Some 40% of 401(k) plan participants do not fully understand
and find it hard to use the fee information that the U.S. Department of Labor
requires plans to provide to participants in fee disclosures, according to a
report from the Government Accountability Office.
The report is based on GAO’s analysis of a survey administered
by NORC at the University of Chicago in July and August to a nationally
representative sample of 1,004 plan participants drawn from its pre-recruited
AmeriSpeak web survey panel.
GAO assessed participants’ understanding of samples from 10
large plans’ fee disclosures and other information about fees, and asked
general knowledge questions about fees.
It found, for example, that 45% of participants were unable
to use the information given in disclosures to determine the cost of their
investment fee. Moreover, 41% incorrectly believed that they do not pay any
401(k) plan fees.
GAO said its previous work has shown that even seemingly
small fees can significantly reduce participants’ retirement savings over time.
Ideas: layer data, provide online tools
GAO reviewed fee disclosure documents from Australia, Italy,
New Zealand and the European Union, and found that they have implemented
practices to help retirement plan participants understand and use fee
information from plan disclosures.
For example, stakeholders interviewed in those locations
said layering data — a technique whereby information is presented
hierarchically — can help participants understand disclosures by providing them
key plan information first.
These countries also help participants understand fee
information in other ways. In Italy, the government provides a supplemental
online tool so participants can compare and calculate fees across plans and
investment options, according to stakeholders.
This tool also includes a fee benchmark — generally an
average fee among comparable funds — that helps participants judge the value of
an individual investment option.
The report said Labor could take additional steps to help
401(k) plan participants improve their understanding and use of fee
information, based on GAO survey responses and analysis.
The department’s regulations require that disclosures
present fee information in a format that helps participants compare investment
options. GAO noted, however, that disclosures are not required to include
certain information, such as fee benchmarks and ticker information, the unique
identifying symbols used for many popular types of investments that could be
helpful for participants.
GAO said fee benchmarks can help participants assess an
investment option’s value, not only relative to other in-plan options but also
to options outside the plan. Ticker information can help participants identify
many plan investments online to evaluate and compare them to options outside
the plan.
5 recommendations
GAO made five recommendations to Labor, including to
require, in a manner deemed effective, that participants have investment
options. It said the assistant secretary of the Employee Benefits Security
Administration should require or take these actions:
That fee disclosures for participant-directed individual
retirement accounts use a consistent term for asset-based investment fees,
e.g., gross expense ratio.
That quarterly fee disclosures for participant-directed
individual retirement accounts provide participants the actual cost of
asset-based investment fees paid.
Take steps to provide participants important information
concerning the cumulative effect of fees on savings over time. These could
include ensuring that disclosures cite a working, specific Labor Department web
address where such information is shown and requiring that fee disclosures include
the agency’s graphic illustration on the cumulative effect of fees.
Require that participant fee disclosures for
participant-directed individual retirement accounts include fee benchmarks for
in-plan investment options.
Require that participant fee disclosures for
participant-directed individual retirement accounts include ticker information
for in-plan investment options, when available.
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