The Department of Labor (DOL) has written a comprehensive set of regulations to help defined contribution plan participants understand plan fees. Why?
Consider these statistics from a 2011 AARP survey:
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- 71% of plan participants said they pay no fees for plan administration;
- 62% said they have no idea how fees might impact their savings; yet
- 81% said fees charged are important to making decisions about their plan investments.
It’s clear from the survey that plan participants have significant interest but little knowledge or understanding of plan fees. The DOL regulations attempt to address this problem.
How do fees impact a 401(k) account balance?
Here's an example from the DOL: You are a plan participant with 35 years until retirement and a current 401(k) account balance of $25,000. If investment returns in your account average 7%, and fees and expenses reduce your returns by ½%, your account balance will grow to $227,000 by retirement. However, if fees and expenses average 1½%, your account balance will grow to only $163,000. The 1% difference in fees and expenses would reduce your account balance at retirement by 28%.
That’s a lot to lose.
As a fiduciary, a plan sponsor has a legal responsibility to consider the fees and expenses paid by a plan. A plan participant has a responsibility to understand their retirement plan and how contributions are used. Awareness of fees and expenses could be the difference in having a secure retirement… or not.
The rules for fee disclosure are due to become effective April 1st. If you’re a plan sponsor and don’t know about, or haven’t done anything to prepare for, these regulations, now is the time to act.
As fiduciaries, plan sponsors are required follow the DOL rules. But following the rules may not be enough for plan sponsors. Disclosure is not the same as communication… one is the dissemination of information, the other is the understanding and use of information.
Since it’s clear participants don’t know about the fees they pay, telling them they are losing 1% or more in investment return won’t make things easy for plan sponsors as participants may be angry.
The best advice: be clear and direct about plan fees. Use plain language. It can promote trust and encourage employees to use their 401(k) plan more wisely.
BLR has created a compliance report that provides you with explanations, checklists, samples, charts, fact sheets and the actual DOL regulation from Federal Register. It will guide you through the maze of establishing the framework for disclosure and help you develop the communications for compliance. Learn more about our 2012 New 401(k) Fee Disclosure Compliance Focus.