How Labeling Retirement Plans Like We Label Cigarettes Could Save Workers A Fortune

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The financial industry routinely skims tens of thousands of dollars in fees off the top of American workers’ retirement savings accounts. The best way to stop that could be to treat investment fees the same way the government treats tobacco and trans fats, according to a new report from the Center for American Progress (CAP).

The individual retirement accounts and 401(k)s that have become the primary vehicle for retirement savings come with fees that are four to five times higher, on average, than those associated with traditional mutual funds. Over the course of a lifetime, that difference amounts to between $71,000 and $94,000 in additional fees for the median American worker who starts saving for retirement at age 25. And because higher fees do not correlate with better market performance, a worker in a high-fee plan will have to work four years longer to accumulate the same nest egg as one who saves through low-fee systems.

Until 2012, the companies that manage these investment accounts didn’t have to tell their clients about fees at all. Even after a Department of Labor regulation came into force that year requiring fee disclosure, half of all 401(k) participants surveyed say they don’t know how much they’re paying in fees.

Fees remain obscure because disclosure requirements are too soft, according to CAP experts Jennifer Erickson and David Madland. Current rules allow companies to describe the differences among plan options using short-term figures that make the contrast “look like a few dollars instead of the hundreds of thousands of dollars it could easily translate to over time,” they write. Given how much jargon and the complex mathematics of financial markets can obscure the core reality that fees will cost a person around $100,000 over their career, Erickson and Madland propose a major shift in disclosure. Rather than making companies throw numbers at people, they suggest affixing a large-print label to retirement system documents that compares the fees to low-cost plans:


Yet while the fees deceptions Erickson and Madland highlight hurt more than 50 million American workers, fewer than six in 10 workers have access to savings accounts through their employer, and fewer than half are actually enrolled in one. Traditional defined-benefit pensions that offer a more secure safety net for working people have almost entirely disappeared over the past few decades. The shift has made economic inequality worse and transferred wealth to the financial services sector. The primary benefit of the shift for workers — increased employment mobility due to being able to take their retirement savings with them when they change jobs — may be disappearing as corporations realize the law doesn’t require them to allow for such portability.

Even those who are offered 401(k)s or similar savings options through their workplace are getting far less from those systems than their parents got from old-school pensions. The common misconception is that they always come with employer matching funds that dramatically improve a worker’s savings outlook. But as economist and retirement policy expert Teresa Ghilarducci previously told ThinkProgress, the system “in no way obligates them to make a match.” Instead, it feeds workers into the high-fee low-disclosure financial services thresher that Madland and Erickson want to see reformed.