New Idea Could Save You Billions of Dollars in 401K Costs

If you count yourself among the 42 million workers who own a 401K retirement plan, you pay sizable fees on those accounts, a combined—gulp--$35 billion in fees annually, says the National Association of Retirement Plan Participants.

But a big 58% of those 42 million workers don’t even know they pay fat fees on their retirement savings accounts. Those who did know, only about one out of four, 26% could describe how those fees are calculated.

So, wouldn’t you like one, annual receipt every year from your 401K manager saying how much you paid, exactly, in clear dollar figures, in fees? Just like your get for your grocery bill, or for your mortgage or car payments?

Billions of dollars, and retirement savings, are at stake, says the non-partisan Center for American Progress (CAP) in a new report.

CAP now proposes that financial firms like Fidelity Investments or Charles Schwab be required to send you an annual receipt that breaks down how much in fees you spent for, say, account maintenance or investment-related costs. Armed with that information, you could cut your annual fee by, say, 0.75%, but that “could be worth $71,000 by the time a 25-year-old is ready to retire,” CAP says.

Considering what’s at stake—and the perilous situation Social Security is in—it might be a good idea for the federal government to take this up, either at the Consumer Financial Protection Agency or the U.S. Department of Labor.

In fact, as CAP suggests, the Dept. of Labor could even consider including the new rule in their proposed regulation on fiduciary duties, which stipulates that financial advisers must act in their clients’ best interests. Specifically, the new rule is supposed to get at hidden fees often submarined in pharmaceutical-font type disclosures, and conflicts of interest that can erode savings.

In fact, the White House estimates that conflicts of interest result in retirement investors losing a combined $17 billion per year. CAP figures its easy-to-read annual receipt could potentially save “American families an additional $17 billion per year.”

It adds that: “Until 2012, there was no requirement for 401(k) providers to tell investors how much they were paying in fees for their accounts. And unless you are a forensic accountant, you probably have not navigated the multiple pages detailing these expenses and determined how much you are really paying in 401(k) fees.”

CAP also notes that: “Fees matter. An often-cited 2009 study by Javier Gil-Bazo and Pablo Ruiz-Verdú detailed a ‘negative relation between funds’ before-fee performance and the fees they charge to investors.’ That is to say, higher fees do not necessarily translate to better performance. In fact, that is often not the case.”

If policymakers are serious about helping the American middle class, they need to give investors information that they can actually use.