Sunday, April 23, 2006

410(k) Plans Are Like Goodie Bags For Wall Street

Everywhere you look, traditional pension plans are being replaced by the magical 401(k) accounts that many people on the right claim will bring larger returns and provide better retirement benefits for individuals than pension plans.

The 401(k) plan is a large part of George Bush's push to create an "Ownership Society" - a society where Bush claims individuals will own the responsibility for taking care of their own welfare, health care, education, and retirements.

In addition to pushing 401(k) plans, Bush has also tried to privatize Social Security by providing people with "personal retirement accounts" instead of guaranteed Social Security benefits in the future and he has also attempted to sell people on a national plan for personal health care accounts that people could use when they become sick.

The problem with Bush's personal retirement accounts was pretty simple: taking money out of the Social Security system to put into the personal retirement accounts of younger people would essentially bankrupt Social Security while not necessarily providing for more money for these younger people when they retired. In point of fact, the one group of people who would stand to make money from Bush's Social Security reforms would be Wall Street. For every dollar invested from people's Social Security personal account, Wall Street would take a percentage.

Bush's health care savings account plan is just as bad as his Social Security reforms. The idea behind his health care reforms is to give people the opportunity to save money in a personal account that they can used for health care costs. In years when the individual doesn't need to go to the doctor or have a check-up, money would accumulate in the account. The money from the accounts is invested, of course, so again the boys and girls from Wall Street get their greedy little mitts on it. The big problem behind the health care accounts, besides the fact that it's designed as another goodie bag for Wall Street, is that it would discourage people from going to the doctor for preventative medicine or check-ups, since those kinds of doctor visits would eat money out the account that might be better saved for catastrophic events.

This is not to say that the current Social Security system isn't in need of reform, of course, nor to say that the current health insurance system isn't in need of major overhaul (especially since so many people are uninsured.) But it seems to me that George Bush's solutions for Social Security and health care are designed to be corporate giveaways, just like nearly everything else he has done as our first CEO preznit (Medicare law is a giveaway to the drug companies, Iraq war is a giveaway to Halliburton and other Bush/Cheney cronies, No Child Left Behind law is a giveaway to the tutoring and testing industries, etc.)

So now we come to 401(k) plans, which admittedly have been around awhile. Nonetheless, with all the companies either canceling their traditional pension plans for 401(k) plans or ratcheting down their contributions into employee pension plans in order to encourage employees to take advantage of 4o1(k) plans, 401(k)'s have been much in the news.

Today, the LA Times describes how 401(k) plans, like Bush's personal retirement accounts and health care savings accounts, are goodie bag giveaways to Wall Street and related industries through arious charges like "fund maintainance fees," "administrative fees," and "overhead fees" :

John Fuchs was checking his 401(k) account online one afternoon when he saw something that seemed amiss. Listed along with his regular contributions was a $48 charge, in red.

That's odd, he thought.

Why would anyone be taking money out of his account?

After a flurry of phone calls and e-mails, Fuchs learned that the $48 deduction was no mistake. The money was paid to an outside firm that enrolls employees in his company's 401(k) plan, mails quarterly account statements and handles other administrative tasks.

Fuchs knew the mutual funds he'd chosen charged fees for investing his money. He didn't know that overhead costs were also being taken out of his account. They now cost him about $500 a year.

Because the administrative fee is a percentage of his balance, he will pay more and more as his savings grow. Fuchs figures that by the time he retires, it will have cost him more than $316,000 in direct charges and lost investment returns.

"I think a lot of people out there pay this fee but don't know it," said Fuchs, 38, an information technology manager for an engineering firm in Exton, Pa. "To the average employee, it's totally invisible."

As many employers scrap their traditional pensions and doubts grow about the future of Social Security, Americans' hopes for a secure retirement depend more than ever on their 401(k)s. About 44 million workers have more than $2 trillion invested in these accounts.

Yet unknown to many of them, obscure fees and deductions are quietly eroding the value of their nest eggs. In many cases, employers could bargain for lower charges, but don't.

