Quick question: How much are 401(k) fees removing from your retirement nest egg each year?
If you are either unaware of such fees or don't know their amounts, don't worry: Nearly 83% of Americans don't know, either, according to AARP.
But the coming months may change that.
Congress and the Department of Labor are working on legislation and regulation that would require employers to disclose more information about administration and management fees in an understandable way. And an independent website, Brightscope.com, seems to be gaining traction as it aims to provide workers with company 401(k) plan ratings that include fee information.
More workers are relying on 401(k) plans for retirement funding, as pension plans are frozen or no longer offered. The recession and stock market losses battered 401(k)s over the past year. But associated fees — often hidden or extremely confusing to find and understand — haven't helped.
"When money is going in every month, it's hard to keep track of the fact that your account balance might not really be growing," says Rebecca Davis, staff attorney at the Pension Rights Center. "Participants need to know that they are saving for their own retirement and not just funding the income of a third-party administrator."
The assortment of fees can suck thousands out of your 401(k).
Suppose your account with a balance of $20,000 earns 7% a year, with fees equal to 0.5% a year. Over 20 years, the balance would be worth about $70,000, according to a report from Congressional Research Service. Were the fees 1.5% a year — near the industry median, according to the Investment Company Institute, or ICI — the balance would amount to $58,000, or 17% less.
All sorts of fees exist, and it can be hard to determine whether workers or employers are paying them. Administrative fees pay bookkeepers, trustees and legal advisers; management or investment advisory fees pay those who operate and invest in mutual funds; and distribution fees, or 12b-1 fees, are charged by certain mutual funds.
Fee amounts vary considerably, especially depending on the plan's size.
But Fred Reish, an employee benefits lawyer, says it is not uncommon for fees on a small 401(k) plan to break down like this: 0.25% a year for the plan adviser, 0.25% a year for the record keeper and 0.75% a year for mutual funds, totaling 1.25%.
Many workers assume that they pay fees only for their mutual fund investments. But even fund fees can be tricky, because they may contain other fees, such as expense and trustee fees, says Pamela Hess, director of retirement research at Hewitt Associates.
More companies are passing on additional fees to their workers. About 58% of plans now charge participants for administrative fees, up from 33% in 2001, according to a 2007 Hewitt survey.
"That has been a steady trend," Hess says.
Small companies, because they lack negotiating power due to the few employees they have on staff, often have to rely on costly plan providers, such as insurance companies.
"It's a crime that they are extracting somewhere around 3.5% to 4.8%, which is the lion's share of what the market returns on investments," says John Sullivan, a registered investment adviser. "Workers end up giving away half of their retirement savings."
But most 401(k) plan fees are fair, and plan sponsors have been trying to make them more transparent in recent years, industry officials say.