Your 401(k) is pocketing fees on your investment
WASHINGTON – If you’re putting money in your workplace’s 401(k) retirement plan, it’s important that you understand that the fees you’re being charged matter.
Yet an amazing percentage of 401(k) plan participants not only don’t understand what they are being charged – they think there’s absolutely no cost to invest in these plans. They are wrong.
For about a decade, the Labor Department has required plans to provide fee disclosures. Currently, 87 million plan participants are required to get fee disclosures. The Government Accountability Office was asked to examine how well participants understood those disclosures.
Using actual disclosure content from 10 large 401(k) plans, the GAO found in a recently released report that almost 40% of 401(k) plan participants do not fully understand and have difficulty using the fee information.
Many people don’t realize they are paying multiple fees that generally fall under two categories: administrative fees and investment-related fees. Bundled into those charges are expenses for legal, accounting and record-keeping services. You might be paying for access to customer service help or investment advice. Funds that are actively managed might incur higher fees. If you work for a small company, your plan fees and expenses might be higher.
“Fees remain a huge issue in the 401(k) industry,” said Edward Gottfried, director of product at Betterment’s 401(k) business. “They’re frequently too high and rarely transparent enough to retirement savers.”
The fees can be assessed as a flat dollar amount or as a percentage of assets. Asset-based investment fees, which are also called the expense ratio, are typically the largest fees a participant will pay, according to the GAO.
Investment fees are typically expressed as a percentage of assets under management, or the total dollar balance of an employee’s 401(k) account, Gottfried said.
The GAO asked folks to review a fee disclosure note that was supposed to provide some clarity to plan participants. But it’s all in how you present the information. For example, survey participants were asked: If your investment fund’s expenses are $4 each quarter per $1,000 invested, how much are your expenses for a $15,000 investment in that quarter, assuming that the amount of the investment doesn’t change?”
Dollars people know. When presented fee information this way, 88% of participants correctly answered that the quarterly investment cost was $60.
The percentage of correct answers fell when people were asked to identify the fee when presented as an expense ratio. When explained this way, 53% of participants were unclear of what was being charged.
What’s important to grasp is that whatever you’re charged has an impact on your returns.
The GAO found that 64% of participants believe they are not paying any 401(k) fees or are unsure whether they’re charged anything.contact Michelle Singletary at michelle.singletary@washpost.com. Follow her on Twitter: @Singletarym.