Do you trust your 401(k) plan provider? If you’re like most Americans,
probably not.
Only 30% of Americans trust their own retirement plan provider, which is
the highest point in the last five years (in 2014, that number was 26%),
according to the National
Association of Retirement Plan Participants’ trust and engagement
survey of more than 4,500 plan participants. Another 13% said they trust
financial institutions overall, and 23% said they have confidence in these
institutions.
Why the distrust? Mostly, participants said they didn’t understand the
fees they were paying for their retirement accounts, and thought they weren’t
being told everything about those fees, said Laurie Rowley, co-founder and
president of NARPP. Only 27% of Americans know how
much they’re paying in 401(k) fees, according to a recent TD
Ameritrade study, but high and unnecessary fees can diminish portfolio returns,
thus leaving investors with less money in retirement. Large plans have an
average fee below 1% while small plans are somewhere between 1.5% and 2%, but
other plans can be 3.5% or more, according to a Brightscope analysis.
The consequences are dangerous for investors, Rowley said. “Low trust
means investors may save at lower rates and have suboptimal savings,” she said.
“A low-trust environment is hindering people’s ability to make good financial
decisions.” Even if they know they have to save for their futures, Americans
may be hesitant as they don’t know what to do and aren’t comfortable to work
with financial institutions.
The Department of Labor attempted to combat overly high retirement
account fees with its fiduciary rule, a piece of legislation from the Obama
administration that argued retirement savers lose $17 billion a year to
conflicted advice and unnecessary fees. The rule, which was supposed to go into
effect this year, has been delayed indefinitely. The Securities and Exchange
Commission is currently evaluating its own type of fiduciary rule (though some
critics say it is a watered-down version of the DOL’s
rule).
Litigation over 401(k) plans has surged
recently. More than 100 new complaints over these accounts were filed
between 2016 and 2017, the highest two-year total since 2008-09. The biggest
sources of tension? Inappropriate investment choice, excessive fees and
self-dealing (which is when advisers act in the own best interest instead of
the client’s). There are positive consequences to these lawsuits, however, such
as increased fee transparency (which could lead to lower fees). There are also
neutral or negative risks, including more passive investment choices (which do
not pose as much of a risk of underperforming index funds on performance or
fees).
What would make Americans trust their plan providers more? A few
factors, the NAARP said. Education, transparent fee information, shared
relevant information about the plan or retirement savings and feeling as though
the provider is acting in the participant’s best interest.
About 19% of respondents said they know how to estimate money for
retirement and 21% feel comfortable planning for it. Another 19% said they
understand investing principles and 30% feel comfortable managing their money.
Failing to prepare for retirement can be detrimental once a person gets there.
It’s never too early to start saving for retirement, but the earlier the
better. Only about half of Americans expect to feel comfortable in retirement,
a new Gallup
report found, and one major concern is not having enough income during
those retirement years.
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