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?
Steps You Can Take
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.
For a U.S. stock fund, look for an expense ratio of .70 percent or less, and for an international stock fund 1 percent or less. With a domestic bond fund, my ideal would be under .50 percent. But my ideal and your particular 401(k) may be in conflict.
Second, do a little math. Multiply a fund's expense ratio by the amount you have invested in that fund. That tells you how much you're paying over the course of a year for that particular fund. Then compare that amount to the cost of a similar fund in your 401(k) lineup.
On a $50,000 investment, what's the difference between a fund with a 1.5 percent expense ratio and one with a .50 percent expense ratio? It's a $500 difference — each and every year.
Spread out over 20 years, an after expenses return of 7 percent a year, versus 6 percent for the higher cost fund, could mean an extra $33,000 available at retirement.
Third, try to pick out the best fund available to you in various asset classes. Break down your 401(k) lineup by major asset categories and then try to find the best choice within each category you want represented in your retirement portfolio. Sound investment practice requires you to hold mutual funds representing a variety of asset classes, including U.S. small and large cap stocks, international stocks, bonds and maybe even a little bit each in real estate and emerging markets funds.
In many cases, you may only have one choice. But if you have more than one option, this is where costs can be a critical deciding factor.
Finally, ask for better alternatives.
Under federal law, retirement plan sponsors — the company you work for — have a fiduciary responsibility to look out for your best interests in that retirement plan. That means enough complaints about current 401(k) offerings could mean they will be persuaded to seek out better options.
A verbal tirade in front of the human resources director may not be the best idea. But a polite letter to those responsible for crafting your 401(k) plan — and by law responsible to you — is a smart option.
Try it. Your retirement security could depend upon it.
This work is the opinion of the columnist and in no way reflects the opinion of ABC News.
David McPherson is founder and principal of Four Ponds Financial Planning (www.fourpondsfinancial.com) in Falmouth, Mass. Before establishing the firm, he worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, which is dedicated to providing financial planning and advice to clients on an hourly, as-needed basis. Contact David at firstname.lastname@example.org