Starting in July, your 401(k) plan will have to disclose more information about now-hidden fees and charges. Plan sponsors will have until August 30, 2012 to provide 401(k) fee information directly to you, as a plan participant.
The new regulations, which have been repeatedly delayed and strongly opposed by many plan sponsors, may revolutionize the 401(k) marketplace.
Astonishing but true … nearly 83% of Americans have no idea what their 401(k) plan is really costing them, according to research by AARP. The vast majority of participants seem to think their plan is offered “free” by employers.
- Only 17% of U.S. employees surveyed by AARP said they knew they were paying 401(k) fees.
- 65% believed that they paid “no fees.”
- Another 18% were “not certain.”
Even worse, many business owners who have set up 401(k) plans for their employees have no idea what they really cost, either. How is that possible? In part, it’s because 401(k) fees cover a complex bundle of expenses, ranging from plan administration fees, to investment and trading fees, sales fees, and individual service fees.
Average expenses for small retirement plans are 1.3% per year, according to the 401(k) Averages Book. Expenses for large plans are slightly lower at 1.08%, due to economies of scale, greater administrative and investment expertise, and more negotiating muscle. However, some very small or poorly designed plans may cost up to 3% per year in fees, with much of that charged to the employee. Since those expenses are not currently disclosed, employees are none the wiser.
Financial Tip: Many industry observers believe the new fee disclosure rules will lead 401(k) plan participants to put pressure on employers to reduce costs, something that will make their retirement savings dollars go further. If you participate in a 401(k) plan, make sure you read the disclosure materials when you receive them. If you think your workplace plan is too expensive, speak up and ask your employer to switch to a more competitive provider, or consider other alternatives to “opt out” of the plan. Your 401(k) plan is a critical part of your retirement savings strategy. Most plans are well run, but a minority are not. The new rules will help make sure your plan is doing its part to get you closer to your goals.