Study Finds 401(k) Fees Strain Middle Class, Policy Analysts Say Individuals Need to Act

Fees associated with Section 401(k) accounts are often obscure and too high, causing individuals to lose thousands in savings and delay retirement to offset the expense, according to a new report from the Center for American Progress.

Better fee disclosures that are concise, accessible and relevant will aid American families in making better de- cisions on retirement, the report said.

‘‘The reality is, the corrosive effect of high fees in many of these retirement accounts forces many Ameri- cans to work years longer than necessary or than planned,’’ the group said in the report, ‘‘Fixing the Drain on Retirement Savings,’’ released April 11.

But tax policy advisers said the report’s conclusions, while accurate, aren’t enough to solve the issue nor are anything relative to more pressing issues that threaten retirement security.

‘‘I don’t think it’s new,’’ said Jagadeesh Gokhale, se- nior fellow at Cato Institute. ‘‘It’s a regurgitation of facts. It’s something that would have been more impor- tant a decade ago.’’

In the report, the educational institute said seemingly low fee numbers aren’t explanatory enough on face value for plan participants. More must be done to make disclosures easier to read and lower the high fees, the report said.

‘‘All retirement funds should have a clear, under- standable label that provides consumers with relevant, concise, and accessible information about fees,’’ said the report.

Fee Disclosure. There are many problems beyond fees that jeopardize retirement security, but the disclosure of fees is critically important, the report said, as more Americans rely on defined contribution plans, including 401(k) accounts, as their primary source of retirement savings. The high fees charged to retirement plans are straining the middle class, the report said.

The stance is a bit vague, said Catherine Theroux, public relations director at LIMRA, a research company with data cited in the report.

‘‘My concern is high fees as compared to what’’ she said. ‘‘Yes, there are variances in services and consum- ers should be aware, but it is a consumer responsibility to know what they are paying.’’

A 2013 study by LIMRA showed that 38 percent of 401(k) participants thought they paid no fees in 2012, a number that dropped to 22 percent in 2013. However, 

even after the new disclosures began, half of partici- pants still said they don’t know how much they are pay- ing in fees, according to the report.

The change, the study said, could be attributed to the Department of Labor’s final rule released in February 2012 under Section 408(b)(2) of the Employee Retirement Income Security Act that establishes specific dis- closure obligations for plan service providers (22 PBD, 2/3/12; 39 BPR 217, 2/7/12), as well as the related rules under ERISA Section 404 requiring plan sponsors to make disclosures to plan participants that went into ef- fect later that year.

Impact of Disclosures. While the fee disclosures are an important step forward, better disclosure is needed, the report said. Some disclosures, for example, are more than 30 pages long and overwhelm plan participants with information that is difficult to navigate, the report said.

With improved disclosures, the report said, plan participants could be equipped with the information necessary to make better financial decisions.

‘‘The easier they are to understand, the better,’’ said David John, senior strategic policy advisor at AARP’s Public Policy Institute. ‘‘It’s a classic tale we see not just in 401(k) accounts, but in all disclosure statements ranging from websites to bank accounts.’’

There is firm data from numerous sources in addition to the report that shows the negative effect high fees have on savings and accumulations, said John, who is also the deputy director of the Brookings Institution Retirement Security Project.

‘‘It essentially seeps away a substantial amount,’’ he said.

But as evident in multiple consumer markets, including the tobacco industry, strong disclosures aren’t enough to inform plan participants, John said.

‘‘It’s easy to blunt a disclosure by drowning it in verbiage,’’ John said, ‘‘but they are there, you need to read them and you need to act on them.’’

John said possible solutions exist with automatic enrollment features and a qualified default investment alternative where portfolio risks change with age.

Gokhale agreed and said a modicum of education for plan participants interested in learning about their retirement options will be enough to help individuals make correct decisions.

Gokhale also said the report missed an opportunity to focus on more pertinent issues for retirement accounts, including initiatives to help people understand how to spend their savings once they retire and information on better investment techniques for individuals. 

Large-Employer Perspective. This isn’t a concern within the large-employer community, where plan sponsors have more leverage to negotiate tailored plans, said Kathryn L. Ricard, senior vice president for retirement policy at the ERISA Industry Committee in Washington.

The DOL’s rule for fee transparency also helped ad- dress the disclosure concern, Ricard said.

‘‘Its kind of hard to argue there is a mystery of fees behind being charged,’’ she said.

John agreed and said while the issue of retirement account fees are critical for both large and small employers, smaller employers face higher costs and are more likely to not offer plans because of the expense.

More plan sponsors are changing investment options than before in response to the disclosures, Theroux said. It is a sign that employers are working to be good stewards of plans, she said.

The Center for American Progress didn’t respond to several requests by e-mail and telephone for comment. 

This article was originally published by the Bloomberg Bureau of National Affairs, which maintains all stories behind a paywall.