Most Participants Don't Know Their Fees

Participants indicated that costs do matter to them: A whopping 81% believe that fees will play either a very or somewhat important role in their decisions about their investments.

According to a study by AARP conducted earlier this year, a sizable majority of 401(k) plan participants (71%) wrongly believe they pay no fees.1 Only 23% correctly knew that they pay fees associated with their workplace retirement plan. However, most had no idea how much they were paying.

Participants also indicated that costs do matter to them: A whopping 81% believe that fees will play either a very or somewhat important role in their decisions about their investments. More than half indicated that they would consider switching to lower-cost investments if they could.

The new fee disclosure regulations -- which require plan providers to fully disclose all costs on both plan and investment levels to participants -- will take effect by January 1, 2012. A proactive approach may be the best solution for plan sponsors.

Next Steps 

Be sure to contact your plan provider or record keeper to find out what communications they have planned and what their timetable is for a rollout. Then take action to make sure your employees won't be blindsided by the news. Some steps to take now:

Spread the news soon -- before the regulations take effect. Let your participants know that they will be receiving new information with their statements that details how much they pay to participate in the plan. This communication should include a brief summary of what types of expenses are included in the plan and why understanding fees is important. Send this communication via email, payroll stuffer, or in your company newsletter at least a few months before the end of the year.

Ask your plan provider or advisor to be accessible. Schedule a "town hall" meeting, conference call, or Web meeting with your advisor and/or client service representative once the first batch of newly disclosed statements have been delivered and invite interested employees to attend and ask questions. You -- or your advisor or plan representative -- should also be prepared to explain to participants why certain investments were chosen over others.

Be prepared for some angry feedback. The bottom line here: Most participants thought their plan was "free." Some may be upset and may feel duped. As a fiduciary, you have a responsibility to act in the best interest of your participants. That's why it is essential to communicate and reinforce the long-term benefits of the plan.

1Source: AARP, "401(k) Participants' Awareness and Understanding of Fees," February 2011 (http://assets.aarp.org/rgcenter/econ/401k-fees-awareness-11.pdf).