New rules for 401(k)s that go into effect July 1 will require more complete disclosure about retirement account fees. that means that when investors open their statements this fall, they'll be able to see in detail how those previously hidden fees are chipping away at their retirement savings.
As part of the Department of Labor's new rules, 401(k) plan administrators will have to give employers details of all of the fees they charge, and employers will be required share those details with employees; including how much they're paying in fees for every $1,000 invested.
That will help. But to really shine a light into the murky 401(k) waters, consider the following advice:
1. Avoid Ignorance and Passivity
It is a truth universally acknowledged that most us of are hands-off and in the dark when it comes to our 401(k) plans.
According to one AARP survey, 71% of people believed they didn't pay fees on their 401(k). In reality, they were getting docked for administrative services, "record keeping" and other hidden costs.
It's a major problem with the current system: the misguided expectation that people will take the time to do their due diligence.
"The [current] disclosure is only helpful for the most sophisticated individual," said Robyn Credico, senior consultant at Towers Watson. "Participants only spend about two hours a year on their 401(k) plan."
"Congress gives way too much credit to the employee to do all kinds of detailed analysis," said Ken Himmler, president of Los Angeles-based Integrated Asset Management. "Those are not the kind of people who go home and want to be research analysts at night."
And even among those with a desire to become investing wonks over their plans, the information providers offer is fundamentally unclear.
"This is one of the only industries where you're not really clearly aware of how much you're paying," said Chad Parks, CEO and founder of The Online 401(k). "Imagine you go to buy a car and they say, 'here's the sticker price but we're going to take 1% of your account each month just because.'"
2. Decode the Disclosure and Understand the Consequences
Fee disclosures prior to the new rules were full of technical jargon, with fine-print galore and incalculable totals.
"I'm pretty good at math," Himmler said, "and I read through two companies, and I had to set up a spreadsheet. I can't imagine the average employee even with a degree in finance can understand, and they're not going to take the hours to figure it out."
"A problem with these disclosures is there's so much detail and so much volume that so many people aren't reading them and paying attention," said Credico, "On top of the volume of information, it's not easy to understand to begin with."
The Department of Labor has now placed responsibility on the employer to offer employees the right choices on their 401(k)s, and this makes disclosure all the more important.
"Transparency is a good thing, " said Charlie Jeszeck, an economist at the Government Accountability Office. "And we can't afford to keep participants coddled or ignorant about fees, because it can have a negative impact on their retirement. Financial literacy is a big deal, and we need to educate them in how to invest and what can eat away at their futures."
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