Lawmakers made a splash this week when a House panel scrutinized 401(k) fees that employees pay. Or, rather, lawmakers attempted to scrutinize them and found out just how little investors actually know about the fees they pay through their 401(k) plans.
The big problem with 401(k) fees is that it's nearly impossible to figure them out. The law requires that plan participants (that's us cubicle dwellers) get a summary of our plans, account statements, and annual reports. None of these documents, however, has to tell you very much about the fees you pay. According to the Government Accountability Office, the summary plan description must tell you how your plan operates. However, it does not have to tell you anything about fees charged to participants, such as your investment fees, record-keeping fees, or loan fees.
Similarly, your individual account statement must reflect your account balance. Typically, it will also show fees specific to your account, such as loan fees, but it's not required to tell you anything about your investment or administrative fees. Finally, the annual report must describe the plan's financial health and the total costs incurred during the year, but that tells you little about how much money came out of your pocket.
Most 401(k) plans have participants make all of their own investment decisions, and these plans have a few more rules. They must tell you about the investment risk and historical performance of each mutual fund (or other investment option) available to you. You also have to be told how much you might be charged for buying or selling shares of any of the investments. But only upon request does the plan have to tell you anything about a mutual fund's expense ratio. Foolish readers know they can get this information from a fund's prospectus, but it would definitely be a lot easier if the plan documents themselves made those expenses clear.
No help from the government
It's the Labor Department's job to oversee this whole arena, but the GAO found that it doesn't get enough information, either. Many fees get deducted straight from the plan's investment returns, so they don't show up on the reporting forms that plan sponsors submit to the government.
The government also doesn't get any information about arrangements among 401(k) service providers, raising the possibility that they'd never know about conflicts of interest. When fees get hidden, the people responsible for the plans can't tell whether they're getting their money's worth.
Big fees, big problems
Why is this such a big deal? Fees can eat up a big chunk of your retirement savings over time if you let them. Consider an employee who is 45 years old and 20 years away from retirement. She leaves $20,000 in a 401(k) account and earns 7% annually on her investments. If she pays 0.5% in fees, she'll have $70,500 at retirement. If she's charged 1.5% annually, she'll have only $58,400 at retirement, and our hypothetical saver will have lost 17% of her account balance to fees.
The Labor Department says it plans to propose new regulations later this year that would require that workers be told more about their fees. The department will soon be asking the public for suggestions about how to improve fee disclosures. In the meantime, some plan participants have filed several class action 401(k) fee lawsuits against large employers such as International Paper
Your first step should be to check out your own 401(k) fees. If you can't find anything on your account statements, ask your benefits manager. Check the expense ratios on your mutual funds, tracking down the prospectus for each if necessary. Make sure you're keeping as much money in your pocket as possible, and find out more about whether your 401(k) is Foolish.
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