Portrait of a Plan Participant

In the wake of recent regulations, plan participants are soon to be provided with more information than ever regarding their defined contribution plans. In the lead up to fee compliance, issues such as getting the information out to participants and ensuring that they know how to access it have been considered. However, the matter of what plan participants will do with the fee disclosure information has been overlooked.

To gauge how participants may react to fee disclosures, a good place to start is with a recent survey conducted by the AARP entitled “401(k) Participants’ Awareness and Understanding of Fees,” which found that 70% of those surveyed did not believe they paid any fees as part of their plans. The approach of a recent Department of Labor webcast, “Retirement Savings: Saving More for Tomorrow by Paying Less in 401(k),” served to reinforced the idea that participants aren’t well informed about their plans. The DOL presentation focused on the basics necessary to understand the new information being disclosed to participants instead of demonstrating how to make more informed decisions with this information. The webcast used rudimentary examples, such as comparing a $25,000 investment with 7% return over 35 years using a 0.5% fee and a 1.5% fee. It demonstrated how increasing the fee by just 1% will lead to a 28% difference in account balance, a shocking example to some but elementary investment math to others. The webcast also described why it is necessary to look not just at current rate of return for an investment, but at rates during the past one, five, and ten years, and that an investor looking at a product with a fixed rate of return should also pay attention to the annual rate and the term of the investment. In other words, it focused exclusively on the very basics of investing. The new regulations also seem to cater to an uninformed audience by requesting that operating expenses be expressed both in percentages as well as dollar amounts per $1,000, and that a glossary of financial terms be provided to participants.

How well do plan participants understand their investments? A closer look at the AARP survey paints a dismal picture of plan participants’ understanding of fees. While 70% of those surveyed didn’t realize they were charged fees, of those who did understand that retirement plans include fees, 62% didn’t know the amount of fees they were being charged. Even with the lack of information, 81% of those polled said they believe fees are very important in decisions regarding their plans and 64% responded saying they prefer to make their own investment decisions. In addition, 51% said they would change their investments to reduce fees if needed. Not surprisingly the younger investors, those under 50, typically knew less about their 401(k) plans. Younger investors who professed to not knowing they were charged fees averaged 10% higher than older investors, and of investors who understood that investment managers charge fees, 10% more investors under 50 admitted they had no idea how much they were paying. Those who did say they knew how much they paid in fees responded with amounts as high as 75%. Interestingly, the majority of older investors said they would not bother speaking with their employer to try to lower their fees, but the majority of younger investors said they would.

To better understand plan participants, SVIA polled a random sampling of 401(k) investors about their plans. They were asked if they knew how much they paid in fees for their accounts, if they knew what their rate of return was, and if they would try to change their investments if either the fees or the rates weren’t what they expected. The results were very consistent with the AARP survey, and when asked about fees two participants said “no idea, I have paperwork at home,” and “there are no fees with [my] retirement plan.” The most informed response received was regarding rates of return, with one participant telling SVIA that they did not know their current rate but that “[they] usually check about once a quarter to make sure it’s above 3%.” However, another respondent told SVIA that their account “has no interest, you put as much as you want aside towards it and it is taken out before taxes and has no interest but the company matches dollar for dollar up to 6% of your pay for the year.” Responses to the  question on taking active control of 401(k) accounts reflected participant’s lack of engagement with their investments. Answers ranged from “depends if it would be worth it, if it was drastic I’d look into it, otherwise probably not bother,” to “I try to have as little to do with it as possible.”

The amount of interest plan participants are currently showing towards their retirement funds is a good indication of how much attention they will pay to the new fee disclosure. Participants in general lack a basic understanding of their investments and as long as nothing catastrophic occurs it seems very little will pique their interest in the details of their retirement funds. For the average plan participant, the new fee disclosure will just be business as usual, if it is even noticed at all.

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