Congressional Watchdog Finds That Almost 40% of Participants Don’t Understand 401(k) Fees. By: Joe Carreno

Public Sector Retirement - PSR - Significant Number of 401(k) Participants Have no Knowledge About its Fees

On Thursday, August 26, 2021, the Government Accountability Office (GAO), a congressional watchdog, released a report stating that almost 40% of 401(k) participants do not fully understand the scheme’s fees. For the past ten years, the US Department of Labor has requested sponsors to educate participants about the fees associated with their accounts. Yet, a significant number of participants do not completely understand the fees. 

Democrat lawmakers, Sen. Patty Murray of Washington and Rep. Bobby Scott of Virginia had requested the report. Sen. Murray chairs the US Senate Health, Education, Labor, and Pensions Committee, while Rep. Scott chairs the House Committee on Education and Labor. 

Scott said the findings of GAO should serve as a wake-up call for the Labor Department and 401(k) participants. He added that the report indicates that the Labor Department must make it compulsory for plan sponsors to give participants full fee disclosures. He added that the disclosures should be easy to understand and that participants should know how the fees affect their contributions. 

The report stated that about 87 million employees have 401(k) plans, making the accounts one of the most popular ways people save for retirement. Around 71% of workers in the private sector, and local and state governments received their retirement benefits in March 2020. Of this percentage, 55% had 401(k) accounts. 

401(k) participants must understand the effects of administrative and investing fees on their contributions as participants who do not understand them may be adversely affected. 

Murray described retirement savings as long-term investments. As such, the Democrat said participants need “clear, complete information.” He added that the report shows that 401(k) participants do not have the needed information to make informed choices about their long-term retirement investments. 

What Participants Do Not Understand about 401(k) Fees

For its findings, GAO surveyed 1,000 401(k) participants. The survey included questions that were meant to test participants’ knowledge of the fees. The government watchdog found that many respondents know about the existence of the fees, but they do not completely understand how the fees affect them. Other respondents do not know about the existence of the fees at all. The members of the latter category made up about 64% of respondents. These respondents didn’t know if they were paying any fees or even if the fees even existed. 

65% of the participants didn’t know how much additional fees they paid on the 401(k) accounts. The government watchdog found that females and savers with less than $1,000 made up a majority of this group. It also discovered that education was a factor. More people with high school diplomas or less also said they do not understand the fees.

“Americans are already struggling to stretch their paychecks and save for retirement,” Chairman Scott stated. “Making fee disclosures more accessible is a common-sense change that will help more people retire with dignity.” 

Long-Term Effects on Participants

Employer-sponsored 401(k) plans and any other investment account come with costs. Participants and their employers pay the fees. Some they pay independently and some together. However, participants have to be aware of these fees, or their savings could be adversely affected. In 2006, GAO submitted a report that shows how an increase of 1% could reduce retirement savings by tens of thousands of dollars. 

For example, a worker who contributes $20,000 to a 401(k) plan with a 7% return rate and 0.5% fee will have $70,500 after 20 years. If the fee is increased to 1.5%, the worker will have $58,000 at retirement. The 1% fee increase caused a 17% reduction in the worker’s earnings.

GAO Recommendations

GAO made five recommendations to the Labor Department. These recommendations will enhance contributors’ knowledge of the long-term effects of the fees. The recommendations are: 

  •  – The department should enforce the use of a consistent term for asset-based investment fees. 
  •  – It should stipulate the fees in quarterly disclosures. 
  •  – It should educate participants on the long-term effects of the fees. 
  •  – It should add fee benchmarks for in-plan investment options. 
  •  – It should add ticker information for investment options in disclosures.  

The department has responded to the committee’s recommendations. It stated that it is unable to enforce the recommendations at the moment but would consider adopting them in the future. The committee, in turn, urged the department to do whatever it can to help the Americans who are saving money.

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