Many 401(k) Participants in the Dark on Fees

Many workers do not understand the expenses they incur when participating in a workplace retirement plan.

A Government Accountability Office (GAO) analysis found that nearly half (45%) of workers were unable to discern the investment fee on their 401(k) from the information provided in disclosures. Furthermore, 41% of participants falsely believed that they did not pay any fees on their 401(k). These statistics highlight an overarching trend: Many people who contribute to a 401(k) plan are simply unaware of the costs they incur.

These misunderstandings exist a decade after regulations were put in place to provide more clarity. In 2012, the Department of Labor instituted rules requiring more comprehensive disclosure fees. To determine whether the enhanced disclosure was effective, the GAO surveyed 1,004 participants in the 10 largest 401(k) plans.

When survey participants were asked to find the expense ratio based on the information provided in a plan’s annual disclosure information, 57% were unable to identify it “for the one investment fund listed.” In a similar vein, participants struggled when trying to understand the impact of asset-based investment fees on their returns. Almost two-thirds (63%) did not know that those fees will reduce the returns they realize.

Various factors may contribute to a person’s understanding of 401(k) fees. According to the GAO, “participants with a high school education or less understand fee information less well than participants with a master’s/professional degree or higher.” The amount saved was also linked, as “participants with less than $100,000 in savings and investments understand fee information less well than those with savings of $100,000 or more.”

In order to educate more 401(k) participants, the GAO believes fee information must be made more widely available and accessible. One suggestion is a fund comparison tool with a breakdown of fees and costs. This has already been used in Australia, the European Union and New Zealand to ensure retirement plan participants understand fee disclosures. Another solution would be to simplify the language used in the disclosures and provide “everyday examples to help individuals relate to the information.”

Source: “401(k) Retirement Plans: Many Participants Do Not Understand Fee Information, but DOL Could Take Additional Steps to Help Them,” GAO Report to Congressional Requester, July 2021.