A frequent speaker on ERISA-plan topics, Ed Lynch has recently been featured at conferences and workshops sponsored by the following organizations: •The American Society of Women Accountants “Managing Fiduciary Responsibility for Plan Sponsors” •The New England Employee Benefits Council “How to Uncover an Evaluate 401(k) Fees, Expenses and Revenue Sharing Arrangements” For information on booking Ed Lynch for your next speaking engagement, e-mail edward.lynch@wachoviasec.com

• Uncovering Hidden Fees - Part 1

Uncovering Hidden Fees - Part 1: There's No Such Thing As Free!"

It wasn't that long ago that a 401(k) plan sponsors who asked "How much does this cost?" would be told "The fees are all in the plan. For you, the service is free." No more. Now, everyone seems to know "THERE'S NO SUCH THING AS FREE!" Today, plan sponsors are asking how much is being paid to whom and for what. This is a very good thing.

Unfortunately, getting answers to those questions isn't always easy. Over the twenty-odd years I've worked with plan sponsors, I've developed a process to help them get the answers they need. It comes down to three simple steps: Find Them. Control Them. Apportion Them.

For every client I've ever had, and for any of you who follow it, this process provides the most thorough understanding of what's really going on inside retirement plans. In this series of columns, I'm going to explain the steps and show you what you can do to "uncover hidden fees."

Find Them

To "Find Them" you first have to know what, in fact, they are. Fees can be called different names even when they look like the same thing. It depends, to some extent, on who is being paid.

Because most plans in some way or other "bundle" services with one point of contact apparently providing all of the plan's services, it's important to break the plan down into its component parts. Custody, administration, record keeping, trustee services and investment management are basic. Some plans also have a broker, advisor or consultant. There are, often, legal and audit/accounting that impact the plan. In the last few years, financial planning, investment advice and participant education all have become commonplace. From a plan sponsor's standpoint, each "part" is a vendor. Each one has a price. Each is being paid.

The easiest fees to find, clearly, are the ones you, as the plan sponsor, pay. Legal, audit and, often in part, administration, record keeping and trustee services are frequently billed directly or, in industry phraseology, are "hard dollar" fees. You can add consultants as well, but we'll have to come back to that because those lines have gotten quite blurred, as the Securities and Exchange Commission (SEC), has recently shown. The important thing to note here is the phrase "often in part;" what you see is not, for the most part, all that you're getting hit with.

Custodians and trustees, for example, can collect and be paid additional fees like 12(b)(1) fees, "soft dollars," "shareholder service fees" and other "platform-related expenses." Plan administrators and record keepers are, almost universally, receiving sub-transfer agency (Sub-TA) fees, 12(b)(1) and shareholder service fees. Some impose "wrap charges" and "re-registration" are also common techniques. (We'll be explaining each of these terms in upcoming columns).

Consultants, advisors and brokers can be paid in imaginative ways: Once again, 12(b)(1)s and soft-dollars come into play and, like wrap and advisory fees, can be hard to identify. Watch your investment manager, most commonly mutual fund companies, for things like high portfolio turnover and multiple share or special "retirement plan" share classes. "Directed brokerage," a form of soft-dollar payment, is hard to discover if you're using mutual funds but the question about a fund company's practices certainly can be asked.

Questions are where we begin to get to the answers you need. Next time, we will explain in more detail what all of these mean.

Next article ... Part 2 of "Uncovering Hidden Fees"

The accuracy and completeness of this article are not guaranteed. The opinions expressed are those of the author(s) and are not necessarily those of Wachovia Securities or its affiliates. The material is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.

Edward M. Lynch, Jr. is a Senior Vice President - Investment Officer with Dietz & Lynch Financial Strategies Group of Wachovia Securities in Newburyport, Massachusetts. For more information, please call Mr. Lynch at 877-609-8476. Wachovia Securities, LLC, member NYSE/SIPC.