The New York Stock Exchange, when the funds in your 401k buy or sell stocks, chances are they trade them here or on another big exchange like the Nasdaq. Everytime mutual funds do that, brokers charge a fee; it’s a legitimate cost, but the funds don’t pay it, you do! And here’s why that matters: Critics say brokerage fees can double the cost of your funds without you knowing because funds deduct this charge from your returns without sending your bill. To learn more about hidden brokerage costs, we headed to Bluegrass country (Lexington, KY) to talk some more with Dr. Greg Kasten, President of Unified Trust Company whose specialty these days is diagnosing ailing retirement plans. He has assembled a special database that enables him to calculate the impact of hidden brokerage fees in mutual funds.
Dr. Greg Kasten (Unified Trust Company): The hidden trading costs or what we call these transaction costs stem from not the plan participants’ doing any trading but the actual managers of the mutual funds buying stocks or bonds. They try to manage their portfolios in an attempt to outperform the markets; which is very difficult.
Commentator (Mike Schneider from Bloomberg TV): What’s difficult is also expensive. The funds don’t disclose all the charges they incur when they trade; in many cases they can double the cost you think is inside the fund and its not uncommon at all even in very very large plans that it adds 50% to the cost. Ford Motor Co. proved no exception, so we asked Dr. Kasten to review Ford’s 401k plan; one of the biggest plans in the country with nearly $12 billion in assets. According to Greg for the year 2004, the most recent year available, the returns were less than 0 – 4/10ths of a percent to be precise. The poor performance was due to a # of reasons, but were hidden brokerage costs one of them? Kasten says, yes! Kasten discovered 0.43% in hidden brokerage fees, which translated into $17.2 million. Overtime, that half a percent can make a bigger difference than you might expect for each of the workers in the Ford plan.
Dr. Greg Kasten (Unified Trust Company): How much of a difference? Maybe 10% – 15% of their retirement account ending balance will be gone because they didn’t pay attention to those hidden brokerage & trading costs.
Commentator (Mike Schneider from Bloomberg TV): In a written statement to Bloomberg TV, Ford Spokesman Tom Hoyt said “Brokerage fees are difficult to quantify and cannot be avoided entirely… Every 401k plan incurs these types of fees.” A spokesman for Fidelity (Jennifer Engle) said, “We provide our plan sponsors full information about fees… We believe our fees are very reasonable.” Jerome Schlichter, a St. Louis based attorney who is giving the industry a wakeup call by filing dozens of hidden fee related class action lawsuits says it should be easy to report brokerage fees.
Jerome Schlichter (St. Lous Attorney): Why shouldn’t their annual statement say, “you paid $400 in brokerage commissions last year”, or “you paid 3 cents per share in trading costs.” It can be done, it’s an electronic calculation, but it’s not done.
Commentator (Mike Schneider from Bloomberg TV): Sometimes funds invest in other funds; see that’s when it gets so confusing that even the pros can’t track hidden brokerage costs. Every trade on this chart costs money and you can see how it adds up. These retirement plan specialists from Atlanta show the Labour Dept. a tangle of investments that resemble in their words a ‘Rude Goldberg Contraction.”
Berg Carmody (Fiduciary Risk Management): Rude Goldberg Contraction is basically, how do I take something very very simple and make it the most complicated piece known to man…
Commentator (Mike Schneider from Bloomberg TV): Take Gerry Schneider’s brokerage costs for example. Are they on his account statement? No. His company’s contract with John Hancock Insurance Services? No. Mutual fund prospectuses? No. What about the annual report? No. They are here, in a document called ‘Statement of Additional Information (SAI).’ In Gerry Schneider’s case, this SAI lists all the brokerage fees in Page 118. House and Senate law makers are so concerned about hidden fees that in 2007 they introduced 3 different bills to fix this problem. The Labour department wants revenue sharing fees and other financial conflicts of interest reported but objects the demand from Congress that all fees be disclosed; the mutual fund industry prefers things stay the way they are now. Americans have over $3 trillion in 401(k)s; the big chunk is managed by mutual funds. Hidden fees amounted to just 1% means $30 billion in revenue for the industry! The Investment Company Institute (ICI) which represents mutual funds is warning that a law requiring the full disclosure of fees to do more harm than good.