New rules aim to help 401(k) investors get a handle on fees
Typically, smaller plans have higher fees.
Contra Costa Times
WALNUT CREEK, Calif. — Millions of employees put money in 401(k) plans to build a retirement nest egg. But most don't know that the plans they invest in charge fees that cost them thousands of dollars over the years.
Starting this summer, new federal rules will make it easier for employees to get a handle on these fees, which are subtracted from an account's value.
Information is already provided by some plan providers, but not all. Some make the information available on websites and others include it on quarterly statements, according to Catherine Collinson, president of the Los Angeles-based Transamerica Center for Retirement Studies.
The new rules will bring consistency to disclosure while making it easier for consumers to understand the fees they are paying, she said.
"Ultimately, they will be taking greater ownership in their own retirement outcomes by understanding how different levels of fees can affect the size of their nest egg when they retire," Collinson said.
The fees pay for overhead administrative costs such as record-keeping and legal compliance requirements, along with expenses in cases where the fund is actively managed. (Some funds, such as index funds, do not have management fees.)
In May, the Transamerica Center reported its annual retirement survey, which found 71 percent of employees with 401(k)s didn't realize they involved fees.
That number is not at all surprising to Timothy Yee, co-founder of Oakland, Calif.-based Green Retirement Plans, a consultant to 401(k) plan providers.
"I think the reason for that is when (employees) look at their statement it simply says beginning balance and ending balance and it will tell them if it went up or down based on the market," Yee said.
"People think it's free," he said. That is not the case.
"Some people think their employer pays their plan costs, but when they receive disclosure information under the new law, they may learn otherwise. Those who do actually realize they pay some plan costs may be concerned when they receive disclosures showing how those fees reduce their plan accounts," said Rich Rausser, senior vice president of client services at Pentegra Retirement Services in White Plains, N.Y. "We anticipate this may present some eye-opening information that should have been clear all along."
The new rules, which also apply to 403(b) plans offered by nonprofits and pension plans, were developed by the U.S. Department of Labor and go into effect Aug. 30. When investors will get the information on fees will depend on their plan.
The new rules require providers to disclose fees before a plan is selected as well as on an annual basis, and also what the fees cover.
Starting in November, that information will be included in statements sent out quarterly, along with the amount of fees deducted from an account.
Fees are typically deducted on a quarterly basis. The amount depends on various factors such as the type of account that's involved and the number of employees who participate in a plan.
Typically, smaller plans have higher fees. For example, fees average 1.3 percent for a small plan with 100 participants and $5 million in assets, and 1.08 percent for a large plan with 1,000 participants and $50 million in assets, according to the 401k Averages Book.
Say $4,800 was deposited annually in a 401(k) plan over 30 years with a return that averaged 8 percent over that time frame. If you had a plan that charged 1.5 percent in fees, you would end up with a nest egg worth about $442,000, based on an actual annual return of 6.5 percent.
But if that same scenario had a plan that charged 0.5 percent in fees, you'd end up with a bigger nest egg: $534,000, based on an actual annual return of 7.5 percent. That's a difference of $92,000.
But while fees are important to consider, they should not be the only factor when it comes to 401(k) plans and saving for retirement, said Yee of Green Retirement Plans.
"The fee disclosure will help consumers ask good questions about what they are getting for the fees they are paying. It will bring transparency to an industry that needs it. I am hopeful that the disclosure will also get employees thinking about retirement," Yee said.
"My thinking is that the employees will first ask about the fees and then start to think about how much has been saved or needs to be saved."