighted average, which assigns larger weightings in the calculation of those funds with the largest share of 401(k) assets.

Loeper says comparing the simple average with the weighted average is misleading, since the simple average is a different mathematical calculation than the asset-weighted average. The ICI is not using the simple average expense ratio for 401(k) expense fees but is using it for the average mutual fund expense ratio, Loeper says. The probable 401(k) simple average expense fee is more likely 1.15% to 1.36%, not much lower than the fees for retail investors in funds, he says.

An ICI study, The Economics of Providing 401(k) Plans, "showed, using [asset] weighting, that 401(k) expense ratios are only 0.14% less than the industry overall expenses, or 84% of the total industry expense (0.74% is 84% of 0.88%). You would think institutional plans would be more competitive than that versus all retail and institutional funds combined," Loeper says.

"If you remove the largest 1,000 plans out of the computations, the expenses would be enormous," he claims. "There are 600,000 401(k) plans in the U.S. and most are small...The ICI counts big plans many more times than you count the small plans when coming up with its figures," he says.

As for Financeware's new 401(k), it has a 0.60% expense maximum if participants elect to receive personal quarterly investment advisory consultations, life planning, and personalized professional management of their funds. "Since half of that expense (.30%) is optional for a lot of personalized professional services, a real apples-to-apples cost comparison to our old plan would be 0.30%. Also, since the company is paying for the administration and custody costs, our employees are actually only paying 0.10% to 0.17%," he states.


Elizabeth D. Festa is a freelance business writer based in Washington, D.C. She can be reached by e-mail at elizabeth.d.festa@comcast.net.

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