After years of delay and controversy, a mandate for transparency in employer-sponsored 401(k) plans has finally arrived.
In October, the Department of Labor issued new 401(k) regulations with teeth. By January 2012, a company retirement plan must disclose all of its fees and costs to employees.
This ruling affects about 72 million employees who participate in 401(k) plans with about $3 trillion in assets, according to Department of Labor estimates.
For decades, 401(k) plan fees were mostly invisible, even to employers who offered these retirement plans to their workers. In fact, a separate rule issued by the DOL last summer requires plan providers to disclose to plan sponsors all direct and indirect compensation related to 401(k) plans -- effective July 2011. And there are plenty of ways these plans can get dinged by fees, many of which get passed on to workers.
The upshot for plan participants: They will have more data to make better 401(k) investment decisions. Fees for 401(k) plans run the gamut and can include record keeping, legal, management services and administrative charges. Additionally, 12b-1 fees, which cover marketing and distribution costs, are sliced off the top of mutual fund investments.
"Employers and service providers benefited from this opaque set-up," says Russel Kinnel, director of fund research at Morningstar.com. "Now, it's more clear what employees are actually paying."
Better accountabilityCosts will be spelled out in plain English and expressed in dollar terms. And each 401(k) enrollee must get quarterly statements detailing investment performance, along with costs.
"Right now, you only see a net return," says Nevin Adams, editor in chief of Plansponsor magazine, which covers workplace benefits. "It's not easy to know what you're paying." Beginning in 2012, he says, employees will see lots of data.
That's good news. More than half of all 401(k) money is invested in mutual funds, according to the Investment Company Institute, a trade group. The ICI says enrollees paid slightly higher expense ratios for stock and bond funds in 2009 than in 2008.
"Most employees don't think they pay these 401(k) expenses -- that employers do," says Jason Roberts, a partner at Reish & Reicher law firm in Los Angeles. "That's the biggest eye-opener."
Some plan providers, such as Putnam and Fidelity, are already taking steps toward disclosure, says Adams. For example, Putnam announced it has begun releasing details about 401(k) plan fees, such as those pertaining to transactions and services, in employees' online accounts.
"Nobody thought that you could put the genie back in the bottle," says Adams. "Providers will start (itemizing costs) before 2012."