For close to 10 years, the Labor Department has required plans to provide fee disclosures. Currently, 87 million plan participants are required to get fee disclosures. The Government Accountability Office was asked to examine how well participants understood those disclosures.
Using actual disclosure content from 10 large 401(k) plans, the GAO found in a recently released report that almost 40 percent of 401(k) plan participants do not fully understand and have difficulty using the fee information.
Many people don’t realize they are paying multiple fees that generally fall under two categories: administrative fees and investment-related fees. Bundled into those charges are expenses for legal, accounting and record-keeping services. You might be paying for access to customer service help or investment advice. Funds that are actively managed might incur higher fees. If you work for a small company, your plan fees and expenses might be higher.
“Fees remain a huge issue in the 401(k) industry,” said Edward Gottfried, director of product at Betterment’s 401(k) business. “They’re frequently too high and rarely transparent enough to retirement savers.”
The fees can be assessed as a flat dollar amount or as a percentage of assets. Asset-based investment fees, which are also called the expense ratio, are typically the largest fees a participant will pay, according to the GAO.
Investment fees are typically expressed as a percentage of assets under management, or the total dollar balance of an employee’s 401(k) account, Gottfried said.
The GAO asked folks to review a fee disclosure note that was supposed to provide some clarity to plan participants. But it’s all in how you present the information. For example, survey participants were asked: If your investment fund’s expenses are $4 each quarter per $1,000 invested, how much are your expenses for a $15,000 investment in that quarter, assuming that the amount of the investment doesn’t change?”
Dollars people know. When presented fee information this way, 88 percent of participants correctly answered that the quarterly investment cost was $60.
The percentage of correct answers fell when people were asked to identify the fee when presented as an expense ratio. When explained this way, 53 percent of participants were unclear of what was being charged.
What’s important to grasp is that whatever you’re charged has an impact on your returns. The Labor Department explains it this way: Let’s assume you have 35 years until retirement and a current 401(k) account balance of $25,000. You stop contributing, leaving the account at $25,000. If returns average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance after 35 years will grow to $227,000.
But what if your fees were 1.5 percent?
You would end up with $163,000. That difference of just that one percentage point reduces your account balance at retirement by 28 percent.
“Given that a large number of Americans already struggle to save enough money to live on in retirement, this is money they can’t afford to lose,” Gottfried said.
The GAO found that 64 percent of participants believe they are not paying any 401(k) fees or are unsure whether they’re charged anything. I get that many workers find the fee disclosures confusing — if they review them at all. But the finding that people are unaware that there are fees had me flummoxed.
It’s not unreasonable for companies to charge for their investment services. It takes money to manage your money. But it behooves you to know the costs. Ideally, the more workers know about the fees they pay, the more they may press their employers to negotiate better deals to manage their workplace retirement plans. Or, plan participants will realize that increasing what they invest can help mitigate the expenses they pay.
Among the recommendations to improve people’s fee literacy, the GAO suggested that disclosures include benchmarks, which could help plan participants better gauge whether their investments’ costs are competitive.
“Fee benchmarks can help participants to assess an investment option’s value, not only relative to other in-plan options but to options outside the plan,” the GAO said.
On your own, you might try brightscope.com, which provides retirement-plan ratings and research. (However, as of Sept. 1, the company no longer provides free access to 401(k) ratings. Users are now directed to Beacon enterprise product suite which contains additional data and intelligence for subscribing clients, the company said in a statement.)
Your employer has an obligation to watch the fees charged for your 401(k) and to make sure they are reasonable. But how will workers know what’s reasonable if they can’t understand the disclosures they are getting?
With millions of people relying on their workplace plan for retirement money, knowing the fees they pay is paramount.