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.
"For most mid to large 401(k) plans, the fees are very reasonable," Hess says.
Hewitt, which administers more than 100 large-company 401(k) plans, estimates that mid- to large-plan fees range from about 0.4% to 0.9% annually, based on a plan participant's investments.
A recent survey that included small and large 401(k) plans said that the fees, including record keeping, administration and investment management, range from 0.35% of assets to 1.72% of assets, according to the ICI.
Workers paying too much?
The industry needs to be changed because 401(k) plan providers too often explain fees in unintelligible ways and hide excessive fees, says Rep. George Miller, D-Calif., chairman of the House Education and Labor Committee. That makes it difficult to know if workers are paying too much. To address the issue, the committee has approved a bill, 401(k) Fair Disclosure and Pension Security Act, which Miller says may pass the House this fall.
Miller's bill would require employers to break down fees into four categories, including administrative expenses, investment management, transaction costs and all other fees.
The Senate Special Committee on Aging also has introduced a bill to require fee disclosure. Although it's unclear how soon plan participants would see a change in the law, it seems inevitable that this year or next enhanced disclosure will occur, says Reish.
Meanwhile, the Labor Department is moving forward with a regulation it proposed last year. Like Congress, it would clarify 401(k) fees and require more disclosure.
"We all have the same goal in mind," says Phyllis Borzi, assistant secretary of Labor at the Employee Benefits Security Administration.
The Labor Department's proposal is further along and doesn't need to be voted into law, so it may be in effect sooner than congressional bills. But because the Labor Department has statutory constraints, it's still important for Congress to stay focused on the fee issue, says the Profit Sharing/401k Council of America.
"We are committed to improving the transparency in the 401(k) process and to ensuring all workers can achieve a secure retirement," says Secretary of Labor Hilda Solis.
Some experts and employees are worried that industry lobbyists may water down the bills.
"Congress might bow to pressure from organizations and then change it in a way that isn't good," says Dennis Frailey, who lives in Fairview, Texas, and works for a defense contractor.
4,500 plans rated
One company, BrightScope, saw an opportunity to step in and offer 401(k) plan employers and employees plan analysis.
The small, California-based start-up rates 4,500 401(k) plans. Its goal is to have 30,000 plans rated by year's end. The site recently started to offer more detailed information to employers for a fee, but the basic information to employees is free.
Anyone can click on the website and look up their employer's 401(k) plan rating. BrightScope crunches the data from public resources and compiles a large database of information. Under the rating is a general description of fees, company contributions, mutual fund investment options and other factors.
The service also compares the plan rating with a number of other company plans in the same industry peer group. The website makes every company open to public scrutiny. Workers can look up any company's 401(k) rating, not just their own plan.
BrightScope ratings are based on calculations that involve the public Form 5500 data that plan sponsors must provide to the Department of Labor. Although it is the most accurate information that is available, it's not made public in a timely fashion. Currently, the most recent data are from 2007.
But that will change, because starting next year, the Labor Department's data will be electronic and more easily accessible.
Not all companies are happy with BrightScope, especially if they have a poor 401(k) plan rating. Some plan sponsors complain about the data the site uses currently.
But experts say many employers themselves don't understand the plan fees or don't spend much time deciphering them, even though the Labor Department requires them to ensure that fees are reasonable.
Website and magazine Plansponsor, which monitors the 401(k) industry, no longer asks companies to provide fee information for its annual survey of employers.
"The reality is that the fees that support these programs are coming from a variety of different sources, and it makes it hard for any employer to stop long enough find out how much they pay," says Plansponsor editor Nevin Adams.
Synteract, a San Diego contract research organization, was one of the first companies to peruse BrightScope data.
Kathleen Demarest, Synteract's senior manger of human resources, says the rating helps provide information that can be used to negotiate better fees.
"It gives us a benchmark for how we're doing and leverage against our current administrator," she says.
Scott David, president of workplace investing at Fidelity Investments, says the BrightScope data have been available from third-party consultants for plan sponsors since 401(k) plans were formed. But until now, no independent source had made it easy for workers to learn about their 401(k) fees and compare them with other plans.
BrightScope officials, who expect future competition, say they are starting to see employees using the site to gather information to approach their human resource representatives with questions and complaints.
They say they know that because more companies are calling BrightScope with questions or checking out the website.
Doug Bloomfield, a retiree who still has a J.C. Penney 401(k) plan, says his former company provides participants with plenty of fee information.
"I'm sure a lot of people don't bother to look at it," he says. "It blurs together with all the other information we get."
Not easy to decipher
And even though Bloomfield sees it, that doesn't mean it's easy to evaluate. "I know I have to pay a fee, but I'm assuming that the company would get the best deal that they could because it's a big corporation," he says.
Although J.C. Penney, like many other retailers under financial stress, doesn't have a very high BrightScope 401(k) rating, the website also says that its 401(k) has low fees.
When 401(k) plans were created in 1981, they were supposed to supplement traditional pensions. But today, they are the primary retirement funds for many workers.
"Employees are deciding to put their money into a 401(k) plan," Davis says. "But without having a clear idea about fees, an informed decision cannot be made."