The Skeletons In The Closets Of Your 401(k)

401(k) plans have been the longstanding backbone of most retirement plans, and for good reason with their contribution matching programs, tax exempt contributions and tax free earnings during growth.  They seem like the perfect fit for most investment plans, but as most of us learn the hard way, anything that seems perfect means there is something we don’t see.

 There are always skeletons hiding in the proverbial closets of every dream scenario.  Unfortunately 401(k) plans follow that rule with a skeleton of their own that many people who contribute to the accounts aren’t aware of: Fees.  These fees come from the processing and holding of the plans at each layer of distribution such as administration, investment management, and so on.  The perks of 401(k)’s come with a price.  The tricky part of that falls in the fact that most of the 60 million or so workers with a 401(k) are completely unaware of what that price actually is.  The even trickier part… neither do the employers who provide the plans to those employees.

The extent of this was discovered in a recent report provided by the Government Accountability Office after they surveyed plan-sponsoring companies regarding their knowledge of the 401(k) plans they provide to their employees.  The results were a both surprising and a little disheartening.  The vast majority of the companies didn’t even bother to ask their providers about specific fees that were charged.   For example, a startling 82% of employers never questioned whether there would be fees to reimburse the record keepers that handled administrative tasks involved with the plan (the answer to which is most often yes).   Half of the companies weren’t aware if there were further fees charged for the management of the investment or they mistakenly assumed that they weren’t charged for them.

Even more startling is the lack of companies that took the time to understand the fees and costs disparity between providers in order to make a smart decision of which to choose.  Less than 6% of all the companies surveyed referred to an agency publication from the U.S. Department of Labor, which are designed specifically to help employers understand the fees issued by different providers.

It’s evident that most companies don’t do their homework in terms of understanding the fees surrounding their 401(k) programs, which waterfalls into the lack of knowledge on their employees’ part.  The question is: why?  The success of a company in the business world is based around determining the most profitable avenue for their needs, so why do they skimp in understanding the fees of their 401(k)’s.  Many believe the answer is simple:  Their decision doesn’t cost them, it costs their employees.  Most of the fees surrounding 401(k)’s are paid on the employee’s end.  It’s easy to whimsically toss into the cart whatever product you see first if it’s not your wallet being cracked open at the checkout. The Skeletons in the Closets of Your 401(k)

This situation is a troubling one for employees across the country and it’s a problem that has been recognized by the Federal Government.  The solution?  A requirement of transparency between plan providers, the employers, and their employees.  As of July 1st, the Department of Labor  has raised the standards required in the disclosure of fees surrounding 401(k)’s.  Detailed fee information now must be supplied by the provider to the employers, who must in turn share that information to their employees, giving the employees a chance to see and understand the skeletons that have been kept behind the closed doors of their plans.

Sounds like the perfect solution, right?  Well, as we have learned, “perfect” should raise some red flags.  The bad news is that the Department of Labor isn’t requiring the disclosure of all the fees and also doesn’t offer any sort of benchmark comparison between companies, which can still leave many workers floundering in a sea of obliviousness regarding their 401(k) investments.  But they don’t have to stay there for long, if they are willing to do the research themselves.  401(k) plan holders have access to a variety of resources online that offer free comparisons between the fees of different providers.  This knowledge, plus a discussion with other workers to compare account statements amongst each other, can help hold those companies accountable for making a decision that supports their employees.

They say ignorance is bliss, but in the case of 401(k) plans, ignorance is costly.  Employers aren’t sufficiently motivated to put in the work in understanding the fees involved, so the burden shifts to those who are paying the price.  The government is taking steps to help where they can, but for those workers blindly throwing their hard earned money into a 401(k), it’s time for them to open their eyes and see where their money is going.  They owe it to themselves and their future.