A large portion of 401(k) plan participants (41%) don’t think they pay a cent for their 401(k)s, according to a Government Accountability Office (GAO) study. An improved understanding of 401(k) fees not only betters participants’ financial wellness—it may decrease litigation risk for plan sponsors.
DOL and Plan Sponsors Fall Short
In 2012, the Department of Labor (DOL) issued a final rule requiring plan sponsors to provide plainly written information about 401(k) fees. The goal was to give necessary information to plan participants so that they could make educated decisions on investments in their 401(k) accounts. Under the rule, plan sponsors must clearly show participants’ account-specific fees on a quarterly basis.
The GAO found disclosure statements can be confusing for many participants. For example, proper terminology for investment fees is not specified or defined under the DOL regulation. The GAO found 10 large 401(k) plans use 11 different terms for investment fees. Plan participants looking to compare fees on their plan investments versus other investment options may have trouble comparing due to inconsistent terminology.
Helping Participants Helps Plan Sponsors
There’s been an increase in fee-related litigation targeting plan sponsors. It’s key for plan sponsors to get participants the information needed to make informed decisions. Plan sponsors can implement changes in several ways and hopefully avoid a court appearance.
Service providers are a good place to start. Service providers must disclose their fee information to 401(k) plan fiduciaries. This data must be reviewed and understood by plan sponsors, because lacking clarity about the fees charged by service providers may lead to misunderstandings about participants’ fees.
The GAO looked at how Europe, Australia, and New Zealand work to improve participants’ understanding of fees and other plan-related information. Educating participants on basic financial concepts, presenting information visually with histograms and icons to show cost information, breaking down costs instead of issuing a final figure, and limiting pages as to not overwhelm participants were among the examples cited.
Plan sponsors should engage with their participants — what are their specific needs? Some participants may be more inclined to visual learning, needing diagrams and icons to understand concepts better. Others may need financial literacy education. Developing a plan around what works for a particular group of participants can help plan sponsors deliver.
MarksNelson can help 401(k) plan sponsors navigate compliance and offer insights for improvement. Reach out to us today to learn more.