Workers are about to get valuable information about their 401(k) — specifically, how much they pay for it.
The fee information has been around for years, plan experts say, but to find it, employees often must dig through prospectuses or plan documents. Most don't bother.
But thanks to a new federal regulation, 401(k) participants must receive an annual fee disclosure statement by the end of next month. Between this new statement and additional mandated disclosures that will start appearing in quarterly statements this year, workers should be able to calculate how much of their nest egg is eaten up by fees.
"Costs do matter," says Joseph Valletta with HR Investment Consultants in Towson and co-author of the "401k Averages Book," a fee comparison guide. "They aren't the only driving force ... but you have to make sure your fees are reasonable."
The disclosure statement could be an eye-opener for workers, particularly those who don't realize they pay a plan provider to maintain their account — and seven in 10 workers don't know this, according to a study last year by the AARP.
Of course, these workers will be surprised only if they read the new disclosure. Workers too often ignore paperwork, and some industry experts suggest that will happen in this case, too.
But this could be a costly mistake. You can end up with tens of thousands of dollars less in your account by retirement because you didn't notice that the mediocre funds you chose were the most expensive in the plan. Or you might be out big bucks because you didn't know enough to lobby your employer to switch to a plan provider with lower fees.
Consider the case of two workers with $30,000 in a 401(k), according to T. Rowe Price's calculations. One pays 1.75 percent in annual fees; the other 0.75 percent. They make no more contributions and earn a 7 percent average annual return.
After 35 years, the worker paying the higher fee would accumulate $179,844. But the other worker's account would be worth $250,400, or $70,556 more.
Plan experts say some workers have been getting fee information even before the new federal mandate. But participants in smaller plans are the least likely to get this information — and they are the workers most likely to pay high fees.
What's amazing is that it has taken this long for all participants to have this information at their fingertips.
Valletta recalls testifying about the need for fee disclosure at a Labor Department hearing in 1997. Back then, the stock market was going gangbusters, and workers didn't care about fees when their accounts were growing 20 percent or more a year, he says.
"That set back the discussion on fees by five to seven years," he says.
Since then, there has been a lot of foot-dragging on fee disclosures by companies that provide 401(k) services, such as investment advisers and record-keepers.
The new federal regulations require service providers to tell employers by July 1 how much they receive from 401(k)s. The information is now being simplified into an annual statement provided to workers. (Later this year, quarterly statements will reveal how much the worker paid during the quarter for administrative expenses, such as $10 for a 401(k) loan.)
Most workers will receive an annual disclosure statement that's based on a model drawn up by the Labor Department, Valletta says.
The statement will list each investment in the 401(k) and its historical performance. Next to that will be the performance of the investment's benchmark, such as the S&P 500 index, so workers can see how their fund measures up.
You'll also be able to see the total annual cost of each fund in the plan. It's stated as a percentage of the money you have invested.
To make it more real for employees, workers will see the dollar amount paid in fees for every $1,000 invested. A 1 percent fee, for instance, means you pay $10 for every grand invested in that fund.
The disclosure statement is designed to help workers make investment choices.
Let's say you invest in a large-cap value fund with a 1.8 percent annual fee. But you see from the disclosure statement that a similar fund with comparable performance charges only 0.8 percent. In that case, why not switch to the cheaper fund?
"This is an opportunity to just take a step back and say: 'What funds am I invested in? Do they have high fees or low fees?'" says Scott Holsopple, CEO of Kansas-based Smart401k.
Of course, you need a diversified portfolio, so don't put all your money in one fund with only one type of asset just because it's the cheapest.
While fee information on each investment is helpful, Valletta says, employees should go further and calculate the total cost of their plan. Readers who hate math should skip the next three paragraphs
Start by looking up the annual cost of each fund you invest in. Multiply the annual cost by the account balance in the fund. Do that for each of your funds. Add up those dollar figures along with any other charges you pay that are listed on the statement.
Once you get the annual dollar figure you pay, divide it by your total 401(k) balance. That will give you the bottom-line cost of your 401(k).
For example, say you invest in two funds, each with a $25,000 balance. One fund has an annual cost of 0.5 percent; the other 1.5 percent. That means you pay $125 a year for the first fund and $375 for the other. Divide your total fees — $500 — by your $50,000 balance and the total annual cost of your 401(k) is 1 percent.
The next question: Are you paying too much?
Be aware that small plans with few workers and modest assets will be more expensive than a giant plan that can negotiate lower fees and spread costs among thousands of employees.
The average total plan cost for small plans — with 100 participants who have an average balance of $50,000 — is 1.3 percent, according to the "401k Averages Book." The typical cost for large plans with 1,000 workers is 1.08 percent.
If the total cost of your plan is higher than the average, you should ask your employer how your fees compare to other plans', Valletta says.
"Hopefully, they have gone through that exercise and know if the fees are competitive," he says.
Or, compare your plan to its peers at BrightScope.com, which rates 50,000 plans on fees, employer contributions and other factors. BrightScope calculates how many more years employees would have to work to catch up with workers in the top plan.
It's taken years to get these disclosures, so when you get the statement, review it. If it turns out you're paying high fees, you can take steps that might make a big difference for your retirement.
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