What Your 401(k) Costs…Sort of

By ANDREA COOMBES

You may have heard that employers finally will be required to give employees detailed information about 401(k) plan fees. You could be disappointed when you see the results.

The new annual disclosure form, which the U.S. Labor Department said employers must provide to workers by Aug. 30, may run more than 15 pages long. But it won't provide a simple figure for your annual cost and some employers may bury the plan's administration costs in with investment expenses.

"It's a good start and there's a way to figure out what you're paying, but it's not going to be an easy-to-read, one-page summary that says, 'You're paying this for your 401(k),' " says Scott Holsopple, chief executive of Smart401k, an Overland Park, Kan., firm that advises savers.

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The new form will list, as a percentage, the annual operating expense for each investment offered. It's basically a price list, says Dave Gray, vice president of client experience for Schwab Retirement Plan Services, in Richfield, Ohio.

To figure how much you're paying for your 401(k) investments, multiply the balance you have invested in each option by the expense ratio listed for that investment, then add up your cost for each. (The new form also will describe expense ratios as a dollar figure—the cost per $1,000.)

To get the full cost of your 401(k), you'll need to add in any plan-administration expenses—for record-keeping, legal and other services—that your employer requires employees to pay, plus any transaction costs, such as what some plans charge to savers who take out a loan or distribution.

The annual disclosure form will describe what your employer's plan charges for such transactions, and, in some cases—depending on how your plan is structured—the form will say what employees pay for plan administration.

But the list of investment expense ratios on one form, despite its length, is potentially "the biggest eye-opener" for savers, Mr. Gray says. "Investment expense is the lion's share of expense that a participant pays," he says.

Separately, the Labor Department rules require that by mid-November, 401(k) quarterly statements must detail any fees deducted from a saver's balance, such as for services the saver tapped, like a loan, or for plan administration costs.

But neither the quarterly statements nor the annual disclosure will detail a plan's administrative costs that are paid via revenue-sharing arrangements, in which those costs are offset through the plan's investment options. For example, some plans are set up such that an investment manager agrees to pay a 401(k) service provider a portion of the fees it collects from plan participants who invest in a particular mutual fund.

If your plan's costs are paid in this manner, the new rules require that to be disclosed in general wording on the new quarterly statement. But the precise amount you're paying through this revenue-sharing agreement won't be made explicit. Still, these costs are counted as part of the expense ratio detailed on the new annual disclosure form.

Think of fees in two buckets. One bucket is fees charged to manage investments; one is fees to manage everything else, including record-keeping, legal services and more, says Mark Davis, a financial adviser with Captrust Financial Advisors in Westlake Village, Calif.

If those buckets are combined by a service provider, the employer faces fewer explicit disclosure requirements. Some argue that knowing the expense ratio is sufficient for savers, but Mr. Davis disagrees.

"When a plan sponsor shifts the cost of running a plan from the sponsor to the participant, then the participant has every right to know what's being paid for the various services of the plan. These disclosure regs will not lead to that."

Other costs will remain hidden, too. For instance, expense ratios don't include trading costs generated when the fund manager buys and sells stocks. These costs can vary widely. Still, they are reflected in a fund's net performance—and funds' past performance is detailed on the disclosure form.

The new disclosures can help workers seeking to improve their plan. "Challenge the benefits department," says David Kudla, chief investment strategist at Mainstay Capital Management, a Grand Blanc, Mich., advisory firm.

Workers might ask, he says, "Why is our average expense ratio this high? What are the revenue-sharing arrangements that I don't know about?"

Employees aren't alone in gaining more information. By July 1, 401(k) service providers must give employers clearer disclosures about who gets paid what relative to the plan.

"We're already seeing fees coming down in preparation for fee disclosure," says Mike Alfred, chief executive of 401(k) ratings firm BrightScope. That will continue, he says, "because the increased data will make the market more competitive."

Write to Andrea Coombes at andrea.coombes@dowjones.com