Are you a participant in a 401(k) or similar retirement plan? If so, do you know what that plan is costing you? Ron Lieber of the New York Times thinks you don’t, and I think he is right. In a recent article, he says there’s really no way you could know what your plan is costing you – but the total might add up to thousands of dollars in hidden fees over the years while you work and (if you leave your money in the plan) after you retire.
To understand the issue, it helps to know that employee retirement plans typically have four players. The first is you, the employee. The second is your employer, who offers to withhold money from your pay and (sometimes) to match part or all of what you contribute. The third is a corporate administrator hired by your employer to operate the plan and choose investment options. The fourth player consists of the mutual funds, brokerages and insurance companies that provide those options.
Starting next year, the U.S. Labor Department will require that mutual fund fees be spelled out in retirement plan account statements. Lieber says that will let plan participants know whether or not the funds in the plan are paying part of those fees, which are collected from workers’ contributions, back to the plan administrators.
Lieber’s article shines a badly needed spotlight on the mostly hidden arrangements, politely known as “revenue sharing,” between plan administrators and mutual fund companies. In my own view, these relationships have become so private and so cozy that they cannot operate in the best interests of workers.
The new requirements will make fees more transparent. But transparency doesn’t do you much good if you have no choice.
For better or worse, 401(k) and similar plans provide the main savings vehicle for the majority of workers. While these plans provide a convenient, automatic way to save money, they lack a key part of our economic system: competition.
As a participant, whether you are still working or already retired, you are stuck with whatever arrangements your plan administrator makes regarding your investment options and the fees you pay. Once the plan administrator gets the contract, the competition seems to be over.
Here’s my idea for a better way to do things: Employees should have a choice among plans, with fees and other costs spelled out. Of course I don’t know just how this would work, but it’s interesting to think about something similar that’s already working: the 529 college savings plan.