UPDATED 7/15/10: New rules released by the Department of Labor will require companies to disclose 401k related fees. See It’s About Time: 401k Fees May Soon Be Disclosed for more information.
Ask most people how much it costs to participate in their company’s 401k or their organization’s 403b retirement plan, and you’ll probably hear “nothing.” Wrong.
The simple fact is that voluntary retirement plans at work nearly always offer mutual fund options. And all mutual funds have management and other fees.
If you didn’t know you were paying fees to participate in your work-related retirement plan, don’t feel ignorant- they’re barely disclosed. That’s the way the mutual fund industry likes it. And it appears, for the foreseeable future at least, that’s the way they’re going to continue to have it.
Watch the following news story, and as you do, consider that it’s essentially an update of a story about 401k fees that I’ve done a least a half-dozen times since 1996.
As you saw from the above story, the hidden fees you incur within your 401k or 403b could easily cost you more than $100,000 over your working life. You don’t see these fees because rather than being charged as a cost, they instead reduce the earnings on your accounts. So if you’re earning 7% on your stock account, for example, a 1.5% management fee would lessen your return to 6%.
Obviously, nobody works for free, including the investment managers who pick the stocks, bonds and other securities for the mutual funds within your retirement plan. But some fund managers charge as little as .2% – one seventh the amount of those that charge 1.5%. Isn’t that something you should know?
The fees for all mutual fund accounts aren’t completely hidden – they’re disclosed in the fund’s prospectus. But since few plan participants read these lengthy and often complex documents, few learn about the fees they’re paying or understand their long-term implications.
The reason fees aren’t disclosed more prominently is the obvious one: because the companies charging them don’t want you see them. That’s understandable. What’s less so is why members of Congress are working with Wall Street to maintain the status quo.
Here’s the latest attempt – so far successful- to keep you in the dark regarding 401k fees. Following is a press release from the web site of U.S. Rep. George Miller. Rep Miller recently tried to add language to jobs legislation that would have offered greater fee disclosure. (Keep in mind, we’re not talking about attempts to reduce the fees being charged to manage the mutual funds within your retirement plan – just to disclose them.)
WASHINGTON, D.C. – U.S. Rep. George Miller (D-CA), chairman of the House Education and Labor Committee, today called on the U.S. Senate to add back 401(k) fee provisions stripped out of jobs legislation last week. To illustrate the issue, Miller had a pie delivered to each Senator sitting on the Finance Committee with nearly a third of the pie taken out representing the fees Wall Street takes from account holders. According to a Department of Labor calculation, a one-percentage point difference in fees would reduce overall retirement income by 28 percent over a lifetime of saving.
“Every day, hardworking families make the difficult decision to set aside their earnings to provide for their retirement,” said Miller. “The Senate should side with middle class Americans who want to know the facts about fees and charges that threaten their retirement savings.”
Important 401(k) fee disclosure provisions were part of the American Jobs and Closing Tax Loopholes Act (H.R. 4213), legislation that the House of Representatives approved and sent to the Senate on May 28. Last week, Sen. Max Baucus proposed changes to the legislation that included the elimination of the requirement that 401(k)-type plans disclose all fees that participants pay.
“Americans should be outraged that there is no law that entitles them to know how much Wall Street takes out of their 401(k) account and what Wall Street does with that money,” said U.S. Rep. Rob Andrews (D-NJ), chairman of the Health, Employment Labor and Pensions Subcommittee. “When an American puts a dollar in their retirement account, they don’t expect to get 72 cents back after a lifetime of saving. They expect that dollar to be invested and grow.”
To illustrate his point, Miller sent the pie pictured above to each member of the Senate Finance Committee, along with the the following letter:
There is currently no requirement that Wall Street tell accountholders how much they take out of Americans’ 401(k)-style accounts. With more than 50 million Americans relying on these plans to finance their retirements, hidden fees make a big difference in families’ retirement security.
The attached pie chart (which is delicious!) represents Americans’ 401(k) retirement savings. Yet, nearly a third of the pie is missing. This missing slice represents what Wall Street takes from many 401(k) accountholders in hidden and excessive fees.
A one-percentage point difference in fees over a lifetime of saving reduces some accounts by 28 percent, according to a Department of Labor calculation.
This is why the House of Representatives acted decisively in May to pass 401(k) fee disclosure protections as part of the American Jobs and Closing Tax Loopholes Act (H.R. 4213). However, last week, the Senate proposed to strike these vital protections from the bill at the expense of hard-working Americans.
These 401(k) fee disclosure provisions do not mandate the level of fees that 401(k) service providers may or may not charge. And, it does not add any cost to the bill. It simply requires disclosure of all fees plan participants and plan sponsors pay.
Americans 401(k) investments, which total approximately $3 trillion, belong to those who own the account, not Wall Street firms. At a time when the middle class has already lost too much of their retirement savings because of the financial scandals, they shouldn’t also be losing out because of unconscionable hidden fees.
I urge you to stop Wall Street from hiding 401(k) fees by restoring the House disclosure provisions. The 50 million Americans with a 401(k)-style plan deserve a fighting chance to keep more of their retirement pie.
Since Rep. Miller laid the blame of the failure to force fee disclosure at the door of Democratic Senator Max Baucus of Montana, I called the Senator’s office to ask a simple question: how can anyone think it’s a bad idea to disclose fees paid by 50 million Americans when they invest in a work-related retirement plan?
Here’s the answer I received via email from the Senator’s press assistant, printed here in its entirety:
I received your voicemail regarding the 401k provision in the American Jobs and Closing Tax Loopholes Act from my colleague in Senator Baucus’s personal office. The following is attributable to a Finance Committee aide. Please let me know if you have further questions.
From a Finance Committee aide: Chairman Baucus completely agrees that better disclosure in 401k plans is needed, which is why he supports the Department of Labor’s effort to develop meaningful regulations to increase transparency in 401k plans. The Department of Labor has spent years developing these regulations, drawing on tremendous resources to devise what will likely be tough and effective measures to protect consumers and hold plans accountable. The Department of Labor is expected to release these regulations very soon and Chairman Baucus believes the most effective way to protect consumers is to let the Department complete its work before intervening with legislation.
In other words, we don’t need some nosy buttinskies from Congress passing laws when the labor department is “about to release these regulations very soon.”
My response to the Senator and his press assistant: Tell that to somebody who hasn’t been doing news stories about this lack of disclosure for the last 14 years.
If you’d like to see what management and other fees you’re paying for your 401k, 403b or other voluntary retirement plan that uses mutual funds, either look in the prospectus – you can often find a copy online – or ask someone in your employee benefits department. Then compare those fees from your fund’s manager to other fund managers in the industry. (Hint: traditionally Vanguard has some of the lowest fees in the business, which makes it good for fee comparison.)
If you find the fees you’re paying are too high, especially in light of the performance you’re receiving, speak up. This is your money: the less you lose to fees, the better your retirement. It’s just that simple.