You might've heard that 401(k) plans are about to shine a brighter light on all their fees. If not, don't worry. I'll write more about that in next week's column.



In the meantime, I want to talk about the millions of employees who have workplace retirement plans exempt from these new disclosure rules. They cover teachers, church employees, government workers and employees of small firms with SIMPLE IRAs or SEPs.



There are ways workers can avoid being trapped by high fees in those plans, too. In fact, some of these plans offer more flexibility to escape high fees then do 401(k) plan participants.





ABOUT THOSE FEES ...

Why are fees so important?

Fees come right off the top of your returns. And in retirement plans, some fees are downplayed or hidden from view.

Furthermore,

that investors who keep their expenses low fare better over time than investors who don't.

"Investors should make expense ratios a primary test in fund selection,"

Morningstar's director of mutual fund research, in a 2010 study of fund fees. "They are still the most dependable predictor of performance."

Fees are one of the few things you can control as an investor that have significant impact on your returns. That's a nice thing to keep in mind when you're investing in volatile markets that might otherwise leave you feeling helpless.

-- Brent Hunsberger

In particular, workers with SIMPLE IRAs can do what Nick Welch did. He took his money and parked it elsewhere.

Before we get to Welch's story, let's recap the new disclosure rules.

They require worker-directed retirement plans to reveal all expenses in a clear fashion. The regs are intended to raise our awareness of fees in hopes that our employers and retirement-plan providers will drive them lower.

These

apply to more than a half-million 401(k) plans covering 51 million active participants, according to the Investment Company Institute and the Employee Benefit Research Institute. They also apply to 403(b) plans for nonprofits in which the employer contributes.

But they don't cover government defined-contribution plans, including 457s and 403(b)s. Church-sponsored 403(b) plans and a few others also are exempt.

That's a lot of folks. Nearly 8 percent, or one of every 13 U.S. households, is covered by an employer-sponsored Individual Retirement Account, federal data show. These SEPs, SAR-SEPs or SIMPLE IRAs held an estimated $325 billion in assets at the end of 2011.

SIMPLES and SEPs are supposed to be easy and inexpensive for employers to set up and manage. They've also got more outs. That's why regulators exempted them.

The trick is, you've got to be aware of high fees and the outs.

Just ask Welch.

The 28-year-old software programmer from Portland started contributing to his employer's SIMPLE in May 2009 (SIMPLE stands for

). Little by little, he took more interest in investing. He discovered

. He also found many low-fee funds from The Vanguard Group he liked.

But when he asked the plan's adviser how he could get into Vanguard's Wellington fund, Welch said he was told he'd have to pay $40.

The adviser instead gave him a list of other investment options. Every fund on the list had high front-end loads or high expense ratios. Or both.

Front-end loads

are sales charges paid when you buy into a fund. They're typically a percentage of the initial investment. Most funds suggested to Welch charged loads ranging from 3.75 to 5.75 percent.

Expense ratios

are the proportion of your mutual fund balance that go to pay the fund's management fees each year. In 2011, U.S. stock-fund investors paid an average expense ratio of 0.79 percent, or $7.90 for every $1,000 invested,

. Stock index funds cost much less -- 0.14 percent, on average, or $1.40 per $1,000.

Yet seven of the nine funds recommended to Welch had expense ratios above 1 percent, or more than $10 per $1,000, he said. Some had front-end loads, too.

So Welch took matters into his own hands. He researched online and discovered a "

" that applied to many SIMPLE IRAs.

Employers can set up

the bank, credit union or brokerage where they want it housed.

Welch's didn't do that, and many don't. Instead, they set up a

-- in Welch's case, Ameriprise Financial Inc. -- and required workers to contribute to it.

When employers do that, they are required to allow workers to get out of the plan two years after they start contributing. At that point, employees can roll over or transfer the money to any IRA or eligible retirement plan at no cost to the worker. Employers must notify workers of this option in writing, the IRS says.

Last month, Welch took advantage of that rule. He opened an IRA at Vanguard and moved most of his SIMPLE into it.

His employer still directs his salary reductions and employer match to the original SIMPLE. Welch plans to periodically transfer that money to his IRA, which he's since converted to a Roth. The transfers aren't considered contributions, so he's not constrained by the $5,000 annual contribution limit on IRAs.

"I'm so happy to be out of there," Welch said.

Interestingly, even before that two-year waiting period expires, employees have an inexpensive alternative.

They can set up a "personal" SIMPLE IRA at an institution of their choice and have money transferred from the employer's SIMPLE to their personal SIMPLE, said

, an employee benefits attorney at Stoel Rives in Portland (See

for details. Or see the "Two-year rule" on

). Then, after two years, they can roll over or transfer money from both accounts to a regular IRA.

Setting up a personal or individual SIMPLE IRA is not easy, Leybold warns. "It is not a product that is offered by a lot of IRA providers," he said, "and it may take some time before the personnel of IRA providers understand what the employee wants."

So, be persistent or seek help from a financial planner.

Workers in other plans exempt from the fee-disclosure rules also have alternatives.

SEPs

, or simplified employee pensions, are essentially regular IRAs, and participants have even more flexibility. They can transfer the account balance to a different IRA at any time and can continually sweep contributions to from the SEP to the personal IRA, Leybold said.

403(b) plans for government employees.

The disclosure rules cover 403(b) plans for workers at nonprofits where the employer matches contributions. But other government, public school and church 403(b) plans are exempt, though some plan to reveal fees anyway, said Scott Schiele, an investment adviser and benefits consultant at Mercer in Portland.

So what do you do if you've got high-fee funds? Frankly, if your employer isn't contributing to the plan, you might be better off ignoring it and opening your own IRA instead, said Bruce Miller, a certified financial planner in Vancouver.

That's particularly true if your fund selection is limited or fund fees are high. Opening an IRA with an online brokerage such as Scottrade, TradeKing, Fidelity, Schwab or Vanguard will provide you access to many low-cost investment options. Compare the brokerage's transaction fees before picking one.

Yes, employees get the benefit of pre-tax contributions to 403(b) plans. But IRA contributions are tax deductible, too.

One drawback to this strategy: You can only contribute $5,000 a year, or $6,000 if you're 50 or older, to an IRA. You can get up to $17,000 this year into a 403(b). But most teachers, for instance, won't be socking more than $5,000 away each year, Miller said. That's especially true if they're already covered by a pension plan, such as Oregon PERS.

457

deferred compensation plans for state and local governments and nonprofits deserve the same review. If your employer doesn't contribute and the 457 plan lacks low-cost active or index mutual funds, consider skipping it and contributing to an IRA instead.

--

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