According to a recent survey, more than 70% of participants in 401(k) retirement plans think they pay no fees on their accounts. Less than a quarter got the answer right, acknowledging that they do, in fact, pay fees.

It’s enough to drive true-blue Vanguard investors to despair. But before we give up entirely on our fellow investors, I’d like to suggest that there are some important issues here at play.

For the man or woman in the street, the idea of “paying fees” often means something like writing a check or having an annual charge show up on an account statement. Think of bank statement fees, credit card charges, or even IRA account maintenance fees. From this perspective, the survey results seem on point. Most plan participants don’t have recordkeeping charges deducted explicitly from their balances. Only a minority do.

What the survey is actually telling us is that most participants are paying attention only to explicit fees and don’t understand the mechanics of expense ratios—in other words, that expenses are deducted from gross performance before results are posted in their accounts.* This notion of fees is harder to grasp. Most participants don’t understand how financial institutions operate—earning a gross return on assets, delivering a net return to investors, and running their business on the spread.

This problem isn’t limited to 401(k) plans. Not long ago, an affluent retail investor was telling me about his financial advisor. He was happy with the service and investment advice he received. But when I asked about fees, he paused for a moment and said he wasn’t really sure about fee mechanics—though “of course” his advisor and his company needed to make money.

That, I believe, is how most people think about 401(k) fees. If you were to ask investors whether 401(k) administrators or money managers need to make money to stay in business, they would say “certainly.” If you asked how administrators or managers get paid, they’d be unsure.

The good news is that under new regulations from the Department of Labor, all 401(k) participants will be receiving fee disclosure information in the coming year. These disclosure statements will surely trigger a flurry of press articles and plan communications about the topic—and thereby disseminate important fee concepts further. Plan sponsors will also be receiving new disclosures. That’s good news because employers who sponsor 401(k) plans are important gatekeepers when it comes to fees, negotiating overall fee levels with their service providers.

All of these disclosures should help move the dial on fee literacy in retirement plans. Five years from now, more Americans should understand that they really do pay fees for their 401(k) plans.

* The uber-investor will also know that it’s not just expense ratios that matter, but also capital market transaction costs. But this was a survey on the basics.

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