What does it really cost to invest in a 401(k) plan? A recent AARP survey found that more than 80% of plan participants did not know the answer to that question. Most employees have no idea how much their plan is charging. According to the Government Accountability Office (GAO), the information on fees that 401(k) plan sponsors are required by law to disclose is limited and does not provide for an easy comparison among investment options. Annual fees ranging from 3% to 6%–even as some plans still charge 1%–have not been disclosed, and often simply ignored, because, as one attorney who specializes in employment law has said, “everyone was making money.”
Fees are one of the biggest issues in the trillion dollar industry, and many believe the industry is long overdue for transparency. According to the Department of Labor’s estimates, a one-percentage point difference in fees reduces overall retirement income by 28% over the course of a lifetime. As it has become increasingly clear that many companies have been breaching their fiduciary duty by offering plans with excessive or hidden fees, employees have an obligation ask the right questions–and have every right to know “What are we paying for, and what are we getting?”
Unfortunately, administrative fees usually don’t appear on quarterly or annual statements. It can be quite a challenge for employees to find out how much in fees they are actually paying out annually; and it has come to light that many people—providers, third -party consultants—are getting generous portions of the pie. The reality is that the employers sponsor the 401(k) plans and hire the providers and administrators—but the employees pay most of the fees.
“One reason fees have remained hidden,” writes Penelope Wang of Money magazine, ”is that the rules governing plans do not require clear disclosure to investors….So the only way to determine what you are being charged is to plow through hard-to-understand plan documents and do the math.” In an investigation into 401(k) fees, the Los Angeles Times found that there was as much as 28% lost by the employee in investment returns because of fee costs. The Times’ investigation was the impetus for Congressional hearings; a bill was introduced by Congressman George Miller, requiring all fund managers to break down fees, including administrative, investment management, and transactional-based.
But according to attorney Miriam Schindel, Special Counsel to the firm Hinman, Howard & Kattell, the bill has been “battered and bruised,” and as far as the situation for plan participants, “we’re still where we were five years ago,” and most employees do what their employers tell them. Senator Max Baucus introduced proposed changes to the legislation that included the elimination of the requirement that 401(k)-type plans disclose all fees that participants pay; Congressman Miller, however, called the elimination of important reforms to expose hidden fees “unacceptable,” and vowed to fight to keep the reforms.
Indeed, simplifying fee disclosure will allow 401(k) plan participants to make better investment choices to reduce fees, which can substantially erode retirement savings during the long-term. But if there is no legislation in the immediate future, says Ms. Schindel, there will be an increase in lawsuits against board directors and plan sponsors by employees who are no longer willing to absorb the hidden fees and diminish their hopes of a secure retirement.
To hear Mark S. Gottlieb’s edifying interview with Miriam Schindel, Esq., on the topic of “Hidden Fees in 401(k) Plans, please visit www.msgcpa.com.