As of July 1st, 2012, new requirements will make your 401(k) fees more transparent. After over three years of discussion and debate, the Labor Department rules, known as ERISA (Employee Retirement Income Security Act) 404(a)(5) and 408(b)(2) will be put into effect. These laws will expose hidden costs of 401(k) plans sometimes touted as "free" to 72 million Americans.
According to an AARP survey conducted last year, 71 percent of plan participants don't think they pay any fees for their company's retirement plan. In reality, they pay a variety of fees including investment management, administrative and advisory fees, and more -- investment management fees usually comprising the bulk of the expenses.
Part of the reason for this misunderstanding is the way 401(k) plans are generally structured; participants (employees) pay for the plan, while the company or "plan sponsor" doesn't pay anything. Up until now, the fees weren't disclosed to either party. They were just rolled into the performance of the 401(k) without a clear breakdown.
Changes take effect July 1st, but you might not receive the information until your 3rd quarter 401(k) statement. However, you can request fee information from human resources at any time.
The importance of keeping investment fees low is a good rule of thumb, not limited to 401(k) plans. We want to be mindful of the fees we pay when it comes to any investment. According to Mary Beth Franklin of InvestmentNews in a recent NPR story, over 35 years "a 1-percentage-point fee difference reduces your savings by 28 percent." Fees can have a very real effect on your life and require you to work longer or increase your chances of running out of money in retirement.
What the disclosure will and won't tell you...
It won't tell you the exact amount of total fees or a exact percentage for the funds you have invested. It will tell you the amount of fees you pay for every $1,000 you have invested. With this information you'll have to calculate your total fee.
Is there value in the plan and the fees you are paying?
It can be hard to assess a reasonable fee for investments. As a general guideline 1 percent for an all-in annual fee is a place to start. That includes fees for record keeping, custody, third-party administration, advisors for fund selection and management, expense ratios of funds, etc.
What should you do if the fees for your plan are out of range?
Talk to human resources or depending of the size of your company talk to the owner. They have a fiduciary duty and can be held legally responsible if they don't offer a competitive fee option. You might also consult a CERTIFIED FINANCIAL PLANNER™ who can help you assess if the investments (including the fees associated with them) are positioned to accomplish your goals.
One concern is that fee disclosure will deter people from saving for retirement. However, a 401(k) is still a useful tool. You are receiving tax benefits and a possible match of your 401(k) contributions. Because your investments are growing tax-deferred, over time you can still come out ahead of taxable investment accounts. Although you'll want to contribute to those as well after you've contributed the maximum amount to your 401(k) which is $17,000 this year. This is assuming you've taken other financial measures first, like paying off high interest rate debt and establishing an emergency account.
Use this new information wisely, continue to contribute to your 401(k), reduce fees where possible, and create a plan for retirement so you'll be sure to SaveUp!
This post was written by SaveUp's personal finance contributing writer, Catherine Hawley, CFP®.
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