How much are you paying for your 401(k)? Chances are, your boss hasn't been rushing to add up the figures and send you a report -- but beginning Aug. 30, that will change.
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For the first time this year, the U.S. Department of Labor will require administrators of 401(k) plans, the companies that manage these accounts for employers, to disclose to employers and participants how much they are charging to operate these plans.
"A lot of employers are already putting their plans in place because they know this is going to create a lot of controversy," says Joseph W. Valletta, CFA and editor of "401k Averages Book," which helps plan administrators understand how their plans stack up.
Research by Valletta's firm shows that total plan costs on a 100-participant plan with a $50,000 average account balance range from 0.36% to 1.71%.
To put that in perspective, according to the Department of Labor, an employee with a 401(k) balance of $25,000 whose account makes a 7% return annually minus 0.5% in fees will see his balance hit about $227,000 by the time he retires 35 years later -- even if he makes no further contributions. Increase the fees to 1.5%, and that same employee's balance will drop to roughly $163,000 at retirement, a 28% reduction.
If you work for a small employer, you're likely paying more for your 401(k) than you would be if you were working for a large employer. That's because small employers don't get the economies of scale that large employers get, says Ed Ferrigno, vice president of Washington Affairs for the Plan Sponsor Council of America.
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His organization says many large companies charge participants as little as 20 basis points -- about 0.20% -- while the small company average charge is 1.09%.
Ferrigno says young companies that recently started 401(k) plans and have lots of newly hired employees just opening their accounts will incur the most costs -- and they'll almost certainly be divvied up among participants.
Before you go marching into the boss' office to complain, remember he has his money tied up in this plan as well. It has long been the rule that the amount high earners in the firm get to invest is linked to the amount lower earners kick in. So Mr. Big Bucks has lots of motivation to see lower-paid employees saving in the 401(k) plan.
Until now, understanding the costs of a 401(k) hasn't been easy -- even for employers. So if the costs for the plan you're participating in are particularly high, there is every reason to believe your boss is just as unhappy as you are.
Get ready for Lots of Info
The package of information you will receive quarterly likely will be about 20 pages thick and divided into two sections.
The nuts and bolts of plan information:
- A current list of the plan's investment options, and an explanation of any fees and administrative expenses, including those for legal services, accounting and record keeping.
- An explanation of any fees and expenses that may be deducted from a participant's account, including fees for plan loans and fees for processing qualified domestic relations orders, which involve a state court-ordered release of funds to a former spouse.
- Historical performance with one-, five- and 10-year returns for any investment that doesn't offer a fixed rate of return.
- Benchmarking information that compares the returns on these investments with the returns of the appropriate broad-based market index.
- Total annual operating expenses expressed as both a percentage of assets and as a dollar amount for each $1,000 invested. If there are other shareholder fees, they must be revealed here as well. You are likely to be directed to a website for further information and tools that will allow you to more easily compare information about the investments you hold.
The cost for providing all of this data to you online and on paper, an option the Department of Labor mandates, is about $4. And your employer is allowed to subtract it from your 401(k) quarterly, Ferrigno says. Lucky you.
What You Should Ask
When you get one of these reports -- by midsummer or fall -- you can expect to have your basic questions answered, says Connie Certusi, general manager of Sage's Small Business Accounting Solutions business unit.
If you read the report and you still don't have these important answers, you have every right to question the boss or the human resources department.
- What are the total all-in fees and expenses applicable to my company's 401(k) plan?
- What are we getting for the costs we are paying?
- How much is this plan likely to cost me if I were to work at this company until I retire?
This new law will encourage employers to look hard at the costs they are paying for 401(k) plans and motivate plan providers to offer options that cost less. Large providers of 401(k) plans, including Fidelity Investments and Vanguard, are already offering employers new, very low-cost 401(k) options that are almost certainly good for investors.
But Ferrigno warns employees against focusing solely on fees. Some excellently managed investment options aren't cheap, he says, but they may be providing you great results. So don't buy or dump anything before studying up. "You don't want to just chase fees," he says.
Ferrigno also advises against putting too much of your money in what is almost always the cheapest option -- company stock -- because having too much company stock in your 401(k) could be costly if the company has financial problems.