What's not to like about 401(k) accounts? Most companies offering these retirement savings plans match a portion of the employee's paycheck deductions. Contributions are exempt from income tax. Investment earnings grow tax-free until withdrawal.
The problem is that many of the 60 million workers with these job perks are in the dark about what they pay for the privilege of investing in them. It's no easy task getting clear information about the half-dozen or more fees that may be charged for investment management, record keeping, administration and other services.
Federal disclosure requirements taking effect this summer should make it easier to see how much is being shaved off the top of investment returns.
Yet workers will continue to be at the mercy of others. That's because it's employers who hire mutual fund companies and other plan providers. They're also the ones selecting the funds and other investment options that workers choose from.
So it hardly inspires confidence that many of those employers are ill-informed about basic information on the fees paid to providers _ costs which are primarily borne by workers, not employers.
The extent of the problem is documented in a report released last week by Congress' nonpartisan Government Accountability Office. The GAO surveyed a representative sample of 1,000 plan-sponsoring companies, yielding 365 responses.
Among the findings:
_ Half the plan sponsors did not know if they or their plan participants paid investment management fees, or they mistakenly believed those fees were waived. That was the case for 57 percent of small plan sponsors, defined as those with fewer than 50 participants. Even among large sponsors with at least 500 participants, 31 percent didn't know. It's disturbing because investment management fees account for the majority of overall 401(k) fees. They're paid to managers who select stocks, bonds or other investments in funds that 401(k) assets are invested in. Plan sponsors may be unaware because management fees are typically deducted from a participant's account, rather than being invoiced to the plan sponsor, the GAO said.
_ Many sponsors reported they asked providers little about which fees were charged. For example, 70 percent hadn't asked about whether the plan charged 12b-1 fees. Those charges can cover everything from compensation for brokers selling funds to advertising and promotions. Eighty-two percent didn't ask about fees to reimburse plan record keepers for services including maintaining participants' accounts and distributing disclosures sent to fund investors.
_ Few use or are aware of resources the U.S. Department of Labor offers to help companies compare fees charged by providers. Fewer than 6 percent consulted an agency publication on 401(k) fees. The GAO concluded sponsors typically rely on providers for fee information and advice.
The report drew a strong reaction from a congressman who advocates for greater disclosure of 401(k) fees.
"Middle class families who rely on a 401(k) do not have a fighting chance if employers don't understand how their own plan works," said Rep. George Miller, a Democrat from California.
The findings don't surprise Mike Alfred, CEO of BrightScope Inc., which estimates fee amounts of 401(k) plan fees using publicly available data. The company works with plan sponsors and their advisers, as well as providers.
Alfred frequently sees a lack of strong oversight by sponsors who should be ensuring their employees can invest in high-quality, low-cost plans.
"Employees tend to see their employer as some sort of benevolent, wise overseer of the 401(k) plan," Alfred says. "While they may very well be benevolent, they certainly are not wise."
Oversight of a company's 401(k) is typically a low priority for human resources managers, chief financial officers or others who juggle many responsibilities.
"The one thing they pay attention to is how much the company pays to offer the plan," Alfred says. "But they generally don't know what the participants are paying within the plan."
The Plan Sponsor Council of America, representing companies offering 401(k) plans, says the GAO findings don't fully reflect the frequently strong oversight at many large employers. The group's president, David Wray, said about two-thirds of 401(k) participants work at companies with more than 1,000 employees.
"Those companies are pretty much on top of their fees," Wray says.
As for smaller companies, "they do not often have the same kind of expertise, and certainly they don't have the staff time" to devote to scrutinizing fees, he says.
The GAO found a huge gap between fees charged at large plans compared with small ones. Large plans reported paying an average 0.15 percent of plan assets annually to cover record keeping and administrative services. Small plans averaged 1.33 percent.
There is hope that the system will improve. In July, the Department of Labor will begin requiring plan providers to disclose detailed 401(k) fee information to employers. The employers in turn must share information with their plan participants. Individuals can expect to see new quarterly disclosures late this summer, including expense ratios for each of the mutual funds offered in the plans. However, the rules won't require that all fees be disclosed, and they don't require a comparison of fees to an average or some other benchmark.
The fees are complex because several different companies may play roles in administering plans, leading to layers of fees shared among the primary plan provider, the plan sponsor and participants.
Don't give up. Besides reviewing the new disclosures, there are plenty of steps individuals can take to assess plans:
For starters, use free online tools to compare fees. The AARP offers one at www.aarp.org/401kfees(a free registration is required) and BrightScope rates plans of individual companies at www.brightscope.com/ratings
Participants can also team up with co-workers to assess a company's plan. Organize a lunchtime meeting, and bring account statements to compare. If there appear to be shortcomings, collectively approach company officials overseeing the plan to see if changes can be made. Go in prepared.
Says BrightScope's Alfred: "It's a lot harder to complain when you don't know what you're paying. If you're knowledgeable, you can go to your employer, and say, `Look, this is unacceptable.'"
GAO report on 401(k) fees:
Questions? E-mail the AP at investorinsight(at)ap.org