Fri, October 28, 2011
According to a recent AARP poll, 71% of 401(k) plan participants believe that they don’t pay any fees in their company’s plan. In fact, most do, but the fees are not disclosed or are so deeply buried in plan reports that most employees are blissfully unaware of what the actual costs are. New Labor Department regulations will change that next year.
Under a revision of Employee Retirement Income Security Act (ERISA) rules, starting April 2012 the administrators of 401(k) and similar plans will be required, as part of their fiduciary responsibility, to provide explicit statements to plan participants of the fees and expenses deducted from retirement accounts. For transparency, the costs will have to be shown both in percentage terms and in terms of the cost per $1,000 invested.
Plan administrators will also be required to disclose the one-, five-, and ten-year performance records for all funds in a given plan.
The new disclosures, under a rule known as 408(b)(2), will be great for employees, and should help to pressure the highest-cost plan providers to become more competitive.
At present, employers are supposed to provide their defined contribution plan participants with a selection of “prudent and adequately diversified” investment options and charges that are reasonable. In practice, there’s a degree of latitude in what is considered “reasonable,” and employees seldom look closely at the actual costs. But once all participants can easily see the fees in their retirement plans, employers will have a new incentive to police costs closely: the fear of lawsuits from irate employees.
The disclosure rule, which was originally intended to take effect January 1st, was pushed back three months after plan providers complained that they would need more time to implement the changes.