Helping Employees Understand Fees

All three branches of government are zeroing in on the fees that 401(k)-plan participants pay, often unknowingly.

Expect to see plenty of news come out of Washington, D.C., during the next few months as all three branches of government zero in on the fees that 401(k)-plan participants pay, often unknowingly.

The judicial branch is the most active thus far, with at least 14 lawsuits pending against such companies as Lockheed Martin, International Paper, and Kraft Global alleging that plan participants were not adequately informed about 401(k) fees.

On Capitol Hill, George Miller (D–Calif.), chair of the House Education and Labor Committee, held a hearing in March to “find out if hidden fees are eating into workers’ retirement-savings-account balances,” according to his statement. Members of the House Ways and Means Committee and the Senate Health, Education, Labor, and Pensions committees also have expressed concern over fees, says Jan Jacobson, director of retirement policy at the American Benefits Council. Last November, the Government Accountability Office issued a report that cited an AARP study stating that 80 percent of plan participants don’t know how much they pay in fees.

That’s not surprising, according to Trisha Brambley, president of Resources for Retirement Inc., a plan advisory firm. Fees are “all over the board,” she says, noting that investment firms that administer 401(k) plans may assess fees from a list of 70 or more potential charges. The GAO said that “piecemeal” disclosure of such fees makes it nearly impossible for the average participant to get a full picture of his or her plan.

Meanwhile, the Department of Labor intends to issue a request for information to help it determine the level of fee disclosure that participants would find most helpful. Jacobson says that the RFI will be released shortly, but won’t speculate as to whether final regulations will be issued or when they would take effect.

Companies should watch such developments closely, says Martha Priddy Patterson, director in the human-capital group of Deloitte Consulting. Given the spate of recent lawsuits, she says, “you need to be prepared to say, ‘We’ve looked at our fees and believe they are reasonable.’”

The 1% Dilution

As an example of how insidious even small fees can be, consider an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on the account average 7% over the next 35 years and expenses reduce the average returns by 0.5%, the account will grow to $227,000 at retirement, even if there are no further contributions. But if fees and expenses are 1.5%, the account will grow to only $163,000. Thus, a 1% difference in fees and expenses would reduce the balance at retirement by 28%.

Source: Department of Labor

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