401k Fees and Expenses

A study conducted by the AARP said that 83% of employees do not know the fees and expenses associated with their 401k account. Additionally, over half of all employees have no idea how these fees and expenses will affect their account balance and retirement. Perhaps most alarming was that 71% of respondents did not even know they paid fees for their 401k at all!

-401 (k) Participants' Awareness and Understanding of Fees, AARP, July 2007 and February 2011

For the 401k industry at large, which is approximately $3 trillion in assets, very few plan participants know the actual fees they are paying for their 401k. This is an indication that consumers are not being vigilant with respect to the calculation of fees and expenses. Of course the industry makes it difficult for consumers to get a fair assessment of what they are charged as calculating these fees and expenses is unusually complicated and often buried in 150 page investment prospectuses. With a little knowledge of these facts , 401k account holders might be more inclined to take an active interest in how their retirement account is being affected by these 401k fees and expenses.

Furthermore, even for those individuals and employers who are aware of the fees and expenses for their 401k – comparing those fees to average 401k plan costs across the country is not a straightforward exercise. Unlike consumer behavior in a conventional marketplace whereby the consumer seeks the highest quality product at the lowest price, the 401k marketplace has made it difficult for consumers to obtain a true gauge of costs and fees in relation to competing plans. Without this transparency, rational consumer behavior can't function properly. For instance, when consumers buy milk at the grocery store they compare quality and costs from one brand to the next; without a reference point for the cost of milk, it is conceivable to think that $15 for a gallon of milk is the going rate.

This chart shows the complexity of the fees and expenses for 401k plans. Source: Deloitte, 2009

While fees are not the only consideration when making choices about 401k plans, these 401k costs can significantly impact 401k account balances over time. Very often, the fees and expenses being paid by employees and employers are not shown on 401k statements (see hidden 401k fees). Unfortunately, very few employees are aware of the exact amount of 401k fees and expenses and it is difficult to analyze the impact that these costs have on a 401k company plan or individual account.

The U.S. Government believes that there have been enough consumer complaints and lawsuits commensurate with a general level of frustration with 401k fees and expenses that are either too high or not transparent enough. For this reason the United States Department of Labor, starting in 2010, has begun to make 401k changes that will offer more fee transparency/disclosure to employers and employees who participate in 401k plans. These 401k law changes are planned to take effect mid-2012. Many professionals in the financial industry predict that 401k participants (employers and employees) will find that they are paying "unreasonable" amounts after analyzing their total 401k costs compared to average 401k costs and expenses.

These changes are anticipated to create better opportunities for consumers in choosing 401(k) plans in the financial services marketplace.