All too often workers with 401(k) accounts are in the dark. They view their retirement plan as a benefit and are unaware they're paying for the privilege of investing for retirement.
But greater awareness will come this year with new U.S. Labor Department regulations that require 401(k) plan providers to spell out some of the fees workers pay. Labor officials said the greater transparency will help workers and their employers make better decisions that could save them money.
Many investors don't realize that more than a half-dozen fees may be charged against their 401(k) account for recordkeeping, administration, investment advisory, brokerage and management services. In addition, at least eight kinds of indirect fees and expenses could be charged. These are often shaved off the top of the account's investment returns.
The push for greater disclosure has been in the works for several years. Under the new rules, investors will receive additional annual and quarterly disclosure reports that will include information on the performance of account investments and the expense ratio for each of the mutual funds. These expenses will be expressed both as a percentage of assets and as a dollar amount per $1,000 invested for each fund.
Still, the new reporting requirements are not without their drawbacks.
For instance, they don't require 401(k) providers to include a simple total fee figure expressed in dollars. They also don't require a comparison of fees to an average or some other benchmark and not all fees are required to be disclosed. This means investors won't get the complete picture.
The government's new regulations are a baby step in the right direction in that they require at least some disclosure, but they could go much further, said Tom Gonnella, a senior vice president at Lincoln Trust Co., a Denver plan provider to about 2,500 small companies.
His biggest complaint is that they leave out many of the costs of operating a 401(k) that are charged against the returns of each participant in the plan. These investment expenses can account for 70 percent to 80 percent of the total cost to investors in most plans, Gonnella said.
The Labor Department should have pushed for disclosure of a simple all-inclusive fee total and comparisons to averages that would have been much more helpful to workers.
"It fell way short," he said.
The department didn't see its regulations as the final standard and encourages plan providers to come up with their own reports detailing fees in ways that are helpful to investors.
"We expect service providers will find various ways to build on the regulations' requirements to illustrate for their plan clients how their fees and service levels compare to other plans and other service providers," Assistant Secretary of Labor Phyllis C. Borzi said in a statement.
Laying out investment expenses is particularly important for workers in smaller plans. That's primarily because many companies, especially small businesses, do not want to pay the thousands of dollars of operating costs. So they set up retirement plans in which costs are paid by workers out of their investment returns.
All of this discussion is critical because workers who pay just 1 percent more in fees see a significant impact on their retirement balance over their working careers.
As an illustration, AARP calculated that employees contributing $5,000 per year to a 401(k) account, earning an annual return of 7 percent and paying no fees, could grow their balance to $469,000 over a 35-year working career. By comparison, an annual fee of 1.5 percent of the account balance cuts the savings 26 percent to $345,000.
Many 401(k) providers are worried that the additional disclosure may cause investors to simply seek the cheapest investments available rather than work to assemble a balanced portfolio.
"If participants think they're paying nothing today and then all of a sudden they find out they're paying $300 a year, you don't want them jumping out of the plan," Gonnella said.
Education will be very important to help participants understand that they've always paid fees. They're just now seeing how much.
Revealing such costs could cause workers to push their employers for a less expensive plan. That's the takeaway for workers in all this. They should look over the reports and if they feel they're not getting enough information, push for more. If they find their fees seem higher than average, they should talk to their plan administrator about lower fee options.
Workers will get a booklet detailing the funds in their 401(k) accounts, their returns, expense ratios and other details. These booklets must include charts comparing the performance of the workers' chosen funds with benchmarks. The information must be sent out once a year.
In addition to these annual booklets, quarterly disclosure statements will accompany regular account balance statements.
The reporting rules have faced delays in the past, but the Labor Department currently expects the initial rollout to come in late May.