There was a time when folks in the food industry didn’t want nutritional information published. They said people would be so bombarded with facts, they wouldn’t know what to do or wouldn’t bother to find out.
They were right in some respects: People see helpful nutritional facts on packaging, and they buy the bad stuff anyway.
And the same may be true when retirement plan participants get clearer details on how much they pay in fees to invest their retirement money.
New disclosure rules by the Labor Department are intended to help workers and the companies that provide retirement plans understand the fees charged to, or deducted from, individual accounts.
Those with 401(k)s or similar plans should begin receiving the information by Aug. 30. And more detailed information tied directly to the fees you pay will be sent with your quarterly statement by Nov. 14.
So what are you going to do with this enhanced fee information? Will you ignore it? Or will you take it seriously?
“It’s not reasonable to expect service providers to do this for free, but people are going to be shocked and outraged when they see how much they pay in fees,” said Peter Kirtland, president and chief executive of ASPire Financial Services, which provides low-cost retirement plan solutions that can be customized.
The government says the new rules will reduce the time investors spend collecting fee information.
It would be great if most plan participants devoted time to analyzing fee information. They do not, according to AARP.
The advocacy group for seniors polled 800 workers with money in 401(k)s and asked them if they paid fees: Seventy-one percent said no. Yet all fund owners are compensated through fees for the costs of running the fund, says Don Blandin, president of Investor Protection Trust.
The fees passed on to investors can vary greatly. The day-to-day operation of a plan involves expenses for legal, accounting and record-keeping services. There could be added fees if the plan provides access to a customer service representative, seminars or retirement planning software. Funds that are actively managed might incur higher fees.
Fees typically run 0.5 to 2 percent a year. “Even seemingly small differences in expenses — say, half a percentage point a year — can make a big difference in how much wealth you accumulate,” Blandin said.
Look at this example provided by the Labor Department. Let’s assume you have 35 years until retirement and a current 401(k) account balance of $25,000 and you don’t make any additional contributions. Over 35 years, your account averages a 7 percent return. Your account balance will grow to about $227,000 at retirement. Your fees reduce your average returns by 0.5 percent. However, if your fees are 1.5 percent, your account balance will only grow to about $163,000. The one-percentage-point difference in fees would reduce your account balance at retirement by 28 percent.
“Daylight is a great antiseptic,” Kirtland said. “The most egregious fees have been hidden. Now some people will stick out as charging excessive fees. Once all information is out there, it will create price compression.”
Here’s what you can do:
First, watch a very informative video posted on YouTube by AARP. Search for “Understanding 401(k) Fees.”
Second, when you get the fee information, compare it for the various investment offerings in your retirement plan, says Dan Weeks, co-founder of BrightScope, which rates more than 53,000 retirement plans.
To assess your company’s plan, go to www.brightscope.com to find and research the quality of your 401(k) or 403(b) plan.
Finally, talk to your company. “This could motivate participants to ask questions,” said Howard Heller, manager of legislative and regulatory strategy for T. Rowe Price Retirement Plan Services.
Just know fees matter, just like the nutritional information.
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