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Workers are getting their first chance to see how big a bite management fees are taking out of their total retirement savings.
Investment firms that manage retirement accounts for companies across the nation were required by July 1 to send disclosures to companies spelling out in plain English how much workers are paying for management services. The requirement is part of new disclosure rules set in place by the U.S. Department of Labor.
“There will be more and more pressure brought upon high-fee 401(k) providers,” said Craig Larsen, president of AHC Advisors in St. Charles, Ill. “They will need to justify their fees as being reasonable.”
The next deadline, Aug. 30, is for employers to provide individual workers with detailed information about how much their 401(k) accounts are being charged in fees.
Now that 401(k) plans have replaced pension plans as the primary vehicle for workers’ retirement, the Department of Labor instituted the fee disclosure requirement for the sake of transparency for the roughly 72 million workers who participate in the plans.
From now on, the fees will be printed in bold black and white on the front page of account statements. The idea behind the rule changes is that having clear information on the cost can help workers and employers do a better job of comparing the fees charged by plan providers based on the services they provide.
Many workers have been contributing to company 401(k) plans under the false assumption that the management services were free.
According to a recent report compiled by Ann Schleck & Co. based in Woodbury, Minn., management fees for a company with $5 million in 401(k) assets can range from a low of $6,250 a year to a high of about $35,000 a year. The report does not indicate by name which investment firms charge the highest or lowest management fees.
“There’s likely to be a large turnover in the [financial services] industry,” said Art Hazen, director of retirement plans at BPU Investment Management, Downtown. “The fee range [among plan providers] is very broad.”
The total cost of the management fee charged to a company is spread among the individual employees. Fees and expenses are among the main factors that affect investment returns.
Larsen, who is also treasurer of the Financial Planning Association of Illinois, created a 401(k) fee calculator – www.401kfee.com – that shows employers and employees how much fees can cost them in real dollars over the course of their working years.
For instance, his calculator shows that someone who is 40 years old with a $40,000 401(k) balance who contributes $10,000 a year to the plan will pay $236,862 in fees by the time he is 65 years old for a plan that charges 3 percent in fees versus 1 percent in fees.
Assuming an 8 percent return, the worker would have saved $849,587 paying 1 percent fees compared to $612,725 paying 3 percent. To compensate for the 3 percent fees, the worker would need to contribute $14,962 a year to the plan rather than $10,000.
“The fee disclosure will show the difference in cost as a percentage,” Larsen said. “The [401(k) fee] calculator will show the difference in dollars. If you show them the difference in dollars, they can start to understand why controlling fees is important.”
One of the fiduciary responsibilities that company plan sponsors have is to make sure the fees they pay to plan providers are fair and reasonable. Employees enrolled in 401k plans have sued their companies for unreasonably high fees.
Sandra Pappa of Buck Consultants, an employee benefits consulting firm in Pittsburgh, said when companies use plan assets to pay management expenses, they must demonstrate that the fees are necessary for the operation of the plan and will benefit the plan participants and beneficiaries.
“This is another step in ensuring that the plans that are being provided are fairly priced and regularly monitored,” Pappa said. “It’s important these plans are monitored and reviewed to make sure the fees are fair and the investments are sound.”