If you've read or watched the news recently, you may have come across headlines discussing the Department of Labor's new 401(k) fee disclosure rules. The new regulation is great news for you and other 401(k) participants as information regarding fees and expenses related to retirement accounts will soon be more readily available.
What exactly are the new 401(k) fee disclosure rules?
The Department of Labor finalized a rule this past February requiring retirement plan providers to disclose information about the administrative and investment costs associated with providing employees 401(k) accounts. By the middle of the year, plan providers and employers will need to be in full compliance of the new regulations.
The purpose of the regulation is to make the true costs of 401(k) accounts more transparent to individual investors. This allows each employee to know where their money is going and how much they are paying. However, many plan participants do not know they actually pay fees in their 401(k).
Although the fees might come as a surprise, it's important to note that retirement plans were never free. The fees have always been there and you have been paying them all along, but the only difference is that now they are disclosed. Most of the fees associated with 401(k) plans fall into one of three categories: plan administration fees, individual service fees and investment fees. Fees may seem like a big downside to your retirement savings, but there are many advantages to knowing the fees associated with your account.
What are the benefits of the fee disclosure?
Having access to the fee information will help you become a smarter investor. How, you ask? Under the new regulations, you and other 401(k) plan participants will receive data regarding your investment options, including plan costs and comparison charts. The increased transparency will allow you to use the information to your advantage. You will be able to review your quarterly statements with a list of fees and see what you are currently paying for your 401(k) plan.
Once you know how much you are paying in fees, you can begin comparing those costs to other investment fees in order to see if the higher priced fund is worth your money. However, don't abandon a fund just because it has higher fees. That fund may be worth it if it matches your long-term financial needs. If you take the time to educate yourself with the newly disclosed information, you will make more informed investment decisions and have a retirement plan that fits your financial situation and goals.
Another great benefit of the Department of Labor's new regulations is that your employer will be accountable for providing you and your colleagues with plans that have cost-effective investment and administrative fees. From an employer standpoint, this is a great opportunity to compare fees and save money for their employees. There are many different 401(k) providers so employers can easily go out and get price comparisons. From an employee perspective, don't be afraid to have a conversation with your employer about the fees. Ask them if you and your colleagues are paying above or below average in 401(k) costs.
The transparency of 401(k) costs should encourage more open communication between employers and employees regarding retirement needs. The new rules will expand the availability of retirement plan options, allowing Americans to maximize their one shot at retirement and secure their financial futures.
Scott Holsopple is the president and CEO of Smart401k, offering easy-to-use, cost effective 401(k) advice and solutions for the everyday investor. Follow Scott and the Smart401k team on Twitter.