By Glenn Ruffenach
Question: How much time do you spend with the retirement-plan disclosures you receive from your 401(k) or individual retirement account?
Answer: Probably little more than the time you’ve just spent reading these two sentences.
A new study from Limra, a Windsor, Conn., research and consulting firm, found that two-thirds of Americans with defined-contribution plans or IRAs spend less than five minutes scrutinizing each disclosure statement. About 20% say they rarely — or never — read the documents.
The research is tied to new rules from the Department of Labor, which require providers of 401(k)s and related savings plans to disclose additional information about fees, expenses and associated data in quarterly and annual statements. The goal: to help workers cut the cost of maintaining their accounts and building a nest egg.
The Limra study is an effort to gauge employees’ understanding of the new rules — and it highlights not only how little time most workers spend with their retirement-plan documents but also how little they know about their plans’ fees. Excessive fees, of course, can make a big difference in the eventual size of a nest egg. The Department of Labor offers the example of two 30-year-olds, each with $25,000 in a retirement account. The first account has an expense rate of 0.5%, the second has a rate of 1.5%. After 35 years, with identical investment returns of 7% (and no additional contributions), the first account would grow to $227,000 — but the second would total just $163,000.
Among the key findings:
- Half of participants in defined-contribution plans said they have no idea how much they pay in annual fees and expenses.
- Almost four in 10 surveyed workers (38%) believe they don’t pay any fees or expenses.
- About one in eight (12%) participants in defined-contribution plans could offer an estimate of what their fees might be. The most common estimate: 1% of the account balance. (Limra cites a 2011 Deloitte/ICI study, which found that the “median defined-contribution-plan participant is in a plan with an all-in fee of 0.78% of assets, based on plans included in that study.”)
Will retirement-plan participants make use of the new disclosures? Reaction might well be “muted” at first, Limra states. That’s because surveyed workers indicated they aren’t really sure what to do with the information when they get it.
When asked how they might react if they learn that the fees in their retirement plan are higher than average, 31% said they didn’t know; 24% said they would move current assets into funds with lower fees; 21% said they would with speak with their employer about trying to reduce fees; and 16% said they would do nothing.