Workers are about to get valuable information about their 401(k) — specifically, how much they pay for it.
The fee information has been around for years, plan experts say, but to find it, employees often must dig through prospectuses or plan documents. Most don't bother.
But thanks to a new federal regulation, 401(k) participants must receive an annual fee disclosure statement by the end of next month. Between this new statement and additional mandated disclosures that will start appearing in quarterly statements this year, workers should be able to calculate how much of their nest egg is eaten up by fees.
"Costs do matter," says Joseph Valletta with HR Investment Consultants in Towson and co-author of the "401k Averages Book," a fee comparison guide. "They aren't the only driving force ... but you have to make sure your fees are reasonable."
The disclosure statement could be an eye-opener for workers, particularly those who don't realize they pay a plan provider to maintain their account — and seven in 10 workers don't know this, according to a study last year by the AARP.
Of course, these workers will be surprised only if they read the new disclosure. Workers too often ignore paperwork, and some industry experts suggest that will happen in this case, too.
But this could be a costly mistake. You can end up with tens of thousands of dollars less in your account by retirement because you didn't notice that the mediocre funds you chose were the most expensive in the plan. Or you might be out big bucks because you didn't know enough to lobby your employer to switch to a plan provider with lower fees.
Consider the case of two workers with $30,000 in a 401(k), according to T. Rowe Price's calculations. One pays 1.75 percent in annual fees; the other 0.75 percent. They make no more contributions and earn a 7 percent average annual return.
After 35 years, the worker paying the higher fee would accumulate $179,844. But the other worker's account would be worth $250,400, or $70,556 more.
Plan experts say some workers have been getting fee information even before the new federal mandate. But participants in smaller plans are the least likely to get this information — and they are the workers most likely to pay high fees.
What's amazing is that it has taken this long for all participants to have this information at their fingertips.
Valletta recalls testifying about the need for fee disclosure at a Labor Department hearing in 1997. Back then, the stock market was going gangbusters, and workers didn't care about fees when their accounts were growing 20 percent or more a year, he says.
"That set back the discussion on fees by five to seven years," he says.
Since then, there has been a lot of foot-dragging on fee disclosures by companies that provide 401(k) services, such as investment advisers and record-keepers.
The new federal regulations require service providers to tell employers by July 1 how much they receive from 401(k)s. The information is now being simplified into an annual statement provided to workers. (Later this year, quarterly statements will reveal how much the worker paid during the quarter for administrative expenses, such as $10 for a 401(k) loan.)
Most workers will receive an annual disclosure statement that's based on a model drawn up by the Labor Department, Valletta says.
The statement will list each investment in the 401(k) and its historical performance. Next to that will be the performance of the investment's benchmark, such as the S&P 500 index, so workers can see how their fund measures up.
You'll also be able to see the total annual cost of each fund in the plan. It's stated as a percentage of the money you have invested.
To make it more real for employees, workers will see the dollar amount paid in fees for every $1,000 invested. A 1 percent fee, for instance, means you pay $10 for every grand invested in that fund.
The disclosure statement is designed to help workers make investment choices.