Published December 15, 2011
Transparency will be coming to your 401(k) plan next year in the form of new quarterly reports that clearly disclose the fees you pay on investments. Now, the question is: What will you be able to do with the new-found information?
The new reports will turn up no later than the second quarter, and you'll see information about fees being charged to your plan - and the actual dollar amounts charged against your own account and mutual fund choices.
The fee disclosure is mandated under new U.S. Department of Labor rules, and the numbers should be a real eye-opener. Fees vary widely among retirement plans - anywhere from well below one percentage point to a whopping 5%. Yet 71% of retirement savers don't think they pay any investment fees at all, according to a recent AARP survey.
"I think the public will be shocked when they see the dollar amounts they are paying," says David Loeper, author of "Stop the Retirement Rip-off: How to Avoid Hidden Fees and Keep More of Your Money." "If I have $100,000 in my plan and I'm being charged two or three percentage points, it's going to dawn on me that I'm paying $2,500 a year in fees that I didn't know about."
The disclosures pose some key questions for retirement savers. How should you interpret the new fee information? And, if the fees in your plan are too high, what can you do about it?
Nothing affects long-term retirement portfolio success more than fees. A 2010 Morningstar study found that fees trump performance as a predictor of success, with low-cost funds turning in much better returns than high cost funds across every asset class from 2005 through March 2010. The lowest-cost domestic equity funds returned an annualized 3.35% over that period, compared with 2.02% for the most expensive group.
"The only things you can control are your risk exposure and expenses," Loeper says. "So, control what you can control."
And, while large companies often have the most efficient plans, "there are plans with $100 million in assets paying less as percentage in fees than billion dollar plans," notes Dan Weeks, founder and chief operating officer of Brightscope, which rates 401(k) plans. Brightscope is working on updates to its website that will help investors interpret the 401(k) fees and benchmark them against the plans of similarly-sized companies and industry peers.
What can you do if the numbers suggest you're in an inefficient 401(k) plan? Start with an apples-to-apples comparison of your mutual fund options with funds you could buy on your own elsewhere. The challenge here is to get an apples-to-apples comparison, since many workplace plans offer high-cost actively-managed funds that may be difficult to compare with outside alternatives.
But if your plan offers a passive index fund - as it should - the comparison is easy. "If your workplace plan has an S&P index fund that is charging 75 basis points, you should understand that you can get the exact same thing elsewhere for seven basis points," Loeper says. "Then it's just a simple question: Why isn't my plan using a less expensive index fund? We're not talking about the difference between a Chevy and a Lexus. We're talking about paying a Lexus fee for a Chevy."
If your retirement plan isn't competitive, consider taking the following three steps:
- Inquire, don't complain.
"Go talk with your plan administrator, and ask some questions," Loeper says. "You can say, 'Hey, we got these statements showing the costs on our investments, it looks like we don't have any index funds. I'm doing some retirement planning, and I'd like to use some lower-cost alternatives. Would be possible for us to add one?"'
Don't be the only voice raising questions. "In these economic times, you don't want to sound like complainer to your boss," Loeper says. "So, step 2 is how to rally your troops. Everyone will have received these statements - have a group lunch, or bring it up at happy hour - 'Hey, have you noticed how much we're paying for these funds?"'
- Look for an open window.
Many workplace plans permit you to set up a "brokerage window" that allows you to buy and trade whatever stocks, mutual funds or ETF offered by your plan's vendor. The privilege typically comes with an annual fee around $150, but that price could be more than offset by shedding high cost funds in your plan. Many in the industry frown on brokerage windows out of concern that they'll be used for risky investing, and many plans restrict the trading of individual stocks.