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The Boston Globe

Business

Savers ignore fee disclosures

The federal government, namely the Labor Department, had a great idea when it pushed through regulations last year that require the disclosure of fees for in 401(k) employer-sponsored retirement savings plans.

The government knew fees were undercutting the value of the savings by erasing much of the compounding effect of regular investments withheld from workers’ paychecks.

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The government also knew that few workers understood how much in fees was being taken from 401(k) accounts.

The reaction from workers saving for retirement to the fee notices?

So far, a great big collective and indifferent yawn.

The mutual fund industry, which collects the 401(k) fees, must be jumping with joy.

The Washington, D.C.-based Employee Benefit Research Institute reports that with 53 percent of 401(k) savers having received fee notices to date, just 14 percent of them, or 7 percent of all plan participants, have made changes in their investment choices.

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Of the savers who made changes, 32 percent moved money out of investments with high fees to ones with lower fees. Only 8 percent had shifted their future investments into mutual funds with cheaper fees.

Alarmingly, 7 percent started contributing less to their 401(k) accounts, a bad move, although 6 percent have opted to invest more with each paycheck.

Fees are necessary to cover administrative costs, but retirement savers are hurting their futures significantly if they do not understand the effect of the fees and how they can shop around for lower fees.

NerdWallet, a financial education Internet site, has reported that a married couple typically will pay between $150,000 and $200,000 in 401(k) fees over their working careers. Even if that is only half right, it’s too much.

NerdWallet also reports that two-thirds of retirement savers have no idea that fees are being charged.

With corporate pensions being withdrawn from the American work scene at a dramatic rate, workers must be responsible for their retirement savings through the tax-advantaged 401(k) plans. As they do so, they need to know which investment choices charge the highest fees.

This leads to the issue of actively managed mutual funds, in which portfolio managers buy and sell selected stocks, versus passively managed mutual funds, such as index funds. Index funds invest in buy-and-hold fashion in a broad array of stocks like those in the Standard & Poor’s 500 index.

Fees for actively managed mutual funds average 0.93 percent yearly, while index-fund fees average 0.14 percent, NerdWallet says.

Past performances strongly suggest index funds are less volatile and, over time, return better yields than actively managed funds. Index-fund investors also get to keep more of their earnings because less is taken out in fees.

Employers are not explaining this plainly enough. Workers saving for retirement either don’t want to bother with understanding the fees and acting accordingly or they are reluctant to complain to their employers about the investment choices and high fees.

Workers saving for retirement should realize they can build their nest eggs to suitable levels with efficient, low-fee investments.

Or they can make their investment brokers rich. It’s the workers’ choice.

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