The Fine Print on 401(k) Fees Just Got a Little Bigger

My last blog post 7 Threats To Your Retirement When All You Have Is a 401(k) Plan generated a lot of interest! It was my most visited blog post to date and for that I thank all of you who follow my blog. I sincerely hope you find it useful.

Still on the topic of 401(k) plans, you may or may not know that as of July 1, 2012  The Department of Labor, in an effort to improve transparency of 401(k) fees, has released a final rule which will:

“help America's workers manage and invest the money they contribute to their 401(k)-type pension plans. The rule will ensure: that workers in this type of plan are given, or have access to, the information they need to make informed decisions, including information about fees and expenses; the delivery of investment-related information in a format that enables workers to meaningfully compare the investment options under their pension plans; that plan fiduciaries use standard methodologies when calculating and disclosing expense and return information so as to achieve uniformity across the spectrum of investments that exist among and within plans, thus facilitating "apples-to-apples" comparisons among their plan's investment options; and a new level of fee and expense transparency.”

(For more information, please refer to the Department of Labor website)

So when exactly and how will these fees be put under the spotlight?

First, there is the disclosure requirement from plan service providers (Principal, Fidelity, etc) to the fiduciary (your employer). They are required to disclose the fees they charge for investment management, administration, record keeping etc. The deadline for this disclosure is July 1^st, 2012.

Then, the employer in turn, must inform (at least quarterly) its employees the fees they are paying for the above services. This is likely to be seen on statements as dollars charged per $1,000 invested. The deadline for this disclosure is August 30^th or 60 days after the July 1^st effective date.

What will that mean for all of us?

Will the increased visibility allow employees to really know how much of the fees charged are being passed down to them and potentially question some of them? Possibly.

However, what Mike Alfred, chief executive of 401(k) rating firm BrightScope considers the main advantage, as quoted by the Wall Street Journal is “We are already seeing fees coming down in preparation for fee disclosure. That will continue because the increased data will make the market more competitive”.

And more competition usually results in savings passed down to consumers.

So next time, you get your quarterly 401(k) statement, pay extra attention to the fine print, which just got a bit larger…