Your 401(k) retirement plan is probably your single largest financial asset. But what is it costing you to invest? $100 a year? $1,000?
If you don't know, you're not alone. More than 80% of plan participants have no idea what their 401(k) charges, an AARP survey found.
That may be about to change.
BrightScope, a San Diego start-up that rates 401(k) plans, has just launched its Personal 401(k) Fee Report tool, which allows investors to quickly determine their plan costs — everything from fund expense ratios to plan consulting fees to administrative charges.
Knowing those numbers is essential to your retirement security, since the difference between a high-cost plan and a low-cost one has a huge impact on the size of your nest egg. As the GAO has reported, a plan charging 1.5% annually is likely to return 17% less over 20 years than a plan that costs just 0.5% — a difference that can amount to a $100,000 or more for a typical retiree.
BrightScope CEO Mike Alfred says his company, which began rating plans last year, currently rates more than 30,000 401(k)s, which cover more than 50% of plan participants. Eventually BrightScope hopes to rate the majority of 401(k) plans in the country.
“Fees are one of the biggest issues in the 401(k) industry,” says Alfred. “And we think we can bring some much-needed transparency, which can help bring about improvements in these plans.”
One key reason 401(k) fees remain hidden is that the rules governing plans don’t require clear disclosure to investors. (Labor Department proposals and Congressional legislation to improve fee investor disclosure are still pending.) So the only way to determine what you are being charged is to plow through hard-to-understand plan documents and do the math. BrightScope’s researchers compiled their numbers by digging through company filings with the Labor Department and other government agencies.
As you might expect, small 401(k) plans typically charge more than large plans, which can leverage economies of scale. A plan with less than $1 million in assets might cost 2.5% annually, while one that holds more than $5 billion might levy a fee of 0.8%. Still, BrightScope data show a startling range of 401(k) fees, even among plans of similar size. Some small plans cost a staggering 6% annually, while a few mega-sized plans still charge investors more than 1%.
Perhaps the best feature of the BrightScope tool is the way it lets you see where all those expense dollars are going. Once you register for free on the site, you can get what the company calls a "Personal 401k Fee Report," which, based on the information you supply about yourself, your company and your investments, estimates the percentage of your account balance you're paying annually in fees. If you click on "View Fee Details" and then "View Detailed Calculations," you can see a further breakdown of those fees. At Marriott International, for example, an employee might be charged 1.72% annually, including 0.89% in asset-based investment management costs, 0.08% in administrative fees, as well as other administrative and record-keeping expenses.
BrightScope also calculates the long-term impact of the fees on your account value at retirement, along with how those charges compare with those of a low-cost IRA.
Investors need to be aware, however, that the data have some drawbacks. For starters, since most of the expense numbers are pulled from government documents, they typically are 18 months old and sometimes are incomplete or inconsistent. And because some fees are not disclosed even on those forms — insurance costs for annuities, for example — BrightScope makes estimates that may be higher or lower than what your plan actually charges.
Alfred responds to those caveats by saying that plan participants and employers can help update their data: Links on the website allow people to upload current plan documents. And as BrightScope’s ratings become more widely known, Alfred says, there will be more pressure on employers to make sure their information is complete.
We'll see. In the meantime, for long-suffering 401(k) investors, these numbers are great start.
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