A recent survey suggests that three-quarters of Americans are in the dark when it comes to 401(k) fees. Is that the case with the plans – and plan sponsors – NAPA Net readers work with?
The TD Ameritrade survey of more than 1,000 investors found that the vast majority of people either erroneously believe they do not pay any 401(k) fees (37%), are unaware whether their plan has fees (22%), or do not know how to determine the fees (14%). And while about a quarter (27%) said they know how much they are paying in fees – well, you can’t help but wonder if they really do.
Acknowledging that it’s hard to generalize (accurately), in this week’s NAPA Net reader poll, we asked how many of the participants readers worked with knew that there were fees associated with their 401(k). A strong plurality (42.5%) said that “most of them” did, and another 7.5% were willing to state that “all of them” were in that camp. On the other hand, about a third (32.5%) only went with “some of them,” and 12.5% just held out that “a few of them” did.
“Before we take over the plan generally many participants are not educated that they all pay for the plan,” one reader noted. “Part of our participant education is to talk about fees and educate them on how much their plan actually costs. We do this for fee transparency especially since we generally adopt a zero revenue model that highlights costs.”
Another reader explained that, “I honestly have no idea, but they all have the opportunity to know if they paid attention to the communication they receive.”
Confusion or Delusion?
Noting that there were lots of reasons why participants might be ignorant/confused about 401(k) fees, we then asked readers which one reason accounted for the majority of the confusion. Topping the diversified list was 28% who said it was “because they can’t “see” the fees (even though they are disclosed). Other responses included:
- because they didn’t take the time to figure it out (20%)
- because they are too complicated for ‘regular” participants to figure out (15%)
- because they don’t write a separate check for them (16%)
- because they don’t read the disclosures provided (10%)
- because they don’t want to know (5%)
One reader noted, “Because no one has ever properly educated them on the actual costs of investing money in a 401(k). It is amazing that we have commercials that talk about retail assets and fees, i.e., Schwab fee commercials. But no one ever mentions 401(k) fees. I think the nature of 401(k)s having a lot of dabblers is the reason for this.”
The rest opted for “all of the above” (even though it wasn’t a choice), and they think the company is taking care of it.
Speaking of notices, we asked readers what they thought participants were doing with those fee notices. A strong plurality (45%) said they throw them out without knowing what they are, while another 28% went with throwing them out. Fifteen percent said they file them (never to be seen again), while just 12% said they tried to read them, but were unable to make heads or tails of them.
Once again, “all of the above” was a choice for some (even though it wasn’t a choice). “Truly depends on how engaged they are,” said one reader. “I would say most will probably toss or file away.”
“I think the notices are ineffective,” explained another. “Recordkeepers have done a good job of failing to provide actual real world information. Additional paperwork that talks about fees is pointless. If, however, the fees were highlighted on a participant’s statement you can bet that would have more traction.”
“Glance over, but decide not to go through the hassle of understanding them,” explained another reader. “They are already hard enough to understand from an advisor view. Also, the participant fee disclosure doesn't really lay it all out like the 408(b)(2). Sometimes there are also tiers on the disclosures, how are participants supposed to know how much is in the 401(k) on a plan level?”
“I think it's kinda like the movie Airplane,” said another: "‘Johnny, whataya make of this?’ ‘Well, I can make a hat or a broach... or a pretty pterodactyl...’ They don’t know, don’t care to know or don’t want to know because they are not concerned with it.”
Words from Our Sponsors
If participants are clueless – well, then plan sponsors/fiduciaries should be in better shape, right? It was encouraging to see that the vast majority (78%) of respondents said that all of the plan sponsors they work with knew there were fees with the 401(k), though 13% only went with “most of them,” and 5% only “a few of them.” Half that many said “some of them.” One reader noted, “We educate them but I still believe many do not truly understand it.”
Asked if those plan sponsors knew how much their plan pays in fees, the majority slipped some, but remained a majority. Of the respondents, 58% said that all of their plan sponsor clients knew, and about a third (35%) said that most of them knew. The rest were split between some, a few, and “I have no idea.”
