401(k) fee disclosures have improved transparency, though clarity still a concern

More than a decade after the Department of Labor instituted changes to boost fee understanding among 401(k) plan sponsors and participants, a new report from the Government Accountability Office reveals the effort has led to some improvements – but left some lingering concerns.

The report, which the GAO made public on Monday, examined the impact of two 401(k) fee disclosure regulations that the Labor Department issued in 2010 and 2012.

"Plan sponsors hire service providers to help operate their retirement plans. Service providers charge fees for activities such as tracking participants' investment contributions and providing investment guidance," it explained in its statement revealing the findings. "When paid by participants, such fees can significantly impact retirement savings growth, according to DOL."

The regulations require service providers to disclose fee information to plan sponsors, enabling them to make more informed decisions when selecting and monitoring service providers. Meanwhile, plan members also got to receive more details about their investment options from plan administrators.

The findings indicate that the disclosure requirements have improved employers' awareness of fees. 401(k) fees have also generally decreased since the introduction of the regulations, thanks to increased visibility of costs, plan sponsors' desire to avoid being sued over excessively high-fee options, and the greater scrutiny plan participants have placed on the fees they were being charged.

"Fee disclosures given to participants can increase participants' knowledge of and involvement in their 401(k) plans," the GAO said.

But there's still room for progress. Out of 13 stakeholder groups that were surveyed, six raised concerns that participants might not fully comprehend the information they're getting. They also suggested participants might come away believing the lowest-cost investments are the best choice, even though that might not be true for their specific situation.

To help address those issues, GAO's report highlighted some solutions and recommendations. Apart from DOL's efforts to monitor implementation of fee disclosures and an agency hotline to answer plan members' questions, some commenters suggested employers and service providers can modify the format of their disclosures or supplement them with educational initiatives to enhance financial literacy. 

"[E]ven though not all participants may use or understand the disclosures, informed participants can create positive change in the plan for all participants," the report added. "For example, one stakeholder said that the participants who read the disclosures serve as a 'watchdog' to ensure fees are reasonable."