Too Many 401(k) and IRA Investors Know Too Little About Their Fees

Investors fee knowledgeBy Glenn Ruffenach

Question: How much time do you spend with the retirement-plan disclosures you receive from your 401(k) or individual retirement account?

Answer: Probably little more than the time you've just spent reading these two sentences.

A new study from Limra, a Windsor, Conn., research and consulting firm, found that two-thirds of Americans with defined-contribution plans or IRAs spend less than five minutes scrutinizing each disclosure statement. About 20% say they rarely -- or never -- read the documents.

The research is tied to new rules from the Department of Labor, which require providers of 401(k)s and related savings plans to disclose additional information about fees, expenses and associated data in quarterly and annual statements. The goal: to help workers cut the cost of maintaining their accounts and building a nest egg.

The Limra study is an effort to gauge employees' understanding of the new rules - and it highlights not only how little time most workers spend with their retirement-plan documents but also how little they know about their plans' fees. Excessive fees, of course, can make a big difference in the eventual size of a nest egg. The Department of Labor offers the example of two 30-year-olds, each with $25,000 in a retirement account. The first account has an expense rate of 0.5%, the second has a rate of 1.5%. After 35 years, with identical investment returns of 7% (and no additional contributions), the first account would grow to $227,000 -- but the second would total just $163,000.

Among the key findings:
  • Half of participants in defined-contribution plans said they have no idea how much they pay in annual fees and expenses.
  • Almost four in 10 surveyed workers (38%) believe they don't pay any fees or expenses.
  • Only about one in eight (12%) participants in defined-contribution plans could offer an estimate of what their fees might be. The most common estimate: 1% of the account balance. (Limra cites a 2011 Deloitte/ICI study, which found that the "median defined-contribution-plan participant is in a plan with an all-in fee of 0.78% of assets, based on plans included in that study.")

Will retirement-plan participants make use of the new disclosures? Reaction might well be "muted" at first, Limra states. That's because surveyed workers indicated they aren't really sure what to do with the information when they get it.

When asked how they might react if they learn that the fees in their retirement plan are higher than average, 31% said they didn't know; 24% said they would move current assets into funds with lower fees; 21% said they would with speak with their employer about trying to reduce fees; and 16% said they would do nothing.

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bill griffis

what repubs want fo us to do set 401ks up for t retirement so there friends can make more money off them with set seting up if the market crash u lose. they still get there money..

September 11 2012 at 9:09 PM Report abuse +3 rate up rate down Reply

I could not figure out why the company's 401k wasn't paying any dividends year after year. When I retired I looked into it. The managing company basically took all the dividends for fees. I rolled it over to a Vanguard IRA and low and behold, 1.5 dividends magically appeared. Too little to worry about? NOT 1.2% compounded over 10 years is 21.89% extra. If you are still working, complain. If you are retired call Vanguard or another low fee fund group.

September 11 2012 at 5:41 PM Report abuse rate up rate down Reply

I know about those fees and there is absolutely nothing we can do about it except turn it into a Self-directed IRA without employer matching. I would like the ability to manage my own money but the rules of IRS does not allow me to do so just like Social Security. Thank god the fee are still reasonable today but I am not too sure if that will be the case in the future. Indeed there should be reforms taking place on this issue but neither political party are willing to take up these issues for the public that will have profound impacts for the quality of retirement for millions of American.

September 11 2012 at 5:07 PM Report abuse rate up rate down Reply