As the saying goes, there's no such thing as a free lunch. Yet, according to a recent survey by AARP, 71% of 401(k) plan participants reported that they pay no fees for their plan. When told of the fees, six in ten (62%) were not aware of the amount they pay in fees to maintain their account. Just under one quarter (23%) of those surveyed said that they do pay fees.
"It's a very common misconception that plan participants have, that the plan is free to them, that the company is covering the complete cost," says Marylou Bontempo, an investment analyst with CBIZ Retirement Plan Services.
Employees may be in for a rude awakening come January 2012 when new Department of Labor participant fee disclosure rules come into effect. The new regulations require fees and expenses that plan participants pay to be disclosed in a clear, easy-to-understand way. They're a complement to new plan sponsor disclosure rules, which require vendors to do a better job of how they're disclosing the fees and expenses they're charging the plan. The participant fee disclosure rules are to come into effect for plan years beginning after Oct. 14, 2011. Since the majority of plans run on a calendar year, this means they'll have to be compliant by Jan. 1, 2012.
Under the new rules, fees and expenses will have to be spelled out more clearly to employees.
"In the past, there may have been fees buried in an expense ratio. You may have found it if you dug into the prospectus, but I don't think that's really been sent out to participants," says Barbara Hogg, a consultant with Aon Hewitt. "Now, there will be more information on a fund-by-fund basis that helps people understand what the expense ratio means, and what it is per $1,000 you have invested."
In addition, the regulations require that participants receive information on comparative benchmarks for each fund they're invested in. "In the past, employees haven't necessarily had that good comparison data in a chart form that really helps them compare the options," says Hogg.
Additional details, such as the name and type of investment, the operating expenses and investment performance, and a website address where participants can get more information, must also now be included on participants' statements and not just in the fund prospectus.
Little direction from DOL
It all boils down to more information for plan participants, but some in the retirement plan industry question whether more information is necessarily better.
"We are strongly in favor of transparency in fees, because we understand the important impact fees can have on the overall ability of the participant to generate returns," says Kristi Mitchem, head of State Street's defined contribution business. "However, we believe the most beneficial use of that information is at the plan sponsor level, rather than the participant level."
She adds: "We haven't seen a lot of research that indicates that participants, in general, understand fees and make correct distinctions on the basis of differential fee levels."
There's also been little direction from DOL about how this information is to be presented to employees.
"All these things must be written in such a way as to be understood by the average participant. What does that mean?" asks Peter Welsh, vice president of product and marketing strategies with OneAmerica. "Is it average for the U.S.? Average for that plan? If it's a Spanish-speaking population, does it have to be written for the average of that group? There's still a fair amount of jockeying going on. To program for all this stuff takes time and money, and none of us want to get it wrong."
And while it's widely assumed that recordkeepers and providers will help plan sponsors convey the proper information, the ultimate responsibility for providing the information rests with the employer.
"Although the fee disclosure rule is new, what's not new is the fiduciary responsibility on the part of the plan sponsor," notes Scott Holsopple, CEO of Smart401k, an online investment advice provider. "They always had the fiduciary responsibility to make sure they're paying reasonable fees for the services they're getting." (Visit ebn.benefitnews.com/video for more from Holsopple in a segment on BenefitsTV.)
Still, if a majority of employees don't even realize they're paying fees for their 401(k), they may be in for a surprise when they start receiving their statements next year. "My worry is that they'll be confused by it," says Bontempo. "That they won't understand this is how it's always been and that it's just being disclosed more clearly now."
Don't get blindsided
That's why employers need to start preparing employees now so they're not blindsided later. "You can't overcommunicate at this point," says Welsh.
Here are some suggestions for things to communicate to employees in the coming months:
1. There is a cost for your plan. Tell employees there's a cost associated with your plan. And if you pay for part of it, say so. "If I'm an employer, it's a great opportunity to go to my employees and say, 'We're going to be providing you more information about the cost of this benefit we provide to you to enable you to make better decisions about your retirement,'" says Skip Schweiss, president, TD Ameritrade Trust Company.
2. Do not be shocked by this information. "If you're in the retail market, you'll find these same things. Most folks don't see that," says Hogg.
In fact, she says, employees might pay more on the retail market because they don't necessarily have the same leverage that a large retirement plan does.
3. These are not new fees. Employees have always paid them, only now they're being disclosed differently. "That's an important thing to bring out, that this is a standard practice," says Hogg. "I'm not sure employees have been aware of that when they think about investments."
4. Fees are only one factor to consider when making investment decisions. "Investment fees shouldn't drive a decision," says Hogg. "There could be lower cost investments, but that doesn't mean it's the right type of asset for your portfolio."
5. We know these fees are reasonable (or not) and here's why. "A good place to start is to go out to all your service providers and say, 'Who am I paying and how much am I paying?'" says Holsopple. "And once you get that information, start disclosing it to participants."
He adds: "[If you] tell a story of research - 'here's what we found' - and do that before you're legally required to do so, I think you'll have a better story to tell participants."
In addition, if you haven't done a fee and expense benchmarking study in a while, now may be the time to do it.
"Go to market, do an RFP if you haven't done one in the past three years so you can tell participants, 'This is what we found, we're competitive,' or 'we found things out of line, and this is what we're doing to change it,'" says Ed Lynch, managing director and chief retirement officer with Dietz & Lynch Capital. -A.D.
Fee awareness low, according to AARP
Retirement plan participants have little understanding of the fees they pay in their 401(k) plan. According to a survey released by AARP in February, 71% of Americans are not aware that they pay fees to their 401(k) plan provider in order to maintain their account. When told of these fees, 62% were not aware of the amount they pay in fees. Six percent, meanwhile, stated that they did not know whether or not they paid any fees.
Other findings from "401(k) participants' awareness and understanding of fees" include:
- Almost one-third (32%) report that they do not feel knowledgeable about the impact that fees could have on their retirement savings. However, 81% believe that the fees charged for investments are "very" or "somewhat" important in decisions about their 401(k) investments.
- Fifty-three percent of those aged 25-to-49 who feel that the fees charged for investments are "somewhat" important said they find information about fees through the Internet, while only 37% of those aged 50+ said the same.
- Among plan participants who are aware of fees, about one in eight (13%) said that they are not paying any fees associated with their 401(k) plan.
- Sixteen percent estimate that they are paying one percent or less of their account balance in fees, while 19% estimate they pay between 1.1% and 5% in fees.
- While most plan participants (63%) say they have contributed money to their 401(k) plan, about one-fifth (22%) have withdrawn money or received payments from their 401(k) plan.
- Almost two-thirds (64%) stated that they prefer to make their own decisions about saving and investing. Among those who make decisions on their own, about one-quarter (23%) reported that they made decisions without any suggestions from a professional.
- When asked about how confident they are about having enough money to live comfortably throughout their retirement years, (74%) said that they are "very" or "somewhat" confident.The national survey of 803 401(k) plan participants aged 25 and older was conducted in December 2010. Full results can be found at www.aarp.org/401kfeesurvey.
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