Your 401(k) is pocketing fees on your investment. Many people don't realize it. If you're putting money in your workplace's 401(k) retirement plan, it's important that you understand that the fees you're being charged matter. Yet an amazing percentage of 401(k) plan participants not only don't understand what they are being charged — they think there's absolutely no cost to invest in these plans. They are wrong. For close to 10 years, the Labor Department has required plans to provide fee disclosures. Currently, 87 million plan participants are required to get fee disclosures. The Government Accountability Office was asked to examine how well participants understood those disclosures. Using actual disclosure content from 10 large 401(k) plans, the GAO found in a recently released report that almost 40 percent of 401(k) plan participants do not fully understand and have difficulty using the fee information. Many people don't realize they are paying multiple fees that generally fall under two categories: administrative fees and investment-related fees. Bundled into those charges are expenses for legal, accounting and record-keeping services. You might be paying for access to customer service help or investment advice. Funds that are actively managed might incur higher fees. If you work for a small company, your plan fees and expenses might be higher. "Fees remain a huge issue in the 401(k) industry," said Edward Gottfried, director of product at Betterment's 401(k) business. "They're frequently too high and rarely transparent enough to retirement savers." The fees can be assessed as a flat dollar amount or as a percentage of assets. Asset-based investment fees, which are also called the expense ratio, are typically the largest fees a participant will pay, according to the GAO. Investment fees are typically expressed as a percentage of assets under management, or the total dollar balance of an employee's 401(k) account, Gottfried said. The GAO asked folks to review a fee disclosure note that was supposed to provide some clarity to plan participants. But it's all in how you present the information. For example, survey participants were asked: If your investment fund's expenses are $4 each quarter per $1,000 invested, how much are your expenses for a $15,000 investment in that quarter, assuming that the amount of the investment doesn't change?" Dollars people know. When presented fee information this way, 88 percent of participants correctly answered that the quarterly investment cost was $60. The percentage of correct answers fell when people were asked to identify the fee when presented as an expense ratio. When explained this way, 53 percent of participants were unclear of what was being charged. What's important to grasp is that whatever you're charged has an impact on your returns. The Labor Department explains it this way: Let's assume you have 35 years until retirement and a current 401(k) account balance of $25,000. You stop contributing, leaving the account at $25,000. If returns average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance after 35 years will grow to $227,000. But what if your fees were 1.5 percent? You would end up with $163,000. That difference of just that one percentage point reduces your account balance at retirement by 28 percent. "Given that a large number of Americans already struggle to save enough money to live on in retirement, this is money they can't afford to lose," Gottfried said. The GAO found that 64 percent of participants believe they are not paying any 401(k) fees or are unsure whether they're charged anything. I get that many workers find the fee disclosures confusing — if they review them at all. But the finding that people are unaware that there are fees had me flummoxed. It's not unreasonable for companies to charge for their investment services. It takes money to manage your money. But it behooves you to know the costs. Ideally, the more workers know about the fees they pay, the more they may press their employers to negotiate better deals to manage their workplace retirement plans. Or, plan participants will realize that increasing what they invest can help mitigate the expenses they pay. Among the recommendations to improve people's fee literacy, the GAO suggested that disclosures include benchmarks, which could help plan participants better gauge whether their investments' costs are competitive. "Fee benchmarks can help participants to assess an investment option's value, not only relative to other in-plan options but to options outside the plan," the GAO said. On your own, you should go to brightscope.com, which provides retirement-plan ratings and research. When you go to the BrightScope site, click on the drop-down menu and select "Research a 401k plan." You can enter the name of your 401(k) and see how it's rated, including a measure that looks at your plan's fees. Your employer has an obligation to watch the fees charged for your 401(k) and to make sure they are reasonable. But how will workers know what's reasonable if they can't understand the disclosures they are getting? With millions of people relying on their workplace plan for retirement money, knowing the fees they pay is paramount. Reader Question of the Week If you have a personal finance or retirement question, send it to colorofmoney@washpost.com. In the subject line, put "Question of the Week." Please note that questions may be edited for clarity. Q: There is way too much marketing mail, TV ads, and phone calls to get seniors to switch to Medicare Advantage Plans. Is there a disadvantage to these plans? A: First, here's what medicare.gov says about these plans: "Medicare Advantage Plans are another way to get your Medicare Part A and Part B coverage. Medicare Advantage