Saving for retirement is usually thought to be one of the smartest financial choices one can make. But a recent federal report found nearly half of the people participating in 401(k) retirement plans could be losing chunks of their nest eggs without noticing, due to little-known fees charged by financial firms that sell plans.
To increase transparency in the retirement savings market, the U.S. Department of Labor began enforcing new rules in July that require 401(k) plan providers to issue regular reports to sponsors—typically employers offering 401(k) matches to employees—detailing fees charged for administrative services.
Devin Wolf, wealth manager and a certified financial planner at Financial Plan Inc. in Bellingham, said the new rules are a “good starting point,” and should help empower workers who have placed their savings in 401(k) plans.
“It’s going to give them a real avenue to create change within their plan,” Wolf said. “Knowledge is power—so once they actually know if they’re getting ripped off, they can try to elicit some kind of change.”
Up until now, the fees have not been withheld—they’ve just been hard to find. Participants willing to sift through the fine print in their plan’s various filings and statements can usually figure out how much they’re charged and how their money is used. Yet analysts are finding many people are either unwilling to go through the trouble or unable to understand the information.
Close to 50 percent of employers who offer 401(k) plans either did not know whether their employees were charged fees or falsely thought the fees had been waived, according to an April 2012 report from the U.S. Government Accountability Office.
The oversights can prove costly.
An average American household with two income earners can lose nearly $155,000 in 401(k) savings over the course of a lifetime due to retirement plan fees, according to a May 2012 study from the economic research firm Demos. High-income households—ones where both partners earn annual incomes higher than three-fourths of Americans—can lose more than $277,000.
Change elicits company expansion
Prompted by the new transparency rules, Financial Plan Inc. has expanded its 401(k) services, devoting a new company branch entirely to 401(k) management. Devin Wolf leads the new department.
Wolf said his company has offered 401(k) management services for some time, but until now the service has been limited to the firm’s existing customer base. With the branch out, Financial Plan Inc. broadens its spectrum of potential 401(k) clients, he said.
A major component of the new arm, Wolf said, is the fact that the company’s financial planners assume liability for their 401(k) management decisions, rather than letting liability fall to employers offering retirement savings to their employees.
The offer strengthens Wolf’s belief that financial advisers should stand behind the choices they make for their clients, he said. It also attempts to give a 401(k)-sponsoring employer peace of mind.
“The reason they’re hiring someone else is because they don’t think they’re qualified to do that in the first place,” Wolf said. “It’s the same reason I go to a doctor instead of performing heart surgery on myself.”
Disclosures start this fall
The real test of the new disclosure rules will be this fall when 401(k) sponsors and participants begin getting the new statements from their plan providers, Wolf said.
Financial Plan Inc. is trying to jump one step ahead. The company has unveiled an online “quick benchmarking tool” that allows prospective clients to input the total assets of their retirement plans along with the number of participants—then see how much they would likely pay in various administrative costs under Financial Plan’s retirement savings structure.
Wolf said 401(k) sponsors’ next steps once they receive the disclosure statements will be to understand where their money is going and ensure the services they are receiving are appropriate for their companies and for the number of employees they have.
“For the most part, people aren’t doing that.” Wolf said. “They need to figure out what process is reasonable for them.”