It is incredibly difficult to avoid 401(k) fees. Even if you’re a savvy enough investor to know you should be on the lookout for fees that eat away at your investment returns, tracking them down often means pouring over fine print and firing off questions to your plan administrator.
Choosing investments with lower expenses, however, is well worth the trouble. A 35-year-old who invested $20,000 in a 401(k) plan over 30 years, earned a 6.5 percent return, and paid 0.5 percent in fees would end up with $132,287 at retirement, according to a 2007 AARP study. If fees increased to 1.5 percent, only $99,679 would be left for retirement – 25 percent less.
“It is absurd that millions of Americans rely on 401(k) plans for their retirement security and yet they aren’t told what fees they are paying to maintain these accounts,” says Senator Tom Harkin (D-IA). Harkin and Senator Herb Kohl (D-WI), chairman of the U.S. Senate Special Committee on Aging, introduced a bill this week that would require 401(k) plan providers to disclose all fees. “In an economy with more and more defined benefit plans being slashed or frozen everyday, it is vital that employees have access to all the information they need to maximize their retirement savings,” says Harkin.
The Defined Contribution Fee Disclosure Act would require employers to keep a comprehensive list of the 401(k) fees employees are paying and why. This information would be provided to participants when they choose investment options, on their quarterly statement, and upon request. Disclosure of the business arrangements between all parties with a financial interest in the plan would also be required.
Fee disclosure gives retirement savers the tools to make better investment decisions, but that doesn’t necessary mean they will make them. A study by RAND released this week found that people with high financial literacy are better able to maximize their wealth when provided with information about 401(k) fees, but less financially savvy investors may perform even worse. Researchers Angela Hung and Joanne Yoong asked more than 1,000 people to choose among similar index funds carrying different fees. Only half of the survey participants selected the low-fee fund and one-third put their money in the most expensive fund.
Harkin and Kohl previously introduced 401(k) fee disclosure legislation in 2007, but the bill never reached a vote.