The fees you pay matter over the long run so you may want to take a look at what is happening with your 401(k). If the fees are too high, send an email to your human resources department and make a complaint. It may help if they hear from enough employees.
Take two savers, one at Company A and one at Company B. They each have $20,000 in the same investments in their respective 401(k) plans, which they leave untouched for 30 years, earning 7 percent. But the employee at Company A ends up with $132,000 and the employee at Company B ends up with $99,600.
The difference is the result of fees paid along the way, which reduce an employee’s return. At Company A, the annual cost for the 401(k) comes to 0.5 percent of assets. The cost at Company B is 1.5 percent.
Is the employee at Company B paying too much? Probably. As a personal finance rule of thumb, an employee should not pay more than 1 percent for a given fund in a plan. But when it comes to specific plans, costs can legitimately vary, based on the size of a plan, its level of administrative support and other factors. The problem is that it is exceedingly difficult to tell how much is being charged and whether those fees are reasonable.
A bill recently introduced in the House to fix the lack of meaningful fee information in 401(k)’s should be a high priority when Congress returns this week.
Under current law, 401(k) providers, such as mutual fund families or insurance companies, are not held to any consistent standard for disclosing fees. As a result, employers often have insufficient information when they make decisions about a 401(k)’s options and services. For instance, money management firms routinely list administrative fees, which are generally paid for by employers, as “zero.” But in truth, administrative costs are generally covered by charging higher investment fees, which come out of employees’ account balances. The bill would require 401(k) providers to break out all costs.
The House bill would also correct current law, which does not require that employees be told about fees that reduce their investment returns. Opponents of the measure, mainly 410(k) providers, argue that more information would be more confusing. It could certainly be made that way, full of legalese and equations. But it need not be. Fees are a major determinant of how much money one has at the end of a lifetime of saving. It’s ridiculous to maintain that savers should be kept in the dark.
Last year, Congress took a giant leap forward in helping Americans save for retirement when it allowed employers to automatically enroll employees in 401(k)’s, rather than requiring workers to sign up. (Employees are free to opt out.) The next big 401(k) challenge is improving employees’ investment returns. Full disclosure of fees is the logical place to start.
