401(k) Rule Finally Reveals Hidden Fees

Most people who contribute to a retirement plan at work don't have a clue how much they pay in expenses.

A new rule proposed by the Labor Department would require that all fees, administrative costs and related charges be clearly listed on statements. With employers replacing pensions with self-directed accounts called 401(k)s, a clarification of who is paying how much to whom is long overdue.

Now the various fees are not secrets, but are typically hidden in the fine print of multiple documents available in multiple places, so it's very hard for individual investors to figure out what has been subtracted from their individual accounts.

Just one percentage point can be significant. The Government Accountability Office reports that one point added to fees can cut a worker's retirement savings by 17 percent over 20 years. Four out of five participants in 401(k) plans currently say they don't know how much they're paying in fees.

The Labor Department's plan would allow investors to easily see most of the administrative costs, mutual-fund fees, brokerage charges and similar drains on their bottom line.

To further clarify things, the rule would require benchmarks, comparisons of the expenses of other plans, and a record of the past returns of various investment options. An investment bringing high returns might be worth high fees, but many investors will be dismayed to learn they have been paying high fees for funds with sub-par results.

If you had $100,000 in an account, a fund charging 0.2 percent would subtract only $200 a year. A fund charging 2 percent, as many do, would take $2,000.

Account holders also will be able to see how much extra expenses they caused by buying and selling, withdrawing money, and asking for advice.

The administrative fee is usually a cost an individual employee cannot avoid when joining a workplace plan. But the employers would have more incentive to try to negotiate the lowest possible costs if employees see how much they are paying and complain. Competition doesn't work if prices are hidden from the paying customers.

Investors cannot expect their money to be managed free of charge. The accountants, envelope-stuffers, brokers, administrators, clerks, lawyers, and analysts involved in managing an investment company must be paid.

What we investors can expect is to be told, in terms we can understand, how deeply these financial helpers are reaching into our pockets.