After the recession brought on a host of lawsuits by employees who felt their employer didn’t do enough to educate them on the fees and costs associated with their retirement plans, we can all probably agree the new fee disclosure legislation provides some added security for plan sponsors.
On the other hand, there are some challenges. It will require work from plan sponsors as they will be responsible for rolling out the information in any plan communication to employees by Aug. 30, and calling awareness to the fees being charged to employees in the plan might not make for better employee morale.
Still, HR and benefits managers can use the fee disclosers as an opportunity to educate their employees about the importance of their decisions regarding retirement, rather than simply informing them about what they’re paying in their plan.
Here are three ways HR managers can use the disclosures to educate employees about their retirement benefits and improve their ability to make the best financial decisions associated with them to reach their retirement goals.
1) Educate employees about the fees they have control over.
A recent AARP study found that 71 percent of employees reported they did not pay fees in their 401(k) plan, but they actually did. Because the majority of employees are not aware of the fees they’re currently paying in their plans, many employers are expecting a backlash as they begin to call attention to them.
To mitigate this, it's necessary to educate employees on the fees they can control—in funds they choose—rather than simply disclose the fees within the plan. Educate them on what to look for when choosing funds to determine and compare costs. Provide things they should consider to choose the best funds for their financial plan and lifestyle. By helping employees see that they actually have more control than they think in the fees they pay, they will be less likely to resent the company’s decisions with the plan and be more likely to make positive changes to their retirement plan that will benefit their own situations.
2) Educate employees on the differences between managed accounts and index funds.
Investment fees account for the largest amount of money employees spend within their 401(k) plans, yet since they’re deducted directly from investment returns, employees often miss that they’re paying them altogether. Provide education for employees around the differences between managed accounts, which typically come with hefty fees, and index funds, where fees are often significantly lower. Use examples to tangibly show employees how much money they could be saving toward retirement if they made some small adjustments to their 401(k) plan, getting them to consider whether their decisions make the most sense for their circumstances. Employees often choose managed accounts without even realizing they are paying higher fees for it.
3) Show employees a comparison of the fees in your plan to the industry average.
Employees don’t see the work their employer puts into researching and negotiating with plan providers to bring them a reasonable 401(k) plan that fits their needs as best possible. Because they don’t see this, they might be missing the fact that their fees are much lower than those they’d receive if they sought a retirement account outside of their employer. In this sense, they are getting a significantly better deal by investing their assets with their employer. You can highlight your due diligence in choosing a reasonable plan by showing employees how your company’s 401(k) fees compare to those in the industry.
Though many managers are stressed simply thinking about adding the new disclosures to their communications by the end of August, they can benefit much more from taking their communication a step further and educating employees about how to secure their retirement in the process.