Survey: 401(k) participants unaware of associated fees

The survey, titled 401(k) Participants’ Awareness and Understanding of Fees, also found that 50 percent of plan participants don’t feel knowledgeable about the impact that fees can have on their retirement savings.

“With Americans more responsible than ever for making better choices to secure their financial futures, financial literacy and an understanding about those decisions is increasingly important,” said David Certner, legislative counsel and policy director for AARP, in a news release. “Consumers need to get more informed and ask questions. In return, plan administrators are going to have to be more transparent and make the necessary information about 401(k)s readily available to plan participants.”

Understanding the fees

401(k) plans typically include three types of fees: investment fees, administrative fees and individual fees. These fees can cover the management of investments to operational expenses to optional individual services and can significantly reduce retirement savings, perhaps by as much as 0.75 percent a year, according to a recent Deloitte study, resulting in losses of about 15 percent after 20 years.

Helpful hints

When considering any 401(k) plan, AARP offers the following tips:

• Do your homework. Ask the administrator of your plan about any fees associated with specific choices. Compare the fees of various funds in a class and look for those with lower expense ratios.

• Talk to human resources representatives. If you find that your plan contains high-cost funds, ask HR to review the fund offerings and consider switching to those with lower costs.

• Make saving a priority. Focus on saving – not spending – your retirement funds. Individual fees from loans, wire transfers and hardship withdrawals can significantly deplete retirement savings.

• Consider no-load mutual funds. Most plans offer several mutual funds to choose from. Select no-load funds since they don’t charge a sales commission.

• Consider index funds. Index funds are comprised of stocks that mirror a particular stock index, such as the S&P 500. These funds tend to outperform the average fund, and generally have lower fees due to less trading and need for portfolio management.

A need for change?

AARP is advocating for legislative and regulatory changes to lower 401(k) fees and promote transparency so that consumers can make more informed financial decisions.

In comments submitted to Employee Benefits Security Administration in July, AARP representatives urged the organization to draft regulations requiring plan administrators to provide comprehensive, readable disclosures on plan investments, fees and expenses to all 401(k) participants when they enroll in the plan and periodically thereafter.

Congressman George Miller, D-Calif., recently introduced the 401(k) Fair Disclosure for Retirement Security Act of 2007, which would require transparency and disclosure of fees, but also promote investment education.

AARP is a nonprofit, nonpartisan membership organization that advocates for the concerns of people 50 and older.