Washington, D.C. — Better disclosures from financial firms could help American workers save billions of dollars in value of their nest eggs each year, according to an analysis from the Center for American Progress. A new proposal from CAP would require financial firms to send 401(k) and IRA investors a simple, easy-to-read annual receipt detailing how much investors spent that year on retirement fees, including both overall plan fees and investment-related fees. A similar, firmwide receipt would be sent to companies that manage 401(k) plans.
The authors of the proposal, Jennifer Erickson and David Madland, posit that if investors are able to more easily understand whether their fund choices are high cost or low cost, they will likely pay much closer attention to fees. With the average 401(k) balance worth more than $72,000 at the end of 2013, even fees totaling 1 percent would result in a receipt that showed more than $700 in fees—an amount likely to get the attention of many investors.
“It’s unfortunate but true: The vast majority of Americans have little idea how much they are paying for their retirement accounts—even when the fees on those accounts can stack up to hundreds or even thousands of dollars annually,” said Erickson, Director of Competitiveness and Economic Growth at CAP. “Compounding the problem is that 401(k) providers often bury these expenses in page upon page of fine print. Improved fee disclosures, including a retirement receipt, could help better educate Americans about how much their retirement accounts really cost—and help them seek out more affordable options.”
“The United States is already in the thick of a retirement crisis, with many Americans unable to maintain their standard of living in retirement. While retirement accounts make up just one part of retirement security, previous research has shown that high 401(k) fees could cost the average worker tens of thousands of dollars over a lifetime of work,” said Madland, CAP’s Managing Director of Economic Policy. “It’s time to remove the smoke and mirrors that surround retirement disclosures and give consumers the information they need to save smarter.”
Last year, CAP published research showing that for a median-wage worker investing 5 percent of his income in a 401(k) starting at age 25 and receiving a 5 percent company match, an annual fee difference of just 0.75 percent could be worth $71,000 to that worker by the time he retires, and that worker would have to work three years longer just to cover that excess fee difference. At the time, CAP proposed a nutritional-style “retirement label” that would provide a more visible, effective disclosure of fund fees to those saving for retirement, including when new employees set up a 401(k)-style plan or if they roll those assets into an IRA.
In thinking about how better information through retirement receipts and labels could help Americans save more of their retirement funds, CAP calculates that if better disclosures led even half of 401(k), 403(b), 457, and IRA mutual fund assets to be invested in funds that save investors 0.50 percent annually, American workers could save $17.5 billion in a single year alone.
Click here to read “Retirement Labels and Retirement Receipts Could Save American Investors Billions Each Year” by Jennifer Erickson and David Madland.
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