Determining Whether 401(k) Plan Fees are Reasonable: Are Disclosure Requirements Adequate?
By: Sandy Mackenzie, AARP Public Policy Institute | Source: AARP Public Policy Institute | September 15, 2008
Working Americans and their families are becoming more and more dependent on 401(k) plans for a financially secure retirement. The fees that these plans charge their participants have a big impact on the size of the retirement nest egg that participants will ultimately accumulate. Excessive fees can eat into account balances and cause the income that the plans can sustain in retirement to be substantially lower than it should be.
The fees of 401(k) plans can be complex, and the information on them that participants receive tends to be fragmentary and hard to understand. The unsatisfactory state of fee disclosure reflects the failure of the current regulatory framework to require plan sponsors to provide comprehensive information on fees and to require the plans’ service providers to disclose needed information to sponsors. Under the circumstances, it is not surprising that most plan participants lack even a basic understanding of the fees they pay.
The Department of Labor is changing its regulations to require fuller disclosure of fees, and there are several pieces of legislation before the 110th Congress that have a similar aim. In general, these bills require than plan participants be furnished with comprehensive but not overly detailed information on the fees they pay. An enhanced reporting framework would entail some upfront expense for plan sponsors and service providers but should not entail significant costs once in place. Fuller disclosure of 401(k) plan fees will not guarantee that all plan participants are informed, but it is undoubtedly a necessary condition for that to occur. With better information on fees, participants should be able to make a more informed choice among plans, increase the size of their retirement nest egg, and enhance their welfare. (9 pages)
