WALNUT CREEK, Calif. — Millions of employees put money in 401(k) plans to build a retirement nest egg. But most don’t know that the plans they invest in charge fees that can make that nest egg smaller. Starting this summer, new federal rules will make it easier for employees to get a handle on these fees, which are subtracted from an account’s value.
Information about fees is already provided by some plan providers, but not all. Some make the information available on websites and others include it on quarterly statements, according to Catherine Collinson, president of the Los Angeles-based Transamerica Center for Retirement Studies.
The new rules will bring consistency to the disclosure process while making it easier for consumers to understand the fees they are paying, she said.
The fees pay for overhead administrative costs such as record-keeping and legal compliance requirements, along with expenses in cases where the fund is actively managed. (Some funds, such as index funds, do not have management fees.)
In May, the Transamerica Center released its 13th annual retirement survey, which found that 71 percent of employees with 401(k)s did not realize they involved fees.
That number is not at all surprising to Timothy Yee, co-founder of Oakland, Calif.-based Green Retirement Plans, a consultant to 401(k) plan providers.
“I think the reason for that is when (employees) look at their statement it simply says beginning balance and ending balance and it will tell them if it went up or down based on the market,” Yee said. “People think it’s free.”
That is not the case.
“Some people think their employer pays their plan costs, but when they receive disclosure information under the new law, they may learn otherwise. Those who do actually realize they pay some plan costs may be concerned when they receive disclosures showing how those fees reduce their plan accounts,” Rich Rausser, senior vice president of client services of White Plains, N. Y.-based Pentegra Retirement Services, said in an email.
The new rules, which also apply to 403(b) plans offered by nonprofits and pension plans, were developed by the U.S. Department of Labor. They go into effect Aug. 30. However, when investors will actually get the information on fees will depend on their plan.
The new rules require plan providers to disclose fees before a plan is selected as well as on an annual basis and what the fees cover. Starting in November, that information will be included in statements sent out quarterly, along with the amount of fees deducted from an account. Fees are typically deducted on a quarterly basis.
Fees depend on various factors such as the type of account that’s involved and the number of employees at a company who participate in a plan. Typically, smaller plans have higher fees. For example, fees average 1.3 percent for a small plan with 100 participants and $5 million in assets and 1.08 percent for a large plan with 1,000 participants and $50 million in assets, according to the 401k Averages Book.
