Everyone with an interest in investment funds wants to know "the number" that 401(k) plans must start disclosing as of Sunday — all of their fees.
Shock and awe is expected after the new fee figures start to go public ahead of the Fourth of July fireworks. Financial advisers arewarning: “What You’re About to Learn Will Shock You.”
At the risk of putting out a spoiler alert ahead of the fireworks, you should know it might a dud at first, but just wait. Save your shock for the awesome results that will follow once people start to absorb the data, which must be finalized by July 1. That day is a Sunday, and it will surely take time for people to absorb the number and understand what they really pay to have "safe" money in a 401(k).
The plan is to make fund figures as simple to read as a billboard ad. The U.S. Department of Labor set the July deadline for 401(k) plan administrators to have simple dollar figures available that tell what fees you pay for each $1,000 you invest. But nothing is simple when people's money is involved.
“The disclosures are a huge step forward," said former Intuit chief Bill Harris, who is now chief executive officer of financial advice provider Personal Capital. "But it’s really not sufficient.”
To begin with, the deadline is mostly of concern to fund administrators, who must be done with their part by Sunday. Many of them will be surprised, since surveys may show managers are unaware of fee costs. Next up are the 60 million households that own 401(k) retirement accounts, more than half of the nation's households. The administrators have until the end of August to get out the forms, which will land as people return from summer vacations.
Unless you are shocked by thick financial disclosure forms, you are not likely to find it all that stunning when you uncover it in stacks of summer mail. October surprise anyone? But if you read the material patiently you may well develop a sense of dread about the holes in your safety net.
Fund advisers and watchdog groups have already been issuing dire warnings. Fees can reduce your 401(k) by 30 percent, advocacy groupDemos said this week, basing its data on a hypothetical model. The average two-income middle-class household pays a hefty $155,000 in fees. That figure is spread over 40 years, of course, and it might be high, since it does not fully account for all fee discounts and investment gains. Consumer Reports cited the Demos report to show that fund fees “can really scramble your nest egg.”
Boiling Down Nest Egg Number
"Some funds barely make anything for investors because they can't cover the fees, and sometimes the fees wipe out gains entirely. The sad thing is you just don't know," said Harris. The first step in dealing with hidden charges is to expose them, he said. Then you can start to get a broader look at what you pay — and what you get for all of your financial services, banks, brokers, insurance and credit cards.
Personal Capital has built a cloud-based personal finance advice business that has been described as “mint for rich people.” Harris shuns that description but concedes his service is similar, but more focused on wealth and investing than Mint's budget-oriented data. The cloud tools on his Personal Capital site crunch data for free. Personal Capital will make its own capital by giving advice or transactions for a fee.
He invites people to visit Personal Capital to plug in their own numbers. His algorithms will chew through the 200-page forms fund administrators send and spit out the number you need.
Will he give a preview on what people might expect? "It's about 1 percent," he said, without doing the math. That's what the app is for: to give you the number.