For better or worse, these are the waning days of the guaranteed pension.
The 401(k) is the future of American retirement.
Yet, for millions of American workers, their efforts at saving for retirement are being hindered by high investment costs.
By one estimate from the Boston College Center for Retirement Research, investment fees reduce 401(k) returns by about 1 percentage point a year. With about $2.7 trillion held in 401(k) accounts, that 1 percentage-point slice amounts to $27 billion a year.
In many cases, those paying the bill have no idea they are contributing to that $27 billion even though it's been going on for more than a decade.
Finally, help could be on the horizon.
The U.S. Department of Labor is weighing proposals to improve disclosure of 401(k) administrative and investment fees and expenses to plan participants. The hope is that armed with information, 401(k) investors will make better decisions when selecting among investment options.
At the same time, Congress is considering legislation to achieve a similar goal. A bill introduced in July by U.S. Rep. George Miller, D-Calif., would require improved disclosure to participants, mandate inclusion of at least one lower-cost balanced index fund in a 401(k) lineup and require plan providers to inform plan sponsors of any financial conflicts of interest.
"Hidden fees are eating into the retirement savings of millions of American workers without them knowing it," Miller, the chairman of the House Education and Labor Committee, said upon introducing his bill over the summer.
The current Labor Department review effort came in response to a Government Accountability Office study on the issue last fall that found "information on fees that 401(k) plan sponsors are required by law to disclose is limited and does not provide for an easy comparison among investment options."
My own review of the comments submitted to the Labor Department suggests 401(k) providers are resigned to the fact more and better disclosure will be expected of them. At this stage, they seem to be trying to mitigate the regulatory burdens that will be associated with the new disclosure requirements.
"Voluminous and detailed information about plan fees could overwhelm the average participant and could result in some employees deciding not to participate in the plan," commented the Investment Company Institute, a mutual fund industry trade group.
Proposed rules and new legislation are admirable, but the reality is that their effects are unlikely to boost the account balances of 401(k) investors for at least a few years. And even if sound disclosure rules lead to better understanding by investors, there's no guarantee 401(k) costs will decline. There's only the hope that increased competition will encourage it.
So in the meantime, what's a worker stuck in a lousy 401(k) plan to do?
First, study your existing 401(k) investment options carefully. Focus on the expense ratios of individual mutual funds. Don't make these costs your sole criteria when selecting among 401(k) options, but you do want to make it one of the top considerations. In general, lower is better as fees and expenses can be a reliable predictor of mutual fund performance. Lower cost funds tend to do better than more expensive ones.