401(k) fees are lower but still hard to understand. Planners can help

The fees paid by 401(k) plan participants are falling and their investment fund menus are growing. But participants still may not understand the costs they're paying for their retirement savings, a watchdog said.

Labor Department regulations requiring greater disclosure have left an impact that is murky at best on the 401(k) savers' grasp of their plan and fund fees and the shortcomings of the documents that are supposed to inform them, their financial advisors and the agency overseeing the marketplace, according to a report released last month by the U.S. Government Accountability Office. The independent agency reports to Congress, which is awaiting two reports from Labor on fee disclosures due next December under the Secure 2.0 Act.

READ MORE: The highs and lows of target date funds 

Clients of planner Cristina Guglielmetti's Brooklyn, New York-based registered investment advisory firm, Future Perfect Planning, are showing a higher level of understanding about their 401(k) fees than a few years earlier, but their plans' disclosures are "still more opaque than I'd like it to be," she said in an interview. Many plans present the underlying investment-fund fees clearly, but those "paid to the plan are much harder to suss out," she said. That's especially true when 401(k) providers have their own proprietary funds on the menu, according to Guglielmetti. 

"It's hard to really find out what the fees can be sometimes," she said. "It has gotten better, but it's not as good as I would like it to be, and it's not as clear as I would like it to be. It should be pretty simple: 'Here's what you will pay. Here is what you will pay to invest in each.' That should be pretty simple, and that's really not something that's given to plan participants. We're headed in the right direction, but it's still not where I would like it to be."

Competition, technology and innovation and the threat of lawsuits have played a greater role in pushing down 401(k) fees than the 2010 and 2012 Labor regulations the watchdog studied in its report, a group of 13 unidentified stakeholders told the GAO. Regardless, the menu of investment options is getting bigger and the administrative costs and fund fees are dropping, according to the GAO's review between October 2023 and September 2024.

"Millions of workers save for retirement through employer-sponsored 401(k) plans," Tranchau "Kris" Nguyen, the GAO's director of education, workforce and income security, wrote in the report. "Plan sponsors (employers) hire service providers to help operate their retirement plans. Service providers charge fees for activities such as tracking participants' contributions and providing investment education. These fees are paid by the plan sponsor or by plan participants (generally current or former employees). When paid by participants, such fees can significantly impact retirement savings growth."

READ MORE: 403(b) plans a confusing mix of fees, products and regulators, study finds

Retirement plans such as 401(k) accounts carry two types of costs: administrative and investment-related, the report noted. The participants, plan sponsors or a combination of the two pay those fees. 

"Administrative fees can cover services such as recordkeeping for the plan and communications with participants as well as individual fees such as those for processing a participant loan or distribution," Nguyen wrote. "Investment-related fees are associated with buying, selling, and managing investments, but they can also include embedded costs of plan administration. Fees can be assessed as a flat dollar amount or as a percentage of assets."

In recent months, years and even decades, the watchdog has been highlighting how high costs, spotty disclosure and industry conflicts of interest affect retirement savings. In 2024, the GAO unveiled research questioning the oversight methods at Labor and the IRS for conflicted practices in the 401(k) marketplace, revealing information gaps for retirement savers who change jobs and warning about the volatility in some target-date funds. Three years ago, 40% of 401(k) plan participants surveyed by the GAO told the watchdog they didn't understand their fees fully, and 41% of the group claimed not to pay any expenses at all for their retirement plans.

At the time, the watchdog recommended that Labor take five specific actions — one of which was adjusting the obligations for the disclosures supplied to plan participants, Nguyen wrote in a footnote to the report last month.

"DOL has not yet addressed our recommendations but told us, in September 2023, that these recommendations will be considered as the agency reviews fee disclosures in 2024," she wrote. "DOL's review is expected to be completed in 2025."

In addition, the watchdog repeated its criticism of the industry's current methods of reporting plan costs to the government publicly. Form 5500 — a series of documents issued by Labor, the IRS and the Pension Benefit Guaranty Corporation that 401(k) providers must file with the government under the Employee Retirement Income Security Act — doesn't adequately collect the amount of fees paid by target-date fund investors or enable regulators to extract relevant details or protect against the "inconsistent reporting of fees," the GAO report said.

"Known limitations with the Form 5500 — the primary means of collecting information on retirement plans' assets at the federal level — hinder its use in identifying trends in 401(k) plan fees and investments," Nguyen wrote. "To address the identified challenges, we made a recommendation in 2014 that DOL make revisions to the Form 5500, including clarifying certain instructions. While DOL recently initiated efforts to modernize the Form 5500, the agency has yet to make any changes. Implementing our recommendation would assist DOL in providing more effective and efficient oversight of 401(k) fees."

READ MORE: Conflicts of interest are common in retirement advice, watchdog says

With President Donald Trump's second administration taking office early next year and a new retirement advice rule from President Joe Biden's outgoing administration looking increasingly less likely to take effect, significant shifts toward tougher disclosure obligations in 401(k) plans are anything but imminent. In the absence of any new rules, planners like Guglielmetti can help guide participants through their choices with an eye toward the long term.

"'Here are some things that we can do differently that are going to lower your fees or give you a more diversified portfolio,' whatever the case may be," she said. "There has been a push to more broad-based, lower-cost options than there was before. We are headed in the right direction, but it's still not great."