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Comparison of 401(k) Participants' Understanding of Model Fee Disclosure forms Developed by the Department of Labor and AARP

by Colette Thayer, Ph.D., AARP Knowledge Management, AARP Research, September 2008

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While most 401(k) plan participants (85%) recognize the importance of fees when making decisions about the investments in their plan, nearly three quarters (74%) admit they do not know how much they are paying in fees and expenses for their 401(k) plan. Regulations recently proposed by the Department of Labor (DOL) require the disclosure of certain plan and investment-related information, including fee and expense information, to participants and beneficiaries and contain a model disclosure form.

Among 401(k) plan participants who viewed DOL's model disclosure form:

  • Nearly six in ten respondents (59%) feel it would be helpful to receive. However, only a third of respondents who viewed the proposed form agree it would help them make more informed decisions about their 401(k) account (35%) and that it would help them understand the impact of fees and expenses on their long-term retirement savings (34%).
  • A third or fewer respondents agree DOL's form is easy to read (30%), is easy to understand (25%), has a clear purpose (33%), has terms that are clearly defined (24%), and explains how to get additional information (35%).

AARP developed an alternative disclosure form through consultations with experts and revised it through extensive interviews with 401(k) participants. Among 401(k) plan participants who viewed AARP's model disclosure form:

  • Nine in ten respondents (90%) feel it would be helpful to receive. More than seven in ten agree it would help them make more informed decisions about their 401(k) account (72%) and that it would help them understand the impact of fees and expenses on their long-term retirement savings (77%).
  • At least seven in ten respondents agree AARP's form is easy to read (77%), is easy to understand (72%), has a clear purpose (78%), has terms that are clearly defined (70%), and explains how to get additional information (75%).

A comparison of the responses to the DOL and AARP forms suggests:

  • A disclosure form that contains participant-specific information and actual dollar figures linked to account balances may improve participants' comprehension of the form. This is especially important since many respondents (73%) express an interest in receiving fee information displayed in both dollars and as a percentage of total assets and half (49%) are unable to correctly calculate 0.20% of $100,000.
  • A disclosure form can lead to action, but action is not guaranteed. A form that is perceived as easy to understand and helpful is more likely to be used to weigh the advantages and disadvantages of their investment options and to make more informed decisions about the investments in their account than one that is confusing. Using clear definitions of financial terminology and using vocabulary that is not perceived as complicated may help to improve participants' understanding of the form.
  • Layout and design elements can be used to enhance communication of key information in the form. For example, using bold type, underlining, bullets, and borders to highlight important information may enhance comprehension by drawing participants' attention to it.

This survey of 2,106 401(k) plan participants ages 25 and older was conducted for AARP by Knowledge Networks using its nationally representative online panel. The survey was fielded from August 8 to 18, 2008. For further information about the study, please contact the report's author, Colette Thayer, Ph.D., at 202-434-6294. (62 pages)

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