As 401(k) plan participants become responsible for more of their plan costs, their fee accountability is taking a “substantial” toll on retirement savings, according to new findings from the Center for Retirement Research at Boston College.
According to the Center’s new research paper, “The Structure of 401(k) fees,” over a 30-year career, for example, paying an annual fee of 50 basis points can reduce the purchasing power of savings at the time of retirement by one-eighth. Economic crisis aside, the Center’s research concludes employers who sponsor 401(k) plans still have a fiduciary responsibility to ensure their plans’ fees are reasonable and communicated to participants, and that government officials have justifiably pushed for information to be better disclosed to participating employees.
Clearer, concise and convenient disclosures of 401(k) fees, according to the Center, would help sponsors and participants make better, more economical choices: “401(k) fees are so complex, confusing, or obscure that many sponsors and participants report that they do not understand either their magnitude or their consequences. The structure of fees does not correspond closely to that of costs. Fees for some services often are set high enough to subsidize the provision of other services within the plan. In some circumstances, when the funds of a 401(k) plan are pooled with the funds of other investors, the plan’s participants might be paying a share of the trading costs incurred by investors who do not belong to the plan.”
Expenses of 401(k) plans are rooted in three categories: marketing, administration and asset management costs.
But better disclosure by itself is not enough, according to the Center’s brief: “Employers would benefit from more guidance, in law and regulation, in satisfying their fiduciary responsibilities for selecting both service providers and investments as well as making sure their plans’ fees are reasonable given the quality of their services… [This guidance could] encourage plans to provide investments that do not expose participants to excessive trading costs and to the risk of subsidizing other investors who do not belong to the plans. These investments can include separate accounts, exchange-traded funds, trusts, collective investment funds, and mutual funds that restrict transactions.”
For further information, view the entire report here.