On Feb. 3, 2012, the Department of Labor published final
regulations on fee disclosure for retirement plans. The idea of this regulation
was to offer the consumer better transparency when it came to their 401(k) by
having fee disclosures that were much easier to read and understand. But more
than 3½ years later, not much has really changed. One good outcome of the
regulations is that the benefits and human-resources departments of companies
have been able to drive fees down because there is more light being shed on
this topic. But the fact is that many plan participants still don’t have a clue
about what their 401(k) plan costs them. Why is that the case?
Fee disclosures are
buried deep in 401(k) plan documents. The rules require a 401(k)
plan’s administrator (often your employer) to provide plan, investment, and fee
information to the plan participants. This is done through a “fee disclosure”
statement. With this, you should be able to determine the reasonableness of the
costs you’re being charged and compare the costs associated with different
investments.
For most fee-based financial advisers who manage money
individually for clients, the fees typically are shown on the first page of the
monthly statements sent to clients. But on the quarterly 401(k) statements I
have seen over more than three years, the fee disclosure isn’t front and
center. Average investors shouldn’t have to dig around to find out what
they are paying for their plans. In my opinion, the real way to get people
to know exactly what it costs them is to have fees disclosed clearly and
succinctly on page one.
Understanding
expenses. Even when plan participants do find the expense page, I don’t
think many understand what the various costs are. The reason this continues to
happen is that 401(k) fees are still complex and confusing to the average
investor.
The 401(k) fees can fall into three large categories: plan
administrative fees, investment fees and individual service fees. Plan
administrative fees include fees for record-keeping, accounting, legal, and
trustee services. In some scenarios, the investment fees could cover the
administrative fees. Investment fees are the lion’s share of overall costs,
which can include the fees paid to the broker, fees for mutual-fund expenses.
And in some plans, you may be paying a separate third-party manager for
investment advice and not even know it. The last part of expenses include
individual service fees, which are costs for items such as taking a loan or if
you choose a self-directed brokerage account within your 401(k).
It can be dizzying for a financial adviser to pick apart
these expenses let alone the average plan participant. Some plans will show you
the cost per $1,000 you pay for being in the plan, but, in my opinion, giving
plan participants a simple dollar amount that they pay annually to be in the
plan would be much simpler.
Education isn’t
required. I think companies that benefit from 401(k) plan fees should
be required to offer, at least twice a year, a detailed education session on
how the plan actually works. Many participants still lack the knowledge on how
their largest retirement assets function. In an AARP study back in 2011,
before the rules took effect, 71% of 401(k) plan participants
surveyed said they pay no fees to be in their 401(k) plan while only 23% said
they do pay fees. But research from the nonprofit National Association of
Retirement Plan Participants earlier this year shows that more than half of
working Americans (58%) still don’t realize they are paying fees on their
workplace retirement savings plans.
The irony is that those participants that think they pay
nothing in fees account for about $35 billion in fee-revenue annually, or $835
per unwitting participant, according to the NARPP study.
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here to access the full article on The Wall Street Journal.