Not that the subject isn’t coming up. Just over half (55%) say they are talking about fees more with plan sponsors these days, with 40% saying they weren’t talking more – mostly because it had always been an important part of their discussions. “I have been talking about fees long before it was in vogue,” explained one reader.
There were a number of interesting reader comments (as there always are). Here’s a sampling:
“I would say most participants intuitively know that there is a cost to their plan. However, for most participants, it is challenging enough to understand the basics of their plan, understand how mutual funds work, find the money to save, etc. – basic life needs overshadow full knowledge. Those that are interested in knowing their costs are the same ones that are typically engaged with their plan and overall savings.”
“The conversion is evolving from specifically what the fees are and how they are paid, to types of fee structures that exist on their recordkeeper’s platform.”
“Fee equalization remains a challenging concept for sponsors to grasp,”
“Price is only an issue in the absence of value.”
“With every client (many years ago) and every new client we get, we talk about fees right up front. Once you explain how it all works, we have never had a client disagree that levelizing fees – so all employees pay the same amount regardless of what fund an employee should choose – and making them fully transparent – so all employees can see and be aware of what the plan fees are – is not the way to go. 100% of our clients moved to levelized fees many years ago. Every new client moves to level fees as soon as we can get it communicated and administered. PS: If a fund continues to include revenue, it gets credited back to the employee.”
“It is still frustrating that recordkeepers do not disclose their fees in the same way. The fee disclosures should be standard among all providers.”
“If you were TRANSPARENT with fees previously then there is no discussion – but the fee disclosures can cause confusion and clients who even know their fees are confused by the lengthy ridiculous disclosures.”
“Plan sponsors biggest hesitation in moving away from imbedded compensation to transparent fee for service, and zero rev funds, has been the perceived backlash they get from employees once they actually can see a fee line item on their statements. This creates an unnecessary barrier to entry and we've had to get really good at explaining this ‘new’ fee to plan participants.”
“We are more concerned about vendors adding project fees or fund change fees for global fund actions and how to report these to the committees and understand the impact to participant balances when making investment decisions. Due to fee compression over the past several years, vendors are looking elsewhere to make up the difference.”
“We make sure to provide a prudent process to review and discuss the fees throughout the course of a plan year and to document the process.”
“Plan sponsors are more aware of their fees. We have disclosed our fees, record keeping and investment fees from the beginning. Initially, it was a complicated subject as there was the ‘it’s free’ mentality. It has taken years, but our plan sponsors are more knowledgeable and understanding of fees.”
“I love going after BOR plans that appear to not have been serviced so I can educate plan sponsors, which creates an opportunity for me.”
“I think the industry needs to provide plan sponsors with more education on fees and fiduciary liability. Dealing with plans under $10 million, most of our takeover business is moving plans away from advisors who know nothing about the 401(k) industry and only won the business originally due to a relationship. I would say about 99% of the companies we take over are unaware of their responsibility as a fiduciary and have little to no concern over fees initially. The main reason is since they are not writing a check they have very little concern and are not aware of the personal liability of being a fiduciary.”
“We share it in every single Retirement Plan Committee meeting. So I would say all of my Committee members are keenly aware of the fees we are paid, the RK, the TPA, expense ratio too.”
“Our firm has spent the past 24 months transitioning all of our clients away from revenue sharing and implementing an explicit flat dollar or asset based fee. We believe this will result in a better understanding of fees for both plan sponsors and participants.”
“Most of our clients are moving to zero revenue fund options with greater fee transparency.”
“I have no problem helping educate plan sponsors on who is getting paid to help run the plan and what they are getting paid for.”
“I would say most participants are generally aware that there are plan fees. The problem is most participants do not take the time to try and understand their fees or take the time to figure them out. Plus fee disclosures are confusing to participants. Also, today many participants are in one life cycle or target date fund, which they view as set it and forget it.”
My favorite, however, was from the reader who responded: “Participant disclosures are a joke, no one is reading 5-17 pages of blah, blah, blah.”
Thanks to everyone who participated in this week’s NAPA Net reader poll!