Danielle Karr is a young professional living in Boston and one of more than 50 million people who have a 401(k) plan. These employer-sponsored plans allow you to invest pre-tax earnings, and many companies that offer them match that contribution. But these plans charge a fee, calculated from a percentage of total assets. These fees could cost you tens of thousands of dollars in lost savings.
In 2012, the U.S. Dept. Of Labor issued a new rule requiring “plan participants” (people like you and me) to get quarterly breakdowns of all 401(k) fees.
"It is a really important thing for people to pay attention to and yet not enough people do it," said AARP’s vice president of financial security, Jean Stezfand.
A recent survey by the Employee Benefit Research Institute shows only 53% of plan participants even notice the disclosure documents. And of those who did see the forms, 86% made no changes to their plan.
“I can't spend the time on a daily basis to constantly be thinking about what is in my 401(K),“ said Karr. “So I am paying someone else to do it."
The disclosure documents can vary in length and format and the federal government only requires fees to be listed. Individual investment firms are left to disclose and name these fees however they choose.
A Dept. of Labor spokesperson tells Al Jazeera it "continues to monitor the disclosures and determine whether any changes are needed."
The Department of Labor divides fees into three categories.
(1) Plan Administration Fees, which include charges for record keeping, accounting and legal services.
(2) Individual Service Fees, which include charges for options like taking a loan from your plan.
(3) Investment Fees. This is the largest category and covers the cost of managing your money (usually in mutual funds).
Long-Term Costs of 401(k) Fees
The Department of Labor cites this example:
If you invest $25,000 in a 401(K) plan at 7% compounding interest, after 35 years your nest egg will grow to $227,000.
If all else stays the same, but fees and expenses are at 1.5%:
You will have given up $64,000 in assets because of those fees and your nest egg will shrink by 28%. Your nest egg will end up being $163,000.
Is there any good coming from these disclosures?
The Mutual Fund Trade Association believes the new DOL rules has helped to lower 401(k) plan fees. "We saw, just last year, for instance, in just the last look at fees in mutual funds in 401(K) plans (there was a) steady decline in fund fees and for bond fees."
The downward trend is expected to continue, which is good news for Danielle Karr and everyone else hoping to retire in comfort.
Financial advisors suggest reading over your disclosure documents at least once a year to search for any newly named or added fees. And while you can't entirely avoid fees, you may be able to save money by altering the investment mix within your plan.