Employers, Employees Unaware of Rising 401(k) Fees: News of the Day
Many employers do not understand or were unable to identify the 401(k) fees that they and their employees pay. Without the ability to determine the fees charged to both employers that sponsor 401(k) plans and the workers who participate in them, employers and employees may be paying much higher costs than they are aware of, resulting in reduced retirement savings.
Fortunately, new federal fee disclosure requirements taking effect this summer should shine a light on how much is being shaved off the top of investment returns.
A Government Accountability Office report released last week by Rep. George Miller, senior Democrat on the committee and a long advocate for greater disclosure of 401(k) fees, details the extent of the problem. From the Associated Press:
Among the [report’s] findings:
— Half the plan sponsors did not know if they or their plan participants paid investment management fees, or they mistakenly believed those fees were waived. That was the case for 57 percent of small plan sponsors, defined as those with fewer than 50 participants. Even among large sponsors with at least 500 participants, 31 percent didn't know. It's disturbing because investment management fees account for the majority of overall 401(k) fees. They're paid to managers who select stocks, bonds or other investments in funds that 401(k) assets are invested in. Plan sponsors may be unaware because management fees are typically deducted from a participant's account, rather than being invoiced to the plan sponsor, the GAO said.
— Many sponsors reported they asked providers little about which fees were charged. For example, 70 percent hadn't asked about whether the plan charged 12b-1 fees. Those charges can cover everything from compensation for brokers selling funds to advertising and promotions. Eighty-two percent didn't ask about fees to reimburse plan record keepers for services including maintaining participants' accounts and distributing disclosures sent to fund investors.
— Few use or are aware of resources the U.S. Department of Labor offers to help companies compare fees charged by providers. Fewer than 6 percent consulted an agency publication on 401(k) fees. The GAO concluded sponsors typically rely on providers for fee information and advice.
"Middle class families who rely on a 401(k) do not have a fighting chance if employers don't understand how their own plan works," said Rep. George Miller. “For too long, confusing business arrangements and hidden fees have skimmed money from workers’ hard-earned savings without full disclosure.“
In July, the Department of Labor will add some transparency to the process by “requiring plan providers to disclose detailed 401(k) fee information to employers. The employers in turn must share information with their plan participants. Individuals can expect to see new quarterly disclosures late this summer, including expense ratios for each of the mutual funds offered in the plans. However, the rules won't require that all fees be disclosed, and they don't require a comparison of fees to an average or some other benchmark.”
Rep. Miller has worked for years to expose hidden fees and how they can cut into workers’ retirement savings, requesting an initial report on the issue in 2007. He is the author of 401(k) fee disclosure legislation that was approved by the House of Representatives in 2010 and appeared on CBS’s 60 Minutes to discuss how hidden fees can eat into Americans’ retirement savings. For his efforts in advocating for workers’ retirement security, Miller was named a retirement “Legend” in 2011 by Plan Adviser Magazine, a leading publication for advisors and consultants for retirement plans. Rep. Miller also received the Robert M. Ball – Lisle C. Carter Superhero Award “for outstanding contributions for retirement security” from the Pension Rights Center in 2011.