In an era of do-it-yourself retirement planning, workers often are hobbled by a lack of clear information on their investments and the fees they are charged to manage them.
Those fees can eat away tens of thousands of dollars over time. Now, federal regulators are seeking to toughen disclosure rules and devise a single standard for a wide variety of investments and retirement plans.
Saying current disclosures often are "missing the mark by a country mile," Securities and Exchange Commission Chairman Christopher Cox said his agency would seek new rules that would force mutual funds, insurance companies and others to more clearly detail the cost and performance of investment funds and retirement plans.
In an interview, Cox said companies that manage funds and retirement plans should be required to report "one simple number that captures fees and expenses." As traditional pensions disappear, more workers are relying on 401(k)'s and individual retirement accounts. But excessive fees can jeopardize the financial security of retirees.
These costs are often hidden, either buried in the fine print of a fund prospectus or simply deducted from accounts without ever showing up as a line-item expense.
"It's our top regulatory priority," said Cox, who wants to make it easier to compare funds. "There are always technical concerns raised by someone, but the truth is that apples-to-apples comparisons are quite useful for consumers. The same should be possible for our retirement savings."
Mutual funds, for example, provide information about fund fees and trading costs in different parts of the prospectus but don't add them up. Annuities sold by insurance companies, meanwhile, are typically tied to the performance of an underlying mutual fund, but the return of that fund is often not clearly reported, critics say.
Requiring easy-to-read disclosures may be challenging, given the complexity of retirement plans.
"It's a good concept: giving people simple, easily comparable information," said Barbara Roper, director of investor protection at the Consumer Federation of America. "The question is whether they'll come up with a number that is really meaningful."
There also is no single regulator. The SEC oversees mutual funds, but it does not regulate retirement plans offered by insurance companies, banks and other firms that administer retirement plans. To implement new standards that apply across the board, Cox would need the support of other agencies.
The Department of Labor, which has broad authority over employer-sponsored retirement plans, including 401(k) plans, has been pursuing its own disclosure initiative and said it supports the broad effort.
At the top levels of the SEC, the view is that far-reaching changes in the pension landscape require the effort. Self-directed retirement plans such as 401(k)'s usually are linked to the performance of the financial markets, making the decisions of investors, and the bite of fees, crucial.
"If the government expects retirees to manage their own accounts, they need to know how their investments are doing, and right now many don't know how they are doing," SEC Commissioner Roel Campos said.
The initiative will be rolled out in phases. In the coming months the SEC hopes to hold round tables of experts and to publish a concept paper outlining the issue, paving the way for a formal rule proposal this year.
Some observers maintain that stricter requirements are most needed for plans run by insurers and other companies that are not under the direct scrutiny of the SEC.
"I'm very surprised there hasn't been more focus on these kinds of investment products," said Brent Glading, managing director of Glading Group, a Montclair, N.J., firm that analyzes retirement plans for employers.
Lobbyists for the insurance, banking and mutual fund industries all said they supported clear disclosures for the public. At the same time, they said cost was not the only factor that determined the attraction of a retirement plan and urged the public to consider other matters as well, such as the choices a plan offered and their suitability to an individual's needs.
For its part, the SEC may propose a separate rule aimed at enhancing the disclosures of mutual funds. The idea is that improved mutual fund disclosures would make a significant difference because much of the money in self-directed retirement plans such as 401(k)'s and IRAs is invested in mutual funds.
Studies have shown that many workers are unaware of the fees they pay to run their retirement plans, which can be significant.
In a report in November, the Government Accountability Office said a retirement nest egg of $20,000 might grow to $70,500 after 20 years, presuming annual returns of 7 percent and annual fees of 0.5 percent.
By contrast, that same $20,000 nest egg would grow to only $58,400 if the annual fees totaled 1.5 percent, according to the GAO.
"Differences of even a fraction of a percent can matter enormously over time," Cox said. "Investors deserve to know the after-tax, after-fees performance of their fund and to know whether the manager was good or lucky."
Jonathan Peterson is a staff reporter for the Los Angeles Times, a Tribune Co. newspaper.