Though a federal investigation into 401(k) plan administration nationally could end up helping the 900-plus employers here that offer such plans, industry sources say employers might see more impact simply by making careful choices when setting up the plans.


The federal investigation, being conducted by the U.S. Securities and Exchange Commission, is focused specifically on possible improprieties involving plan administrators and mutual fund companies and is unrelated to the common complaint that administrative fees are too high, says John Nester, an SEC spokesman based in Washington, D.C.


A plan administrator can get the worst deal possible for employees and still not be violating the law. There is no law that says an administrator has to be competent, says Nester.


Administrative fees normally are paid by the employer, often to a third-party administrator who keeps 401(k) financial records and manages the plan. Other fees, called investment fees, are charged by mutual funds and almost always are paid by employees out of their investment returns.


What the SEC is interested in are possible conflicts of interest and rebating practices in the wide-open field of U.S. 401(k) plans, says Nester.


We havent drawn any conclusions, he says, so its unknown yet whether any action ultimately will be taken.


An example of a conflict of interest, says Nester, comes when a plan administrator has a sideline business in which he serves as a highly paid speaker at engagements at which mutual fund providers routinely pay top dollar to participate.


He says that can amount to a pay to play entry fee situation, in which administrators, who recommend to employers which mutual funds to include in a plan, are rewarded for their choices.


The rebates he refers to occur when mutual-fund companies kick back to consultants or employers some of the investment fees ultimately paid by employees in their investment plans.


By taking care in deciding how a plan is set up and who will administer it, employers can save themselves plenty, consultants here say.


The burning question about fees seems to be how much commission will be paid? says Michael Otis, a consulting broker at FRP Benefits, of Spokane, who says he has spent much time educating employers about administrative fees.


Some employers try to avoid such fees by administering their companys 401(k) plan themselves, says Steve Cote, a financial consultant who advises employers on 401(k) plans at The Synergy Group, in Spokane. But I dont recommend it.


Cote says about 950 employers in Spokane County offer 401(k) plans to their workers.


Such plans range in size from covering one employee to many and can vary greatly, so employers should demand full disclosure on how a plan will be implemented.


Like the plans themselves, the fees employers pay to have plans administered can vary by as much as a full percentage point. For instance, two employers might have 401(k) plans worth $5 million and that offer similar services, but one might pay annual fees of $50,000, or 1 percent, while the other might pay fees of $100,000, or 2 percent, says Cote.


A complicated gift


A 401(k) plan is a wonderful, wonderful benefit for employees and a great gift by the employer to the employee, says Kelly Ruggles, owner of American Alliance Group, of Spokane, who often speaks at 401(k) workshops.


How well employers understand their plans is a matter of differing opinions among consultants here, but how well employees understand the plans is not.


Generally the employee doesnt have a clue about his 401(k) plan, says Jim Preston, division manager for Waddell & Reed Inc.s Spokane office. Its unfortunate.


Says Cote, Employees as a whole do not understand whats in a plan.


Consultants are divided on whether employers really understand the administrative fees theyre paying.


Cote doesnt shy from the word hidden when he talks about administrative fees, saying if such fees are not highlighted by the consultant, that they can get hidden in what can be a 31-page contract.


Otis, of FRP Benefits, balks at the word hidden. It shouldnt be called a hidden fee if it is in the contract, he says. Yet, he does suggest that the industry could do a much better job of disclosure by placing a separate fees page at the front of each contract.


Asked if not disclosing hidden administrative fees is a legitimate problem in the retirement industry, Otis responds, I believe the abusers are far outnumbered by those of us who are trying to, and doing a good job for our clients.


Independent third-party administrators, those not affiliated with mutual funds, do a better job of keeping employers abreast of 401(k) plan costs than do those associated with mutual fund companies, asserts Mark Towers, president of National Associates Spokane, which acts as a third-party administrator.


He says National Associates routinely sends its fee bills directly to the employer, who pays with a check, making the cost very obvious.


In contrast, mutual-fund companies sometimes use a bundled approach by eliminating the third-party administrator, providing those services themselves, and collecting fees from the employee fund, says Lynn Hurley, co-owner of Randall & Hurley Inc.


That Spokane pension and employee-benefits firm administers 401(k) plans and consults with employers on the investment side of such plans.


Third-party administrator fees can be charged as a percentage of the portfolio or in set amounts.


Hurley says Randall & Hurley charges an annual 401(k) base fee of $1,400 and a per participant annual fee ranging from $20 to $40, depending on the features a business chooses to include in a plan. Costs go up if employees receive quarterly, or even daily, updates on their plan, or have online access through which they can make investment changes and check balances daily.


Preston says that administrative fees for what he calls bells and whistles plans that include all the options are often based on the amount of assets in the 401(k) plan itself. Such fees can range from zero percent for plans that have at least $12 million in assets and are administered directly by mutual funds that also receive investment fees, to up to 2.5 percent per year for smaller plans, says Preston. Base fees for such high-end plans can range from $950 to $1,900 annually, he says.


Cote encourages employers to take a common sense approach when adopting a 401(k) plannot just to work with a consultant whos knowledgeable in the field, but with someone they trust.


He says he likes to strike a balance between the participation pieces most important to the employer, education for both employer and employee, investments, and cost. He adds that lower administrative fees dont necessarily mean better investment returns for employees.


Many 401(k) plans provide for an annual review of administrative fees to the employer, says Preston. Hurley says such meetings at Randall & Hurley come when there is a change in the fee schedule, and that the firm hasnt changed its fee schedule in the past five to seven years. She says such meetings afford employers an opportunity to customize their plans without negotiating the fee.