Understand Your Company’s 401(k) Plan

Employees often cringe or ignore employer’s efforts to inform them of pension or retirement plan changes. It’s complicated, boring, and who has time to sort through legal jargon? But what you don’t know could be costing you in fees.

A 401(k) plan is a tax-advantaged savings plan where employees choose which assets to buy in their account, within a menu of investments offered. The law requires that employers ensure the plans are fair and open to all employees, which means added recordkeeping and administrative work. Payment for that work is either absorbed by the employer or passed onto employees.

The U.S. Department of Labor wants to stem your confusion. Due to take effect July 1, 2012, a new disclosure rule requires record keepers and broker dealers for any plan sponsor (company with a retirement plan) must spell out the fees to participants (employees). So all providers of 401(k) plans and some 403(b) plans must make the new disclosures to you, the participant. As a result, you might make different decisions.

The new disclosure requires the employer list:
  • investment-related fees (generally the most significant fee item paid)

    plan-related fees (recordkeeping and administrative expenses)
    fees and expenses (amounts actually charged to participants)

Why should you care about the fees? Over time, they add up and shrink your nest egg. Even a .5% difference impacts wealth.

For example, what if you invest $10,000 in Option 1, a fund that charges .5% a year, or Option 2, a fund that charges 1.5% a year and they both grow at 8% annually before expenses? After 10 years, Option 1 is worth about $2,100 more. After 20 years, it’s worth almost $10,000 more.

Retirement plan sponsors must provide investment information annually so you can compare fees and expenses. This means you should be able to see the rate of return on any/all of the plan’s investments for a year, as well as for 5 years and 10 years. You should also be able to see if your employer paid for the plan fees or passed them to you.

Employers can show these fees in a chart developed by the Department of Labor, which includes mutual funds, bank collective investment funds, insurance annuity products, funds of funds, and asset allocation portfolios.

According to the Investment Company Institute (ICI), participants/employees typically pay the majority of plan fees in the form of investment expense ratios. A 2008 ICI survey of 117 employers representing 130 plans revealed that the median fee for the plans was .72% of assets, or about $350/participant for accounts totaling $48,522 (the median participant’s average balance).