Are Retirement Plan Fee Disclosures Being Ignored?
Several years ago, the Department of Labor engaged in a major regulatory effort to improve retirement plan fee disclosures, but new research suggests that many workers are not reading their plan disclosures and are unfamiliar with the fees being charged for managing their funds.
The report by the Pew Charitable Trusts, “Many Workers Have Limited Understanding of Retirement Plan Fees Survey
,” finds that of the plan participants surveyed, nearly two-thirds had not read any of the investment fee disclosures from their plans in the past year. And among those who said they were very familiar with their fees, 33% had not read any fee disclosures in the past year.
Based on survey results of employees at small and medium-sized businesses, the analysis examines how worker familiarity with investment fees is associated with confidence in investing and planning for retirement.
Of the third who had read a fee disclosure, nearly 7 in 10 said they found the information understandable. Yet, only 25% of all respondents said they had read and understood a disclosure about retirement account fees, the report notes. As a result, many workers who are unfamiliar with the fees charged for managing their retirement funds are investing without fully understanding the costs associated with these plans, the report suggests.
Not surprisingly, older workers reported greater familiarity with their fees than younger workers. The findings show that 74% of workers age 52-64 were either very or somewhat familiar with their retirement plan fees, but that level drops to 64% for workers age 18-35. The report suggests that, because older workers are closer to retirement, they have more of an awareness of the fees they are being charged.
The survey further shows that workers who said they were unfamiliar with their plan fees also tended to be less confident in their ability to make the right investment choices and were less likely to say they had tried to figure out how much they would need to save for retirement.
Among those responding that they were not at all confident in their ability to make the right investment decisions, only 3% were very familiar with their fees and 62% were not at all familiar. Conversely, large majorities of those who felt confident in their ability to make the right investment choices said they were somewhat familiar with their retirement fees.
Moreover, half of workers with retirement accounts said they had planned for retirement by trying to figure out how much they would need to save. Among those who had not estimated how much they needed, nearly half (46%) responded that they were not at all familiar with the fees associated with managing their retirement investments. And only 10% said they were very familiar with the fees, while 44% said they were somewhat familiar. For those estimating the amount they would need, 26% said they were very familiar with the fees charged by their plans, while 58% said they were somewhat familiar.
Awareness of fees also appears to have some association with risk-tolerance levels. The report explains that, across age groups, those who said they were more familiar with their plan’s fees were more likely to say they preferred higher-risk investment options. However, only 4% of workers age 18-35 who preferred low-risk investments said they were very familiar with their plan fees, compared with 20% of those 52-64.
The report emphasizes that examining whether workers have read plan fee disclosures does not provide a full picture of their understanding of these costs, as some may learn about fees through other means, such as through a plan administrator or financial adviser. Nevertheless, workers who are less aware of their fees could see their retirement savings diminished by not fully understanding their investment decisions and they may be doing less to prepare for retirement, the report further suggests.
The online survey was conducted in 2016, among a nationally representative group of nearly 3,000 private sector workers; the findings in the analysis are limited to 1,923 respondents who said they had retirement plans.