Plans, sometimes called "Part C" or "MA Plans," are offered by Medicare-approved private companies that must follow rules set by Medicare." Before you consider signing up, please read this official government guide from the Centers for Medicare & Medicaid Services: Understanding Medicare Advantage Plans In 2021, about four in 10 people eligible for Medicare are in Medicare Advantage Plans, often because the plans cover things that Medicare doesn't, such as hearing, vision, and dental care, according to personal finance columnist Liz Weston. In a recent NerdWallet article, Weston and Kate Ashford walk through the pros and cons of a Medicare Advantage Plan. "Medicare Advantage plans have benefits and drawbacks," they wrote. "While they're a slam dunk choice for some people, they're not right for everyone." Here's some additional reading: Are Medicare Advantage plans worth the risk? Pitfalls of Medicare Advantage Plans Pros and Cons of Private Medicare Advantage Plans In Retirement News Part of planning for retirement and then living on the money you've saved or invested is keeping up with the issues that you need to know. In this section, I feature blogs, news stories, new research, surveys, and government policy changes that could affect your retirement. If you see a news story or issue you think would help folks, let me know and I'll check it out and share it with newsletter subscribers. The Social Security Trustees just released their annual report on the long-term financial status of the Social Security Trust Funds. The Old-Age and Survivors Insurance Trust Fund (OASI), which pays retirement and survivor benefits, is projected to run out of money a year earlier than last year's report, largely because of covid. Without legislative action to fix the shortfall, the OASI Trust Fund is projected to become depleted in 2033, according to the trustee report. At that point, OASI will only be able to cover 76 percent of benefits payable at that time. Read: Pandemic will push U.S. mortality up through 2023, new government report predicts In a column earlier this year, I urged the Biden administration to make fixing Social Security a priority. How do you feel about this development? Are you worried about the coming shortfall for Social Security? Send your comments to colorofmoney@washpost.com Retirement Rants and Raves What are your thoughts about saving for retirement? If you're retired, how is it going? What advice would you have for others about retirement? This is your space to rant or rave about anything related to retirement. Send your comments to colorofmoney@washpost.com. Please include your name, city, and state. In the subject line put "Retirement Rants and Raves." Responses may be edited for clarity. John Nelson of Nazareth, Pa., like so many readers, complained about the ever-present Social Security scam. "I received two calls from two different California numbers with a prerecorded message telling me my Social Security number has been compromised and I need to press 1 to speak with an agent," he wrote. "I immediately hung up and blocked both numbers." And that is exactly what you should do. Don't engage with the scammers. We all need to pass along information about this dreadful scam. Read: No, that's not the government calling threatening to 'suspend' your Social Security number. Dawn and Vic from Upper Marlboro, Md., wanted to share a retirement rave. They also included a wise example of the importance of estate planning. "My husband and I married 12 years ago, and each has three grown children and a total of 13 grandchildren," the wife wrote. "We're 60 and 63, respectively, and worked all our lives, saving diligently. Not long ago, we worked extensively with a financial planner, and apparently, we are in great shape and in line to retire comfortably, sustaining our current lifestyle. When we met, we each owned our home. When we married, we rented those houses and had a home built for the two of us. After being landlords for over 12 years, and given the current real estate crisis, we decided to sell both rentals, which went smoothly." Having done well for themselves, the couple decided to share their prosperity. "Instead of waiting until we died to share our wealth with our children, we surprised them and decided to give each child the same amount of money and included the grandkids as well," the wife emailed. "We had a marvelous celebration, which was pretty overwhelming as they didn't suspect a thing. We made a decent profit from the real estate sales. We're holding funds aside for capital gains, and the rest we'll invest. I just wanted to share with your readers the importance of not waiting until you die to pass wealth along to your children, which can get eaten up by probate and bickering. We were in total control." On this topic, I suggest you read the following: You will die. Don't exit leaving a hot mess behind. Color of Money Live: How to create an exit plan Put your estate plan on paper before it's too late Here are the documents you need to bulletproof your wishes after you die Looking for 401(k) or TSP Millionaires There are a growing number of workers who have reached the millionaire's club – at least before taxes. Despite the economic upheaval of the pandemic, 401(k) balances hit record levels in the second quarter, creating a record number of millionaires, according to Fidelity Investments. If you've joined this club, I would like to hear from you about a future project. I'm hoping to show workers starting out how it's possible to become a millionaire in their workplace retirement plan. If you'd like to share your story, email me at colorofmoney@washpost.com. In the subject line put "401k or TSP millionaire." | 
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