New rules could save 401(k) investors thousands of dollars – if they would only read their account statements, say labor officials who beg you to “open the envelope.”
By now, most 401(k) investors have received the first quarterly reports to be issued under new federal rules requiring full disclosures of fees and other plan expenses. Whether investors have read the statements is another question entirely.
The quarterly statements are due no later than Nov. 14, or 45 days from the end of the third quarter. They follow the first annual disclosure of plan expenses that were due by August 30, 2012.
“Open the envelope that you get with this information in it, and actually take a look at the information you’re receiving,” Phyllis Borzi, a Department of Labor official who oversees 401(k) plans, said in an archived webinar on the new disclosure rules, designed to benefit participants who manage their own 401(k) investments in so-called self-directed plans. “I know you get a lot of mail and you’re probably more interested in some of the other pieces of information,” Borzi said. “But opening this envelope and looking at this information is the first step to retirement security.”
If past research is any indication of future behavior, few 401(k) investors are likely to follow Borzi’s advice, even though she speaks with some authority. Borzi heads the Employee Benefits Security Administration, the DOL division that regulates private-sector employment-based retirement plans, including 401(k) defined-contribution plans. As employers continue to phase out traditional pension programs, the 401(k) has become the primary retirement savings vehicle for American workers. Today, 72 million of them have invested $3 trillion in 401(k) style plans, according to DOL data.
“In all of our previous surveys that we’ve done with 401(k) plan participants, only a minority indicates that fees are an important issue to them,” Gerald O’Connor, director of retirement research for Spectrem Group, a Lake Forest, IL market research firm, said in a phone interview. “An even smaller share knows what their fees are.”
This ignorance may be bliss, but it’s not going to help build retirement assets, according to Borzi, who says a 1 percent increase in fees can reduce 401(k) savings by 28 percent over a career. To illustrate, she gives the example of a $25,000 contribution that grows at the rate of 7 percent over 35 years. With fees of 0.5 percent, a worker would have saved $227,000 by retirement. A fee of 1.5 percent would have yielded $163,000.
The annual statement gives investors information about both the plan administration and individual investment products offered in the plan. Participants can learn about fees and expenses charged by administrative services, such as accounting and recordkeeping, as well as information about individual investments including objectives, performance, fees and expenses. This statement is intended to be a “shopping tool” to help plan participants decide which investments to choose.
The quarterly statements disclose how much in fees are actually deducted from a participant’s plan, and what the fees are for, according to Borzi. Fees will be presented in two forms, a percentage of assets and a dollar amount for every $1,000 invested. Participants can determine whether the fees, which reduce the rate of return on an investment, are reasonable, and can factor the fees into a risk/return analysis of an investment product offered by the 401(k) plan.
The rules may make more information available to plan participants, but individuals may have difficulty intergrating the information .According to Mark Partipilo, Spectrem Director,“The rules are a first step in the right direction, but don’t go far enough. What many participants may not realize is that their investment fee and plan level fee information are not combined within one statement. A participant will have to look at the annual statement for general plan and investment fees and the quarterly statement for specific plan level fees charged per participant. There's no simple breakout of actual investment fees incurred by individuals."