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Understanding 401(K) Documents: The Annual Fee Disclosure

Posted June 1st, 2020 by .

Categories: 401(k).

401(k) documents are notoriously mystifying—and notoriously ignored. “I must say,” admitted Justice Ruth Bader Ginsburg at recent oral argument of the United States Supreme Court, “I don’t read all the mailings that I get about my investments.”

For about 72 million American workers, 401(k)s are “nest eggs.” Employees expect their 401(k) investments, along with social security, to provide them with a steady income during their retirements. To help protect this expectation, the Employee Retirement Income Security Act (ERISA), imposes strict obligations on employers (and their appointees) who manage and administer 401(k) plans. These 401(k) plan “fiduciaries” make crucial decisions about 401(k) plans, like what investments options are available on the plan; what companies provide services (like recordkeeping) for the plan; and how much the plan (and participants) pay for various services. Under ERISA, 401(k) fiduciaries must make these decisions loyally and prudently: they must prioritize the interests of the 401(k) plan participants (ERISA’s duty of loyalty) and must make decisions with “care, skill, prudence, and diligence” (ERISA’s duty of prudence).

But these decisions are often made behind the closed doors of committee meetings. And, for the average employee, it can be difficult to discern whether their employers are living up to their fiduciary duties.

This is where the obscure “mailings” that Justice Ginsburg referenced come in. Every year, plan administrators must provide 401(k) participants a “fee disclosure.” This document provides, among other things, information about the performance and expenses of plan investments. The disclosures can therefore clue participants into potential fiduciary mismanagement that may diminish their retirement savings.

Take the investment performance data. The annual disclosure documents provide a chart showing the performance of each investment fund in the 401(k) plan compared to a “benchmark” over the past one, five, and ten-year periods. The benchmark is a market index against which the plan’s fiduciaries measure fund performance. If an investment fund consistently performs worse than its benchmarks, the fiduciary may have acted imprudently by keeping that fund on the plan.

The expense information is also revealing. Each investment option on the plan carries its own expenses. The disclosure documents show those expense—both as a percentage of assets and per $1000 of investment. If fees are high, it can significantly harm investment performance and diminish participants’ retirement accounts. As explained in a 2014 article in The Atlantic, even a “1.25 percent difference in annual fees adds up to a six-figure difference in lifetime earnings.” Thus, unreasonably high fees can also indicate a fiduciary lapse because, as one influential commentary notes, “Wasting beneficiaries’ money is imprudent.”

Although the annual fee disclosure provides a window into the opaque world of 401(k) plan management, it can be difficult (if not impossible) for most plan participants to ferret out 401(k) mismanagement on their own. That’s why, if you think your 401(k) plan is being mismanaged, you should speak with an employment lawyer or an ERISA lawyer.

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David Tracey

David Tracey

David Tracey is a Financial Services Litigation Practice Group Co-Chair and a Senior Litigation Counsel in the New York office of Sanford Heisler Sharp, LLP, a national law firm with offices in Washington, DC, New York, California, Tennessee, and Maryland. Mr. Tracey represents employees in individual and class actions involving discrimination, wage and hour violations, employee benefits, and civil rights. He received his law degree magna cum laude from New York University School of Law, where he was awarded membership in the Order of the Coif. He received his bachelor’s degree magna cum laude from Yale University.

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