About 50 million people own 401(k)-type retirement plans, and the percentage of workers with defined-benefit (pension) plans has been dwindling for years. One problem with 401(k) plans is that many plans don’t disclose their fees openly. That would change if Congress moves forward with a bill currently awaiting action in the House of Representatives.
Even if an investor knows how to invest for retirement, the unavailability of a good 401(k) plan can still thwart good retirement planning intentions. From time to time, personal finance magazines publish articles on how to tell whether your company has a good plan. Usually the criteria for a “good” plan include a substantial match, investment options with good mutual fund families, and a low level of fees. But often a plan’s fee structure is not disclosed clearly to the participants.
The fee structure of a retirement plan can be critical; even an extra 1% in fees can have a significant effect on the long-term performance of an investment. Small 401(k) plans often have poorly-disclosed, higher-than-average fee structures. The fees you pay for your retirement plan may be deducted in ways that don’t show up on your statements, making them difficult to detect. There is a commercial service, brightscope.com, that rates company 401(k) plans using criteria that include fee levels, but many plans aren’t covered in their ratings.
Enter the 401(k) Fair Disclosure and Pension Security Act, a bill approved this summer by the House Education and Labor Committee and possibly slated for passage later this year. The bill contains several provisions that require 401(k) plans to provide greater transparency for the benefit of employees. In its current form, the Act
requires 401(k) plans to disclose fees clearly and in detail on quarterly account statements
calls for employees to receive basic information on risk, returns, and investment objectives
provides incentives for 401(k) plans to offer at least one low-cost index fund investment option
requires 401(k) plan service providers to disclose conflicts-of-interest
requires that investment advice provided through the plans be based on the best interests of the employees rather than the financial interests of those providing the advice.
The Senate Special Committee on Aging has its own legislation on retirement plan fee disclosure in the works, and the Labor Department, which regulates retirement plans, is working on similar rules that may take effect before Congress finishes its work.
Until something changes, it makes sense to do your best to understand the fees associated with your employer’s plan, as well as those for any retirement plans you continue to hold from former jobs. A high fee structure might be a sufficient reason to limit your 401(k) contributions or even to try to find other ways to save for retirement.