|Illustration by Christopher Silas Neal|
Participants often pay little or no attention to fees, despite the major impact fees ultimately can have on their income in retirement, says Brigitte Madrian, Aetna Professor of Public Policy and Corporate Management at the Harvard Kennedy School. “Fees are not particularly visible. It is not like when you go to a grocery store and there is a tag on the shelf,” she says. “You kind of have to hunt for the fees; it is like going to the doctor and finding out what the fees there are. It is not what people are used to thinking about.”
Most participants “do not realize they are paying fund expenses, let alone administrative expenses,” says Pamela Hess, Director of Retirement Research at consultant Aon Hewitt. “The vast bulk of people have no idea that there are any fees associated with the plan.” That could change soon, as the U.S. Department of Labor (DoL) announced new disclosure regulations in October. The regs, which apply to plans starting January 2012, would require sponsors to give participants information in their quarterly statements on the administrative and investment fees they paid.
However, most participants do not know what to make of fee data, sources say. The DoL regs will provide some information, “but that is still a fairly modest requirement,” Hess says. For fee disclosure to have its intended impact, employers need to think beyond the regu- latory requirements, to the behavioral-economics aspects that affect participants. Here are three elements experts stress:
Not understanding the basics.Richard Kopcke’s daughter recently asked him to evaluate her 401(k) investment options, and even the research economist at the Center for Retirement Research (CRR) at Boston College had trouble finding all the fee information he needed. Most 401(k) plans currently “do not report their fees in a convenient manner,” according to a February 2009 research paper he co-authored, “The Structure of 401(k) Fees.” They can be hard to find on participant Web sites, he said in an interview, and they get expressed as percentages that most people cannot translate into a dollars-and-cents impact on their retirement income.
Most participants do not understand the financial basics that would allow them to effectively use fee information disclosed to them, sources say. For one thing, they do not understand compounding, says Jeffrey Brown, a Finance Professor at the University of Illinois. “Studies have shown that only one in five people is capable of computing compound interest when it is presented simply,” he says. “Even a difference of 20 or 30 basis points, if compounded over 30 or 40 years, can make an enormous difference. but it does not feel that way to them. They look at it and it seems trivial.”