What to Look for in Your New 401(k) Report

This year, new Labor Department regulations require 401(k) plan providers to be more transparent about the fees embedded in retirement savings plans. That means when you receive a statement this spring or summer (the new rules will roll out in May), you'll see more numbers than usual that detail how much of your savings is going toward fees for recordkeeping, administration, investment advisory, brokerage and management services.

"Studies from AARP show that 80 percent of the public don't know what they're paying in 401(k) fees, or they think they aren't paying anything," says Dave Loeper, a registered investment advisor and author of Stop the Retirement Rip-off. "When the new reports come out, people are going to be dealing with retirement plan sticker shock."

[Related: SecondAct's Retirement Savings Center]

Some 401(k) investors are paying up to 3 percent or more each year in fees, says Peter J. D'Arruda, president of Capital Financial Advisory Group in Cary, N.C. "For many, the loss of money via fees each year, combined with the loss on compounded returns over several decades, could be the difference between retirement success and retirement failure," he says.

What To Look For

The information that must be disclosed falls into two categories: plan-related disclosures and investment-related information. Plan-related disclosures will be new to most participants, says Clarissa Hobson, senior financial planning advisor at Carnick & Co. in Colorado Springs, Colo. They include administrative expenses charged against participants' accounts, individual expenses charged against participants' accounts, and quarterly disclosure of amounts deducted from participants' accounts. These fees will vary widely among plans, depending on what costs the employer chooses to pass on to participants.

The investment-related information you'll receive may be similar to what you've seen before, but now investment performance and fee information must be provided in a comparative format, Hobson says. She recommends looking for the fees for each investment option and the fees for the specific options in which you are invested. Next, look at the rates of return for each investment option, as the fees for each investment directly impact the rate of return you are receiving. Compare your investment options with other options within the plan to determine whether you are making prudent decisions, Hobson says.

The most important thing to look for is the dollar amount charged in fees per thousand invested, says Lars Landrie, CFP, who leads the personal financial planning group at Moss Adams Wealth Advisors. For instance, if you have $100,000 invested in a fund, and the cost-per-thousand is $10, the total cost for the fund is $1,000, Landrie says. In addition to showing a dollar amount, the new reports must also disclose the total cost, as an annual percentage, of each fund the employee is invested in, as well as any other fees that are charged against the individual account, such as those for loans or distributions. By adding these two amounts, you can determine the total cost of investing in your company's 401(k) plan.

What To Do

Some fees for managing your 401(k) are to be expected. But you'll have to determine whether the fees you're paying are warranted. Reasonable fees vary depending on the size of the plan, Landrie says. Plans totaling more than $100 million in assets usually have fees of less than 1 percent, while plans in the $50 million to $100 million range may cost 1.5 percent; smaller plans may incur higher fees, Landrie says.

The amount you're paying in fees should also be determined by the level of service you're receiving, according to Loeper. "If you're meeting quarterly with an advisor and they're making recommendations, that's a lot of service, and I can see paying .75 percent to 1 percent," he says. "But if you're not getting that kind of service, you can get a globally diversified portfolio for .01 percent to .15 percent."

If your plan is charging .5 percent or less, there's probably no reason to consider making changes, Loeper says. "But there are a lot of plans out there charging 2, 3 or even 4 percent," he says. "In that case, you're getting ripped off. A plan like that can cost a teacher or a police officer $1 million over the course of their career."

What If You're Paying Too Much?

If you believe the investment fees you're paying are unreasonable, first make sure it's not because of your own choices. For instance, if you've elected a variable annuity with layers of funds, that could be driving up your costs.

Once you've checked your investment choices, talk with your employer about improving the quality of your plan or offering additional, lower-cost choices. If the plan itself is too expensive, you may need to ask your employer to charge less or find a different vendor.

"Do your research to determine what fees would be reasonable for a plan of your size," Hobson says. "A great consumer resource to compare plans is BrightScope; specific plan fees aren't available, but you can see how your plan rates compare to others. Once you are armed with information, you can approach your plan sponsor to have a discussion about your plan. There is also a nice checklist on the Labor Department website that you can bring to your discussion."

Try to see the situation from your employer's perspective. "You don't want to sound like a complainer; you want to be proactive," Loeper says. "If you work for a small company, the employer may have been misled by product vendors and may not be aware of all the fees you're paying, either."

Through research, help get your co-workers interested, as well. "You might explain, 'Our index fund costs 1.25 percent, but Fidelity has one that does the same thing for .25 percent,'" Loeper says. "You're not comparing a Lexus and a Camry; you're talking about paying a Lexus price for a Camry."

Keep in mind that changes to your plan likely won't come overnight. But "if your plan sponsor knows there are educated and interested employees keeping on top of the process, this may encourage them to make changes," Hobson says. "Because of the new disclosure rules, plan sponsors will become more educated as well, and they may be more willing to make changes as a result."

SecondAct contributor Nancy Mann Jackson writes regularly about personal finance, workplace issues and sustainability. She is based Huntsville, Alabama.

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