Survey after survey shows that many workers don't know how much they shell out in 401(k) fees — or that they even pay them.
But can you blame employees? Fees aren't transparent, and account statements usually reflect the balance after the charges have been taken out. Yet employees likely will spend tens of thousands of dollars in investment and other 401(k)-related fees over their careers.
Even many employers aren't sure of the true cost of their plan, although they have a duty to ensure that the fees are "reasonable."
The veil of mystery is supposed to be lifted this year — cross your fingers. This would be a major shift for the 401(k) industry.
The U.S. Department of Labor has drawn up two regulations on fee disclosures. One will require plan service providers, such as record keepers and investment advisers, to disclose all the 401(k)-related payments they receive to employers. Under the other, employees must receive information on the fees they pay for investment management and other services.
The Labor Department is expected to announce the final regulation on disclosures to employers any day now. But there's widespread speculation that the agency will once more extend the deadline — now set for April 1 — so that plan service providers have more time to comply.
Last month, the Securities Industry and Financial Markets Association, citing potential changes in the final rule, asked for another year or more to comply.
But any delay on disclosing fees to employers means that workers will have to wait that much longer to get fee information. And that's outrageous.
The 401(k) has been around for more than 30 years, and clear-cut disclosures on what workers pay to participate in a plan are long overdue.
Workers pay a fee to the money managers of their funds in the 401(k), and many employees may be aware of this. But they could also be paying for record keeping or other plan services, which they might not know about.
It's not like the industry hasn't had fair warning about stronger disclosures.
The Labor Department has been working on these regulations for several years. It published an "interim final regulation" — as close to final as you can get — on disclosures to employers a year and a half ago. And the agency has been talking about fee disclosures since the 1990s.
Surely, any plan service provider worth its fee should have seen the writing on the wall and prepared. Providers such as Vanguard, Diversified, Principal Financial Group and Baltimore-based T. Rowe Price say they're ready to go.
Some big service providers also note that they provide certain fee information to workers now. But plenty of workers, particularly those at small companies, don't get these disclosures.
A survey last year by AARP found that seven out of 10 workers had no idea they pay fees to a plan provider for account maintenance. And nearly one-third said they didn't know enough about the impact of fees on savings.
But the differences can be startling. Take two 25-year-olds with $20,000 each in a 401(k). They make no further contributions, but their investments gain 7 percent annually.
The worker paying an 1.5 percent in fees annually will end up with $170,266 after 40 years. But the other, paying 0.5 percent a year, will have $248,321 at retirement — $78,055 more.
"That's what this is about: trying to improve people's retirement security," says Mary Ellen Signorelle, senior attorney with AARP Foundation.
Just the prospect of this information coming out, Signorelle adds, has prompted some service providers to lower fees in recent years.
Once disclosures kick in, all participants should have a better idea of what their plan costs. Each year, a worker will get a chart of all the investment options, along with their one-, five- and 10-year returns. The chart will include the performance of the investments' benchmarks over that same time frame.
The chart will include the annual expense ratio of each investment, a figure that's always expressed as a percentage. To make it clear how much workers pay, this information also will be reported in a dollar figure for every $1,000 invested. So workers paying 0.5 percent or 1.5 percent annually will see that comes out to $5 or $15 per $1,000 invested.
Regular mutual funds, collective investment funds from banks and funds from insurance companies calculate expense ratios differently, Labor Department officials say. But for this purpose, all must figure expense ratios the same way so workers can make an apples-to-apples comparison.
The chart also will list any fees or sales charges for getting in or out of an investment. And workers will be given a web address where they can find out more details.
Quarterly statements will report the amount of fees that have been deducted from their account for plan-related costs, such as record keeping or accounting. Statements also will say how much a worker paid for other services, such as taking out a loan.
Fees will vary from plan to plan, and workers likely will be surprised by how much. Some employers, for instance, pick up certain plan expenses, while others shifted those to workers. Big plans tend to have lower fees than smaller plans with fewer workers to spread the costs over.
Mike Alfred, co-founder of BrightScope, which rates 401(k)s, says he's seen plans that charge workers as little as 0.10 percent or 0.15 percent annually.
"These are very well-run plans that use their massive scale to negotiate extremely low costs," he says.
At the other end of the spectrum are plans, often run by insurance companies, that charge 3 percent to 5 percent annually, Alfred says.
He advises workers paying much more than 1 percent a year to see what they can do to lower their costs, such as switching to low-cost index funds.
Some plan experts say all this fee information will only confuse workers, or that employees won't even bother to read it.
Service providers add that workers might use the information to switch to the cheapest investment, even if it isn't appropriate for them. Workers need a diversified portfolio that fits their risk tolerance, they say.
"Fees should not be the only [factor] you consider when making an investment allocation," says Rob Vetere, senior vice president with Diversified, which administers about 4,000 plans. "For example, money market funds will have the lowest fees generally and also have the lowest returns. That probably is not a good strategy for your investment allocation over your lifetime."
But Alfred says giving workers fee information is similar to when nutrition labels were added to food products.
"The only thing that changed was that people were smarter shoppers," he says. And with fee information, he adds, "they will make better decisions about what they are investing in."
Who can argue that's not a good thing? So the sooner workers get this fee information, the better.