Many Participants Do Not Understand Fees

More than half of participants surveyed do not understand retirement plan fees, indicating a need for education before the fee disclosure regulation goes into effect this month.  

The Employee Retirement Income Security Act (ERISA) 404(a)(5) regulation requires plan sponsors to provide fee information to participants by August 30. According to the bi-annual Defined Contribution Investor Survey from State Street Global Advisors, 61.8% of participants said they do not understand fees.

When participants receive their first statement reflecting the new fee disclosure regulation, they may have a strong reaction to the fees listed, even though these are fees they have always paid (see “Participant Education Needed Before 404(a)(5) Deadline”). This reaction could be based on a lack of understanding, Jake Winegrad, adviser at Moneta Group, told PLANADVISER.

“People don’t like paying for something that they don’t understand,” he said.

The survey also found that while 40.1% want to understand fees, only 18.7% said they would use that understanding to inform their investment choices.  

Winegrad said that although he fully supports the regulation, he is concerned that the participants who carefully read their statements might begin making investment choices based solely on fee amounts. “There are many other factors that need to go into your investment election decisions,” he cautioned.   


Advisers and sponsors should explain to participants that if investment choices are made based on fees only, it could result in a portfolio that is not diversified.

Many participants, however, will not look at fees on their statements, Winegrad predicts. Regardless, it is still important to explain the changes that will occur after the regulation goes into effect. “With this type of stuff, if you can be proactive, it’s much better,” he said.

Winegrad suggests plan sponsors schedule meetings before the regulation goes into effect or have participants call plan advisers directly about fee disclosure questions. “That can be a way for the plan sponsor to unburden themselves from that workload,” he said, although he acknowledged that some participants do not have access to the adviser.

Kristi Mitchem, senior managing director and head of Global Defined Contribution for State Street Global Advisors, said plan sponsors can help participants understand the context of their fees by comparing them with industry averages.

Sponsors and advisers can also help participants calculate their fees, Mitchem added. The Department of Labor’s (DOL’s) template requires participants to do math to determine what they are paying because the fees are expressed both as a percentage of assets and as a dollar amount per $1,000 invested.

“The majority of employees aren’t going to do [the math],” said Tom Gonnella, executive vice president, corporate development at Lincoln Trust Co.

He suggests sponsors request from providers a more user-friendly fee disclosure template than the DOL’s, so participants do not have to calculate their fees.