Mutual fund management fees are the biggest expense. But they are prominently disclosed, have attracted wide publicity and have been declining as fund providers compete for customers.

Administrative fees are another matter. They usually don't show up on quarterly or annual statements. Brochures touting the benefits of 401(k) investing rarely mention them. Employees have to work hard to find out how much they're paying — for instance, by scouring their plan's website for a record of all activity in their accounts.

Plan consultants and providers collect their cut in varied ways. Some receive a fraction of each employee's savings. That's the charge Fuchs stumbled upon. Others collect a commission from insurance companies that run 401(k) plans.

When mutual fund companies manage 401(k)s, they often absorb overhead costs in return for the chance to give most of the "shelf space" to their own funds. They get their money back through fund management fees.

What's more, fund providers frequently offer 401(k) participants the same retail mutual funds they sell to the general public, not the low-fee alternatives designed for big groups of customers.

Employees tenacious enough to demand information about fees from benefits departments or 401(k) administrators often complain that they can't get straight answers.

Because of outdated federal disclosure rules, publicly available records on fees often reveal only a fraction of the money leaking out of retirement accounts.

"It's very difficult for the average participant to determine what the total expenses are, how those expenses measure up, and who exactly is getting paid and how much," said Bud Green, a principal at Fortress Wealth Management Inc., a 401(k) consulting firm in Santa Monica.

Workers who save conscientiously suffer a disproportionate hit because fees are typically taken as a percentage of their account balances. Someone with $100,000 pays 10 times as much as a co-worker with $10,000, even though it costs about the same to administer the two accounts.

The structure of 401(k)s leaves employees with little or no voice. Employers sponsor the plans and hire the providers and administrators. But workers pay most of the fees.

Employees can raise a stink about the charges — if they happen to learn about them. But they can't take their business elsewhere; they're stuck with whatever plan their company offers.

"People can be paying thousands of dollars in fees if they've been in their 401(k) plans for years," said John Turner, a senior policy advisor at the AARP Public Policy Institute. "They can be paying thousands of dollars more than they need to be paying."
The rationale behind Bush's Ownership Society, that individuals bear the responsibility for their own retirements, sure works with these 401(k) plans. Individuals are responsible for poring over their 401(k) accounts to find the fees that they don't have to pay if only the companies running the accounts had to disclose that individuals don't have to pay them, which they don't, since the federal laws regulating the plans are outdated.

How's that for a Wall Street goodie bag giveaway? The man in the Times article says the charges will cost him about $316,000 dollars in direct fees and lost investment returns.

Just another example of how in Bush's Ownership Society, the rich and powerful take advantage of the working and middle classes. These fees are all but invisible and you'd have to be quite knowledgeable about your plan before you'd find the charges:

Fuchs works for Groundwater & Environmental Services, which cleans up contaminated groundwater at gas stations and other sites. The company, which has 600 employees, selected Benefits Sources & Solutions, a consulting firm in Bound Brook, N.J., to run its 401(k).

The consultant advises Groundwater on which mutual funds to include, processes employees' payroll deductions and holds educational workshops, among other tasks.

Benefits Sources does not bill Groundwater for these services. Instead, it collects a percentage of employees' total savings every three months.

In 2004, this fee averaged 0.51% — $51 on a $10,000 account. Overall, the company took in $48,185 from Groundwater employees that year, the most recent for which figures are available.

The payments do not appear as line items on employees' quarterly statements. Rather, Benefits Sources takes a cut of the mutual fund shares in each account. That makes the fee all but invisible.

Most employees focus on their dollar balance, not the number of shares. The share balance changes constantly as fresh contributions are added and dividends are reinvested. To detect the deductions, an employee would have to track his or her shares rigorously enough to notice that the number isn't climbing as fast as it would otherwise.

"I think it's pretty sneaky," Fuchs said. "The fees should be reported in a forthright manner, but they're not. All these companies do it. A lot of human resources people don't even know what's taken out of their own funds."

