If you don't know how much you are paying for your 401(k), you're in the company of millions.
"The average participant has no idea what they are paying," says Rick Meigs, president of 401khelpcenter.com. Even employers, he says, don't quite know.
But that's about to change. Last week, the Department of Labor announced new regulations on fee disclosures that will affect about 72 million workers in 401(k)s. The goal is to provide enough information about fees and investments in an easy-to-understand format so workers can make better decisions. After all, the amount of money in your 401(k) at retirement depends largely on the investment choices you made along the way.
"They are a great step forward and very necessary," Meigs says of the new rules.
The department has been working on fee disclosures for about four years. The one drawback is that plan administrators have a little more than a year to comply, so workers likely won't get this vital information until 2012. Nothing, though, prevents plan administrators from providing this information earlier if they want.
Once the new rules are in force, you should get lots of valuable information. You must be told quarterly, for example, how much you pay in administrative fees for such services as recordkeeping, legal and accounting.
The plan also must supply the performance record of investments. You'll get the one-, five- and 10-year performance record of a mutual fund as well as its benchmark.
Investment fees must be disclosed in dollar terms for every $1,000 invested, not just as a percentage of assets. So, if your fund has a 1.3 percent annual fee, the statement will make it clear that you're paying $13 for every $1,000 held in the fund.
Investment disclosures will appear in a chart so you can easily compare plan options. And if you're confused by jargon, investment information must include a glossary or at least list a website where you can find the definitions.
It's understandable if workers don't know how much they pay in fees because there is no uniform way of reporting fees and expenses. And fees differ from plan to plan.
"The current state of affairs is so confusing, even for professional analysts," says Laura Lutton, editorial director for Morningstar's mutual fund research group. Morningstar, which tracks mutual funds, runs into problems trying to compare funds in 401(k)s because of all the different fee structures.
Sometimes fees are so buried that workers don't even realize they pay them. Or workers don't appreciate that small differences in fees can have a huge impact on nest eggs over time.
Consider this Labor Department example: Two 30-year-olds each have $25,000 in a 401(k) and earn 7 percent annually on investments. They make no further contributions. One pays a 1.5 percent annual fee over 35 years, and at retirement has $163,000. The second worker pays a yearly fee of 0.5 percent, and by retirement has stockpiled $227,000.
Many applaud the Department of Labor for shedding more light on fees, but they question whether workers will even notice.
"Most participants don't pay a lot of attention to disclosures and information they get," says Christopher Jones, chief investment officer of Financial Engines. "I don't think this regulation will change this fundamental fact."
Don't be one of those who ignore fee disclosures. When your plan makes this information available, review what you're paying. Choose the low-cost investment options while maintaining the right mix of stocks and bonds for you. And if you discover all your options are pricey, use this fee information to lobby your employer to add better investments to the plan.