401(k) Fees Become More Transparent
Most employees participating in 401(k) plans – and many employers offering these plans to their employees – don't know exactly how much they're paying in plan fees. But that's all changing, with new fee disclosure rules having taken effect July 1.
Since July 2011, the US Department of Labor has required 401(k) service providers, including mutual fund companies, recordkeeping services and other third-party administrators, to clearly tell employers sponsoring these plans about fees charged for investment management, recordkeeping, administration and other services related to maintaining the plans.
Under the rules effective July 2012, employers must disclose to their 401(k) plan participants all fees being charged to participants for plan investments and administration. Under the new rules, employers must:
- Provide plan participants with quarterly statements of plan fees and expenses deducted from their accounts
- Furnish core information on plan investment options, including the cost of those options
- Use standard methodologies to calculate and disclose expense information, for uniformity across the spectrum of investments that exist in plans
- Present all information in a format that enables participants to compare a plan's investment options
- Offer access to supplemental investment information in addition to the basic information required
By August 30, 2012, each plan participant must receive an initial report showing the fees that would apply with each investment option in his or her retirement plan. In fall of this year, plan participants will begin receiving third-quarter account statements showing the exact amount of fees deducted from their accounts.
For employers, what does this all boil down to? Fees can vary widely between providers, ranging from as low as around .30% of assets to more than 2% of assets. More than ever before, employers must pay attention to the costs they and their plan participants are incurring and be willing to shop for lower-cost plan options. The new disclosure rules have already resulted in positive changes – many employers have sharpened their focus on plan fees and either moved their plan or negotiated lower fees with their current service provider.As for plan participants, starting in the third quarter this year, they should scrutinize their account statements for fee information and be willing to ask their employer how their fees compare to those incurred by other companies' plans. Most importantly, participants should continue contributing to their plan, even if they find the fees to be high. Contributing to a 401(k) or similar tax-deferred savings plan is generally considered the best way to save for retirement.