DO YOU KNOW WHAT you pay for your 401(k)? Over time, even seemingly small charges can take a big bite out of your retirement savings.
That’s why a new Government Accountability Office (GAO) report is so surprising. Fully 41% of people surveyed think their 401(k) is free. And I’ve got a unicorn tethered in my backyard. Not only are they incorrect, but also it suggests that those required fee disclosure documents from plan providers are written in ways investors just don’t understand.
Why might so many people think their 401(k) is free? Unlike diners in a restaurant, 401(k) investors are never presented with a bill. Instead, 401(k) fees are silently subtracted from their account balance. That’s why the government insists that plan providers tell investors, ahead of time, all the fees they may pay. Yet, when shown real-life examples of fee disclosures, 45% of investors couldn’t fully understand them, according to the new report.
One failing, says the GAO, is that plan fees are often expressed mathematically, such as “0.16% per $1,000 invested.” I guess a lot of people skipped math class the day they explained these brainteasers. But 88% understood when the cost was stated in plain English: “You are charged $1.60 for every $1,000 in your account.”
Why would plan providers use hard-to-understand language? A cynic might say it’s better for business if customers don’t know how much they pay. But Harvard Law Professor Cass Sunstein offers a more benign explanation—the “curse of knowledge.” People who write fee disclosures are experts. They know the subject like the back of their hand. They assume—wrongly—that everyday investors can navigate their oddball topic as easily as they can.
And, yes, 401(k) fees are complex. There are investment fees for money managers, and administrative fees to pay for legal, accounting, communications and other costs. Then there are service charges, like $125 to originate a loan. They add up like those mystery items on your Verizon bill.
All of this suggests you review your plan’s fees. No, it won’t be as entertaining as Netflix or Reddit. But remember, you’re paying for this party, so you might want to know how much you’re getting charged.