Almost 40% of 401(k) plan participants do not fully understand and have difficulty using the fee information that the Department of Labor (DOL) requires plans to provide to participants in fee disclosures, according to a newly released analysis by the Government Accountability Office (GAO).
The analysis found that 45% of participants are not able to use the information given in disclosures to determine the cost of their investment fee—and 41% don’t even know they pay fees in their 401k plans.
These concerning findings led GAO to come up with a list of five recommendations (listed below) for ways the DOL can help participants better understand fees.
The DOL requires 401k plans to provide the nearly 85 million plan participants with a comprehensive disclosure of the fees they pay. Back in May, Chairman Bobby Scott (D-VA), House Education and Labor Committee, and Chair Patty Murray (D-WA), Senate Health, Education, Labor, and Pensions (HELP) Committee requested that GAO examine how well participants can understand and use the fee disclosures.
“The GAO’s findings are a wakeup call for the Department of Labor and for consumers who have 401k plans,” Scott said in an Aug. 26 statement. “This report is clear evidence that the Department of Labor should require plan providers to make fee disclosures easier to understand and ensure that participants are fully informed about how these fees impact their savings. Americans are already struggling to stretch their paychecks and save for retirement. Making fee disclosures more accessible is a common sense change that will help more people retire with dignity.”
The report’s findings build on previous GAO reporting that has shown even seemingly small fees can significantly reduce participants’ retirement savings over time.
“People making decisions that will affect their financial security for years to come need to have clear, complete, information. This report is a clear warning this simply isn’t happening with respect to fees for 401k plans, which millions of people are relying on for their financial futures,” Murray said. “I look forward to working with my colleagues and the Biden Administration to improve transparency, increase retirement security, and help people across the county make the best financial decisions for their families.”
The GAO’s recommendations for how DOL—or more specifically the Employee Benefits Security Administration—can help 401k plan participants better understand and use fee information by adding information to disclosure requirements include:
- Require consistent terms and measure for investment fees in fee disclosures
- Require participants individualized quarterly statements to show the actual cost of the investment fees
- Provide educational information about the cumulative effect of fees
- Require disclosures to include fee benchmarks which would help participants better gauge if their investment costs are competitive
- Require disclosures to include investment options’ ticker information, which would help participants more easily research and compare their investments.
The recommendations occasionally borrow from disclosure “best practices” used by selected countries researched by the GAO to help retirement plan participants.
For example, stakeholders in those locations said layering data, a technique where information is presented hierarchically, can help participants understand disclosures by providing them key plan information first.
Stakeholders also said other tools can help participants understand fee information. In Italy, the government provides a supplemental online tool so participants can compare and calculate fees across plans and investment options. This tool also includes a fee benchmark—which is generally an average fee among comparable funds—that helps participants judge the value of an individual investment option.
GAO also reviewed disclosures from 10 large U.S. plans, as well as relevant federal laws and regulations, and interviewed stakeholders in the U.S. to further identify any additional steps DOL could take to advance participant understanding and use of fee information.
SEE ALSO:
- Baby Boomers Beware: The Next 401k Scandal is Here
- Investors Still Fail at Fee Comprehension and Understanding
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.