Few things come without a price tag. But sometimes it’s hard to tell what they truly cost. And that’s definitely an issue when it comes to understanding the fees associated with a 401(k) plan.
The implementation of new regulations calling for improved disclosure of the expenses you’re paying has been delayed until sometime later next year.
The Department of Labor has decided to give 401(k) plan administrators, fund companies and plan providers more time to prepare for the changes.
That means you likely won’t begin seeing these new fee reports until sometime after June 1. That’s about three months later than previously planned, said Phyllis Borzi, assistant secretary of labor, who oversees employee benefits, in an interview with The Associated Press.
“We wanted to give the industry plenty of time to retool their systems, and we really did want it to be meaningful information for 401(k) plan participants, so we thought this made the most sense,” she said.
About 72 million workers are enrolled in employer provided 401(k) plans. All told, they have roughly $3.2 trillion invested in the accounts.
Yet despite what’s at stake, most accountholders know little about the fees they pay.
A survey by AARP last December revealed that 71 percent of 401(k) accountholders did not believe they paid any fees. About 23 percent knew they paid fees and the remaining 6 percent didn’t know whether they did or not.
Yet even if you’re aware of the fees and want to gather the information, it can be tough to find. It typically requires sifting through various documents from different sources.
Disclosure in two stages
As a first step, the Department of Labor last year came up with a set of rules requiring providers of 401(k) plans such as Fidelity, Charles Schwab and The Vanguard Group to reveal details of the fees they charge employers in a clear and easily understood format.
These reports must be offered beginning April 1, 2012, which is delayed from the initial Jan. 1 implementation date.
This disclosure is designed to make it easier for companies to shop around for a 401(k) plan. Clearer apples-to-apples fee comparisons will enable them to get a full picture of total fees charged.
The second step requires new detailed fee documents to be sent each quarter to 401(k) accountholders. These will help you get a handle on precisely how much of you’re paying and are to become available starting June 1.
The fine print
The reports will include tables that will disclose:
—Performance of the investments in given 401(k) account. Average annual returns and comparisons to an index or other benchmark will be included.
—Fees for the mutual funds in the account, expressed as a percentage of assets and the dollar amount per $1,000 invested. A detailed listing of shareholder fees for functions like management and recordkeeping will be included.
—Details on annuity options in the plan including the goals of the annuities, pricing factors and fees. An annuity is an insurance contract which takes a lump sum of cash and turns it into a guaranteed revenue stream.
The fee facts
Fees are charged in many different ways. They can be charged directly to the plan as a whole, charged to each participant in the plan or assessed as a percentage of the total assets held in the account.
The impact of even slightly higher expenses can be dramatic.
AARP calculated that an employee contributing $5,000 per year to a 401(k) plan, earning an annual return of 7 percent and paying no fees, could save $469,000 over a 35-year working career. Annual fees of 1.5 percent of the account balance cuts the savings 26 percent to $345,000.
Although companies usually pay some of the costs of providing a 401(k) plan, it’s the workers themselves who pay most of the cost.
In smaller plans of under $10 million in assets, workers pay around 66 percent of the costs while their employer pays the remaining third, according to The Investment Company Institute, a trade group for U.S. investment companies. In large plans with more than $100 million in assets, workers pay as much as 90 percent of the costs.
What’s more, there are some signs that shedding light on the fees may be driving them lower.
The ICI says costs paid by 401(k) investors on their stock funds dropped to 0.71 percent last year from 0.74 percent in 2009. Bond fund fees were at 0.56 percent in 2010 and 2009. They were 0.53 percent in 2008.
The regulations might not be the direct reason for lowering fees, but there’s little doubt the companies charging higher fees will have to do some explaining, and likely change their practices, once consumers can see how much they’re paying.
“The higher fee companies will have to adapt,” said James McCool, who heads the institutional services practice for Schwab.
An unintended benefit
A focus on fees also may be pushing some 401(k) account providers to try new ideas.
Schwab is launching a 401(k) that doesn’t include traditional mutual funds, but only offers only index funds or exchange-traded funds.
Index funds and ETFs are lower-cost options, typically with fees of around 0.20 percent. They’re less expensive because they do not rely on the expertise of highly-paid fund managers to actively pick stocks.
Some providers, The Vanguard Group for example, have provided index funds as an option in their 401(k) plans for years, but with more focus on fees, such lower cost funds have been gaining popularity.