Have you figured out who pays the expenses for your 401(k)?
Two years ago, the Department of Labor pushed through a complex rule requiring employers that offer 401(k) and other contributory retirement plans to tell participants how much money they are paying in fees associated with the plans.
It seemed like a giant leap forward for retirement planning, but experience has made it clear that the fee disclosures are voluminous, wordy and seldom read. Now, the Department of Labor, or DOL, is proposing to require that 401(k) providers offer a readers' guide to fee disclosure to the documents they supply employers so that they can better understand the information. Public comment on the proposal ends June 10.
In 2012 the DOL had hoped that fee disclosure would prompt workers to pressure their employers to find lower-cost plans, but it didn't work out that way.
In the meantime, human resources consultancy Aon Hewitt is urging employers that provide 401(k)s to take a hard look at how they charge fees and how these costs are distributed among participants. Aon Hewitt points out that depending on how fees are structured, employees who are invested in index funds may avoid paying most of the administrative costs of the plan, while employees who invest in actively managed funds end up paying the bulk of them. "Some people are free riding, and some people are overpaying," says Winfield Evens, director of human resources outsourcing, investment solutions and strategy at Aon Hewitt.
A small fee can be a big deal
Some of these administrative charges don't appear to be especially high, but Aon Hewitt points out that a relatively small charge -- even just 0.25 percent, or 25 basis points -- can make a big difference. Bankrate's 401 savings calculator demonstrates the potential significance.
For instance, assume "John" contributes 10 percent of his income each year until he retires at age 65. He makes $40,000 at age 30 and gets 3 percent raises each year. His employer gives a 50 percent match up to 6 percent of John's salary. At the end of 35 years, John accumulates $1,298,350, assuming an 8 percent average annual return net of fees. But if his return net of fees is 7.75 percent -- a 0.25 percentage point difference -- he accumulates $1,233,611.
Aon Hewitt is urging employers to get rid of these kinds of discrepancies and to offer only investments that have low fees to begin with.
"Fees of one or two basis points for passive investment vehicles is very common in the large plan space because of institutional purchasing power," says Evens. But even small plans with higher fee structures can adopt fee models that spread the costs in fairer ways, he adds.
Meanwhile, the proposed DOL regulations should make it easier for employees to find out from their employers whether their plan's investment options include revenue-sharing fees, such as 12b-1 fees or sub-transfer agent fees, how much they are and who receives them.
All of this is more evidence that it really does pay to study the fee structure in your 401(k).