The U.S. has all but failed at helping people understand 401(k) fees, and it should look to practices used by other countries to improve that, data from a GAO report today suggest.
Only 36% of people surveyed by the Government Accountability Office thought they paid any fees for their 401(k) plan, while 41% indicated that they did not and 23% said they didn’t know.
Nearly 10 years ago, the Department of Labor began requiring plan providers to disclose fee information to employers, and ultimately, participants. The statements usually include expense ratios for different investment options on the plan menu as well as some indication of the fees charged for administration. But that doesn’t appear to have helped many retirement savers understand that they pay fees at all, much less what the fees are and how they affect their account balances over time.
When presented with a sample disclosure of a target-date fund’s fees and performance, 43% of people surveyed were able to identify the expense ratio, while 25% got it wrong and 32% admitted that they couldn’t understand it. Further, 37% of people were able to identify the general effect that fees have on net investment returns, while 15% misidentified the relationship and 48% said they had no clue about it.
There were strong correlations between people’s level of education and amount of savings and how well they understood fees, the report noted.
PRESENTATION IS EVERYTHING
A key finding from the report is that people want to see what they are charged in dollars – not just as a percentage of assets, as is the current practice. Only 7% of respondents said they preferred to only see the percentage they are charged in fees, while 22% said they only want to see the actual dollars they paid, and 61% of people wanted to see the information presented both ways.
When shown a boilerplate disclosure about how to find fee information online, 55% of people said they would likely not search for that information. However, of that group, 58% indicated that they would be much more likely to go to a site if it described the ways that fees can affect their account balances over time, according to the GAO report.
The DOL’s fee disclosure rules do not require that level of specificity.
As part of its report, the GAO recommended that the DOL consider requiring that plan disclosures include fee benchmarks and ticker information, which could better help participants grasp what they pay.
“Fee benchmarks can help participants to assess an investment option’s value, not only relative to other in-plan options but to options outside the plan,” a summary of the report noted. “Ticker information can help participants identify many plan investments online to evaluate and compare them to options outside the plan.”
Having some understanding of 401(k) costs can be important, as even seemingly small fees have a noticeable effect on balances over time, the GAO stated.
The average total cost for 401(k) plans with at least $50 million in assets was 90 basis points in 2020, down from 91 bps in 2019, figures from the 401k Averages Book show. For small plans, those with less than $5 million, the average was 120 bps last year, down from 123 bps in 2019.
LESSONS FROM ABROAD
Australia, New Zealand and countries in the European Union follow practices that are designed to help plan participants understand fees.
“For example, stakeholders in those locations said layering data, a technique where information is presented hierarchically, can help participants understand disclosures by providing them key plan information first,” the report noted.
In Italy, the government provides an online comparison site that lets savers see different plan and investment fees side by side. That also includes a fee benchmark that helps them judge the relative value of each investment option, the GAO report noted.
“Stakeholders in Australia, New Zealand, and the EU stated that consumer testing is important to ensure that plan participants understand and can use fee disclosures to make investment decisions and they have conducted such testing on disclosure contents,” the report read. “For example, an official said that the EU’s rules for retirement savings accounts require that pension benefit statements are easy to read and written clearly, but there are no guidelines or metrics to measure this, so the EU uses consumer testing to gauge if this principle is being met.”
Consumer testing led New Zealand to require shorter disclosures that made comparing investment funds easier, the GAO said. That country also found that disclosures shown in actual dollar amounts that people paid in fees were much more helpful than ones that only presented percentages.
Another impediment to understanding fees is jargon, according to respondents in Australia and the EU: “To simplify the language, these stakeholders recommended explaining uncommon terms, avoiding jargon by using simple terms, and providing everyday examples to help individuals relate to the information.”
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Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.