How will new fee regulations affect my 401(k) retirement plan?
The 401(k) retirement plan is the best way for most people to save for retirement, and for many people their retirement account is their second largest asset next to their home.
Fees and expenses in your 401(k) plan can eat into your retirement savings, but knowing how much you're paying is difficult. Current regulations don't require complete disclosure of these expenses to the investor. Many times it's difficult even for the trustee of the company's plan because the fees are buried or hidden in multiple places, such as mutual funds with high expense ratios, 12b-1 fees, asset-based fees, plan administration expenses, insurance costs of a group annuity and record-keeping fees.
In 2012, new regulations from the U.S. Department of Labor (DOL) will bring greater fee transparency to investors and will be implemented in three phases. The "408(b)(2)" regulations require that service providers must fully disclose to the plan sponsor (typically your employer) all fees, including those for administration, record-keeping and investment advice. This first phase of rules goes into effect July 1.
As a plan participant, you may not see these details right away, but there are two additional dates to be aware of. By Aug. 30, these fees must be disclosed to you, and by Nov. 14 they must begin appearing on your quarterly statements.
There are two important points to make about the new disclosure rules. First, the government doesn't specify a fair and reasonable fee. Plan sponsors will want to benchmark their expenses against similar sized plans to make sure they aren't paying too much. Second, plan sponsors aren't required to have the lowest expenses; they're required to ensure the fees paid are reasonable compared to the level of service they provide. The cheapest service isn't always the best service.
401(k) plans from insurance companies will be impacted the most. They traditionally have had among the highest expenses in their retirement plans. Rather than selecting the best mutual funds available, they oftentimes use their own in-house brands, which don't have to compete with better funds available. Even when they do use popular mutual funds from other companies, they usually tack on an extra fee. And when a group annuity is used, there is an additional cost of the insurance contract added on, referred to as a "mortality and expense" (M&E) charge.
Some plans have already begun paving the way toward fee transparency over the past few years. When fees are more transparent, it's easier for your company to determine if they're paying a reasonable price and ask, "What do we get for our money?" Do employees receive assistance in constructing their portfolio? Are additional retirement planning services available? Can employees get advice on other topics, such as long-term care?
The new regulations will pave the way not only for lower costs, but also better investments and more comprehensive service. Employers will benefit by having a more competitive plan to attract talented people and to take care of their people, and employees will win out as they get better investment options and have greater confidence in their ability to retire.
--Gary E.D. Alt, AIF(r), CFP(r) is a co-founder of Monterey Private Wealth in Pleasanton. Send your financial questions to email@example.com.