December 31, 2011 by staff
401(k) Plans, All too often workers with 401(k) accounts are in the dark. They view their retirement plan as a benefit and are unaware they’re paying for the privilege of investing for retirement, But greater awareness will come in 2012 with new Labor Department regulations that require 401(k) plan providers to spell out some of the fees workers pay. Labor officials said the greater transparency will help workers and their employers make better decisions that could save them money.
Many investors don’t realize that more than a half a dozen fees may be charged against their 401(k) account for recordkeeping, administration, investment advisory, brokerage and management services. In addition, at least eight kinds of indirect fees and expenses could be charged. These are often shaved off the top of the account’s investment returns.
The push for greater disclosure has been in the works for several years. Under the new rules, investors will receive additional annual and quarterly disclosure reports that will include information on the performance of account investments and the expense ratio for each of the mutual funds. These expenses will be expressed both as a percentage of assets and as a dollar amount per $1,000 invested for each fund.
Still, the new reporting requirements are not without their drawbacks. For instance, they don’t require 401(k) providers to include a simple total fee figure expressed in dollars. They also don’t require a comparison of fees to an average or some other benchmark and not all fees are required to be disclosed. This means investors won’t get the complete picture.
The government’s new regulations are a baby step in the right direction in that they require at least some disclosure, but they could go much further, said Tom Gonnella, a senior vice president at Lincoln Trust, a Denver plan provider to about 2,500 small companies.
His biggest complaint is that they leave out many of the costs of operating a 401(k) which are charged against the returns of each participant in the plan. These investment expenses can account for 70% to 80% of the total cost to investors in most plans, Gonnella said.
The Labor Department should have pushed for disclosure of a simple all-inclusive fee total and comparisons to averages that would have been much more helpful to workers.
“It fell way short,” he said.
The department didn’t see its regulations as the final standard and encourages plan providers to come up with their own reports detailing fees in ways that are helpful to investors.
“We expect service providers will find various ways to build on the regulations’ requirements to illustrate for their plan clients how their fees and service levels compare to other plans and other service providers,” Assistant Secretary of Labor Phyllis C. Borzi said in a statement.
Laying out investment expenses is particularly important for workers in smaller plans. That’s primarily because many companies, especially small businesses, do not want to pay the thousands of dollars of operating costs. So they set up retirement plans in which costs are paid by workers out of their investment returns.
All of this discussion is critical because workers who pay just 1 percent more in fees see a significant impact on their retirement balance over their working careers.
As an illustration, AARP calculated that employees contributing $5,000 per year to a 401(k) account, earning an annual return of 7% and paying no fees, could grow their balance to $469,000 over a 35-year working career. By comparison, an annual fee of 1.5 percent of the account balance cuts the savings 26% to $345,000.
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