COMMENTARY| On February 2, 2012, the U.S. Department of Labor?s Employee Benefits Security Administration issued a final rule that will provide employers sponsoring pension and 401(k) plans with information about administrative and investment costs associated with providing these plans to their workers. According to the press release, the measures will ?expand transparency in the 401(k) plan marketplace and broaden the availability of retirement plan options so that Americans can maximize their ability to save responsibly and securely.?
The department also announced a 3-month extension in the effective date of this rule, meaning service providers must be in compliance by July 1. Most 401(k) retirement plan participants will see the initial annual disclosure of ?plan-level? and ?investment-level? information (including associated fees and expenses) no later than August 30, 2012.
According to Aon Hewitt, a leading administrator of 401(k) and other benefit plans, total plan cost (TPC) include explicit (investment management) and implicit (administrative, trustee and other) costs. Investment management costs (typically 50-80% of total cost) are disclosed in the plan prospectuses, but costs such as record keeping, call center, records processing, communications etc. may not be disclosed at all, or lumped together in the TPC.
In related news, The Wall Street Journal reported on January 31, 2012 that many companies are ready for ?sunshine? to be shone on their plans, and employers are looking to reduce fees and offer new investing choices.
My Perspective
My former employer discontinued its pension program in the early 2000s. Since Social Security will provide only 76% of my estimated retirement benefits, I know, along with millions of working Americans, that I have to rely on a defined contribution plans such as 401(k) to sustain my expenses after retirement. In 2011, 401(k) plans had $4.3 trillion in assets.
There are ?10 Reasons I Started Investing Early in a 401(k) Plan. ? I have always reviewed fund prospectuses for plan information, including fees and costs. Prospectuses are supplied (either electronically or through hard copies) to all participants by ERISA law. Online 401(k) participants must check that they have read prospectuses before making a new investment. However, in my experience, even though mailed quarterly statements contained portfolio allocation and fund performance, fee information was not disclosed. Also, even though it was possible to check fund investment management fees online, TPC was tough to ascertain. Finally, a customized cost of the entire retirement portfolio was not provided.
Fee disclosures will be a welcome change that adds transparency to 401(k) investing. Fee reductions would be even more beneficial. Due to the power of compounding, even small fee changes of a few basis points (100 bp = 1%) translate to tens of thousands of dollars in savings for the retirement account. For this reason, seasoned investors often prefer index funds with low-management fees over managed funds or target-date portfolios (typically 100 bp plus in costs).
However, 401(k) retirement plans remain a defined contribution plan, meaning the employee, not the company or plan sponsor, is ultimately responsible for its performance. An account that is not diversified, or invested in more risky assets like small cap stocks or international stocks will be less ?secure.? In that respect, I doubt increased transparency in fees disclosure will ?enhance retirement security? as the government press release claims it would.
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Read more:
First Person: Do New Fee Disclosure Rules Mean More Security for 401(k) Retirement Plan Savers? ? YAHOO!
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