November 30, 2012
If you're like many Americans – 71 percent, according to an AARP survey – you might be under the impression that your 401(k) plan administrator doesn't charge you anything to maintain your account. You'd be wrong.
In fact, these companies typically charge fees equivalent to 0.5 to 2 percent of your account balance each year – sometimes as high as 5 percent. In addition to ongoing tariffs for managing your investment options, plan administrators often deduct numerous other fees from individuals' accounts, including charges for administrative costs, sales commissions, advertising, insurance, and trading expenses.
Perhaps equally disturbing is that many employers – which have a fiduciary responsibility to ensure the retirement plans they sponsor have reasonable fees and expenses – often don't know what fees their employees are being charged either.
Over time, out-of-control fees can take a serious toll. The Department of Labor estimates that paying just 1 percent in extraneous fees each year could reduce your account balance by 28 percent during an average working career.
Finding – let alone understanding – such fee disclosures can be time-consuming and often involves wading through complex plan documents. That's why last year, the Labor Department issued regulations requiring fund administrators to provide a more transparent breakdown of their fees to employers, which in turn must pass the information along to employees.
During the first disclosure phase, investment companies were required to send a detailed statement about their plan's investment options, including fund performance and fees. You should have received this information from your employer by August 31, 2012. This statement, which will hereafter be sent annually, should include:
The second phase of fund disclosure was the release of quarterly performance statements tied to your particular investment accounts. The first of these statements was for July 1 – September 30, 2012, and most people should have received theirs by mid-November. It should include specific dollar amounts of plan-related expenses or fees charged to or deducted from your accounts that quarter, along with a detailed description of the related services.
For many, these statements are a wake-up call for why they need to choose investment options more carefully. They won't do all the work: You'll still need to crunch the numbers on how your current investment choices stack up against other funds. And no piece of paper can determine your appetite for risk vs. reward. But they're a start.
The DOL hopes that by shining daylight on 401(k) plan costs, employers will be motivated to rein in costs and seek better investment options for employees – and that employees will be more inclined to seek out the most cost-effective funds for their retirement savings.
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