Fuchs said he learned about the administrative fee by chance: He happened to check his balance online the day the $48 was withdrawn.

"The 'pending transaction' in red got my attention," he said.

Fuchs said his employer wouldn't reveal details of Benefits Sources' fee. From Internet research, he learned that he could ask Groundwater for a copy of its Form 5500, which employers must file annually with the Labor Department, listing certain expenses paid from retirement savings plans. With the document in hand, Fuchs was able to calculate the size of the fee and how much he was being charged: about $500 a year.

That might not seem like much, but over time the effect of such charges can be huge. In addition to the direct cost, workers lose out on the interest, dividends and other returns that would pile up if the money had been left in their accounts to grow and compound.

Fuchs used calculators on the Securities and Exchange Commission website (www.sec.govunder "investor information") to arrive at his $316,000 estimate of how much administrative expenses will cost him by the time he retires in 2030.

John Zelechoski, Groundwater's manager of human resources, said that Benefits Sources had done a good job selecting mutual funds and that he had gotten few employee complaints about the plan.

Scott Rappoport, president of Benefits Sources, said its fee was in line with what other 401(k) administrators charged. He said the firm earned its money by researching investment choices, educating workers and providing other services. But he declined to detail the cost of those services or explain how the fee was determined.

To be frank, that's legalized robbery. If the companies felt comfortable about charging the fees, they'd charge them up front, wouldn't they? But they don't. Instead they finagle the amount of shares you have and unless you're a financial wizard or determined to get to the bottom of the charges like Mr. Fuchs, you're none the wiser.

I'm sick of this bullshit.

I'm sick of middle and working class people who play by the rules getting fucked by rich and powerful corporations and rich and powerful people.

Credit card companies, mortgage lenders, and banks are fast approcaching the Gambino family in terms of customer service, fees, and interest charged.

Insurance companies are happy to take your premiums, but they're not so eager to pay out on legitimate claims (and they love to point to the abuse stories, where somebody took advantage of them, to justify why they don't pay out on legitimate claims.)

The oil and gasoline companies are raping American consumers at the pump, ever happy to raise prices when the market goes up on oil, but not so quick to lower prices when the market price for oil goes down (as Chuck Schumer noted with Wolf Blitzer a few days ago.)

Transnational corporations are squeezing middle and working class wages, making people work ever longer hours for ever less money (at least in terms of real hourly wages and benefits.)

Transnationals are also using "globalization" as an excuse to pay lower wages and squeeze ever more "productivity" out of the workforce.

According to, of all high-income nations, the United States has the most unequal distribution of income, with 30 percent of income in the hands of the wealthiest 10 percent while only 1.8 percent of income goes to the poorest 10 percent.

Even in the middle, people are falling way behind. The lifestyle that used to take just one income to afford (i.e., owned home, money for annual vacations, savings for kids college fund, etc.) now takes two or more incomes to afford. For many, this lifestyle is only paid for with large amounts of credit card and home equity debt.

Something has to change. We cannot go on like this much longer.

Today, the LA Times describes how 401(k) plans, like Bush's personal retirement accounts and health care savings accounts, are goodie bag giveaways to Wall Street and related industries through arious charges like "fund maintainance fees," "administrative fees," and "overhead fees"

It's actually worse for us where the that the L.A Times describes, I think.

Bu$hCo was almost desperate to bring the Personal Retirement accounts to life. So much so that they snuck funds for making it happen into the FY2006 budget even after the whole thing was declared dead on Capital Hill. And why? I'd hazard a guess that it's a way to shore up Wall Street's profits when they go down the tubes as the Baby Boomers start drawing on their accounts. But that's just a guess.

I blogged on this myself some months back. Though my take was: "What a monumental waste of my time."
You're right, kvatch, I forgot about how he stuck the private accounts into the FY2006.

More Bush-style democracy, I guess. 65% of the country is against private accounts - sneak 'em through when nobody's noticing.
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