Five years later these ultra-complicated disclosures exist, but they aren't generating the awareness intended. Instead of digging through the fine print, most plan participants simply trust that their employers are looking out for them.
Sadly, a recent industry survey showed that 67 percent of Americans believe they pay no fees in their 401(k) plan. Of course, nothing could be further from the truth. This is the equivalent of believing fast food contains no calories.
In 2015 the Obama administration announced that hidden fees and backdoor payments were costing Americans $17 billion per year. And that's not counting the excessive "out in the open" fees that are draining our retirement accounts. The Department of Labor also started sounding the alarm. "The corrosive power of fine print and buried fees can eat away like a chronic illness at a person's savings," said Thomas E. Perez, Labor Secretary under President Obama.
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Do investors really understand their own risk tolerance?
Make no mistake: These fees do matter. To that point, a 1 percent reduction in fees can add an additional 10 years to your retirement income. If two people have the same 7 percent return over time but one pays 1 percent in fees while the other pays 2 percent, the latter will run out of money 10 years earlier. Any financial expert would agree that this is an insurmountable headwind in the journey toward financial freedom.
A 401(k) plan is a wonderful savings vehicle — when it's efficient. The problem is that many of the plans are plagued with huge commissions, very high expense ratios (the fees paid to mutual fund managers) and a variety of additional — and often hidden — layers of fees. These added layers have seemingly arbitrary labels, such as "asset-management charges" or "contract asset charges." They often add up to 1 percent or more and are buried in the fine print of plan disclosures.