SmartMoney Blogs

A blog about living in and planning for retirement

Will Savers Yawn at 401(k) Fee Disclosures?


Participants will soon find out how much they are paying in fees for 401(k) and other defined contribution plans.

The U.S. Labor Department is expected to issue final rules, as soon as today, that require 401(k) administrators to disclose to plan sponsors details about the fees they are charging.

The new disclosures cover both the direct and the indirect compensation administrators receive–the latter of which often slides under the radar.

The deadline for the disclosures to employers is expected to be April 1, although that could be pushed back, perhaps by a few months. Sixty days after the disclosures to employers are made, the administrators will also have to provide detailed information to all employees who are eligible for the plan. That information will lay out investment management fees (and any sales charges that may apply), plus the one-year, five-year, and 10-year investment performance of a plan’s funds, versus appropriate benchmarks.

These statements will be mailed to participants annually. (They can be emailed instead at a participant’s request.)  Some participants will also receive quarterly statements–perhaps incorporated into the quarterly account statements they already receive– that disclose details about the administrative fees they pay.

Consultants to 401(k) plans say the coming fee disclosure is already spurring employers to focus on the issue– and negotiate better deals. “We have already seen a number of very large clients look at the fees they are paying, either because of lawsuits or the coming disclosures,” says Robyn Credico, defined contribution practice leader at consulting firm Towers Watson. “A number of them have been able to reduce fees either on the investment side or the administrative side. I would expect more of that to come,” she says.

No one is sure how participants will react. Ms. Credico, for one, is betting that most will yawn. “We know participants hardly read anything and this is fairly complicated,” she says.

Currently, it can be difficult for many 401(k) participants to determine exactly how much they are paying in fees. The investment management fees that account for the lion’s share of what most pay are easy to find–ask your plan or look up any retail funds you own at Morningstar.com. (Again, these fees will also appear on the new annual statements participants will start receiving soon.)

Where the new disclosures should come in handy is in deciphering administrative fees. If your employer picks up the tab, you won’t see anything–because you are not paying anything.

But if you pay a portion of the plan’s overhead costs, you should be notified on quarterly statements. Be aware that participants can pay for those expenses in different ways. Some pay via a direct deduction from their account’s balance. Others pay indirectly, under so-called revenue sharing arrangements. With these arrangements, a portion of the investment management fee you pay is funneled from the investment manager to the 401(k) plan’s administrator.

Why do participants need to know about revenue sharing? For one thing, you may be able to avoid paying for such costs entirely if you stick to low-cost index funds, which pay little to no revenue sharing.

Moreover, some fear that revenue sharing can create conflicts-of-interest. After all, plan sponsors and administrators may have an incentive to pick funds that pay more in revenue sharing, instead of those that are the best investments.

The new disclosures will also lay out transactions fees for services including 401(k) loans and Qualified Domestic Relations Order, a legal arrangement by which divorcing couples split ownership of retirement assets. (Transaction fees will only be disclosed to those who use these services.)


We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name.

Comments (5 of 7)

View all Comments »
    • “….if you stick to low-cost index funds, which pay little to no revenue sharing” is not necessarily a true statement. Yes, if your plan uses Vanguard or Fidelity Spartan funds, but Columbia, Calvert, ING, Mainstay, Rydex, plus dozens of other mutual fund families have index funds that pay a 12b-1, and likely a sub T/A, revenue to some service provider…..

    • When will plan participants figure out that paying a portion of their investment expenses for administration services (via revenue sharing) is insane? Paying asset based fees for administrative services is like hiring a plumber to fix a leaky gasket, but paying him based on the amount of water that flows through the pipes. It makes no sense. With asset based fees for administration, every dollar you contribute to your plan makes the cost of send out your statements go up. When will people figure this out?

    • I doubt most people are even aware of the expense(s) the fund charges (such as Management fee), which can be easily found in the prospectus. Why would they care about the Admin cost for the 401k?

      Personally, I would like to know the cost associated with running Social security.

    • Henry: 401(k) is just the tax wrapping for qualified savings. Whether it is or is not a good idea depends on net expense ratios. Additionally, Roth deferrals are possible within 401(k) allowing for after tax payroll deduction.

      As for “The fees on your 401K are huge. If you pay 1% every year for 30 years, and if your average balance is 300K through these years, then you end up paying 90K. On a 1 million portfolio, that is 9% in fees”,what kind of convoluted argument are you trying to make? First, the 1% fee is relevant only to the extent that it diminishes my portfolio return below average. I’ll pay 4% if my net return beats indexes and peers funds by 2%! Second, adding the cumulative and incorrectly calculated hypothetical fees on 300k and expressing that number as a % of 1 Million is absolutely meaningless. Think before writing, please.

    • To cover the government shortfall of income, tax rates will have to go up. 401K is not a good idea anymore. Google for “PENSION PLAN KONDRATIEFF WAVE” to learn why. Save after tax money. Pay tax now. Tax is on sale. You never know what the tax rates will be by the time you retire. Government can find other ways to confiscate your retirement savings as well!

      The fees on your 401K are huge. If you pay 1% every year for 30 years, and if your average balance is 300K through these years, then you end up paying 90K. On a 1 million portfolio, that is 9% in fees.

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.