A recent study illuminates the mode and manner that employees prefer to receive information about fees and expenses associated with their 401(k) plans. The research suggests that workers participating in a defined contribution plan do not know or have a complete understanding of fees and expenses.
The majority of workers (75%) prefer to receive 401(k) plan information in an electronic format, such as electronic quarterly account statements or through their plan provider’s Web site, finds the Transamerica Center for Retirement Studies.
In addition, employees favor information in simple terms. Over half (54%) of respondents prefer some form of summary information.
Others (32%) would like the information to be somewhat summarized with a break-down of fees for services and investments, while 22% want a summary with a total and all-inclusive costs. Only 31% desired a highly detailed account of fees and expenses. Fourteen percent had no preference.
“Given workers’ stated preferences, an ideal solution for disclosing 401(k) fee-related information would be through electronic summaries combined with the ability for them to obtain additional detail on their retirement plan provider’s Web site,” says Catherine Collinson, president of the Transamerica Center for Retirement Studies.
Moreover, employers don’t perceive the knowledge gap on plan fees as astutely as they should. While the majority of employers (73%) believe that their employees have a good grasp on 401(k) fees, only 29% of the 3,466 workers polled indicated that they were aware of fees.
Employers can increase this percentage by educating workers about 401(k) investments. In the study, workers who proactively monitor and manage their retirement savings are more than twice as likely (35% compared to 16%) to be aware of fees than those who don’t involve themselves.
For those workers that are unaware of the fees and expenses associated with their retirement savings plan, their ignorance can translate into great financial losses. After all, fees, whether administrative, transactional or managerial, can eat up as much as 50% of a retiree’s ending 401(k) or 403(b) plan balances, finds CJM Fiscal Management, an independent financial advisory firm.
“The sad truth is that hidden fees in 40l(k)s have been a dirty secret for too long,” says Charles Massimo, president of CJM. “Most employees aren’t even aware that there are fees associated with their plans, not to mention what could amount to as many as 17 different fees depleting their retirement funds. These fees, ranging from 2% to as high as 12%, can amount to tens of thousands of dollars,” he adds.
Currently, lawmakers are in the midst of developing legislation that would safeguard employee interests by forcing the divulgence of retirement plan fees and expenses. Recently, the House passed a bill, the 401(k) Fair Disclosure and Pension Security Act, which Washington insiders say is also likely to pass in the Senate.
The bill instates that 401(k) plan administrators disclose fees taken from participants’ accounts in a single dollar figure in a worker’s quarterly statement. Further, it would require 401(k) service providers and plan administrators to disclose fees charged on 40l(k) plans to be enumerated and packaged into four categories: administrative, investment management, transaction and other fees.
“It is little wonder,” that such a bill would be introduced, says Peter S. Anastasian, managing director of CJM. “The total fees are not written in 401(k) contracts. Instead, they [are] buried deep within obscure documents that account holders never see, he contends. “The frightening part is that not only are employees unaware of these fees, but many plan trustees are also in the dark and under ERISA, they are required to know all fees. The liabilities to trustees associated with hidden fees and poor plan design can be quite costly.” Case in point: the rise of litigation relating to 401(k) plans.
Related coverage:
Assuring appropriateness of 401(k) fees for value received: a sponsor primer
