Hidden 401(k) plan fees to be disclosed

12b-1 fees disputed

The DOL has concerns about 12b-1 fees, says Adams. These fees affect mutual fund investors, especially those invested in higher expense stock funds, and they're typically hard to find.

"With 12b-1 fees," says Kinnel, "it can look like providers aren't collecting anything. A lot of fund industry fees are too hidden and not always understood."

The 12b-1 fees were developed when the mutual fund industry was in its infancy, says Roberts. They were meant as incentives for sales representatives. "There has been a disconnect between their intended purpose and what they're being used for today," he says. "It takes more explanation."

Kinnel says that 12b-1 fees were originally intended to attract assets to a fund. Once the fund reached a certain size, it could gain economies of scale that would result in reduced fees. However, the fees did not change appreciably, though mutual fund assets grew tenfold or more.

In recent years, some disgruntled employees in 401(k) plans took matters into their own hands, launching lawsuits against employer plans.

One example involved a lawsuit against Wal-Mart Stores Inc. "There were billions of dollars in the plan," says Roberts, "but investment options were limited to retail funds that paid heavy 12b-1 fees." The respective retirement plan fees of Kraft Foods Inc. and John Deere were also targets of class-action lawsuits.

"Participants wanted to pay reasonable fees for reasonable services," says Adams. "More suits were dismissed than decided."

The DOL's ruling breaks this 401(k) fee logjam.

What's coming in 2012

Once DOL regulations are set into motion, 401(k) enrollees will get lots of data for making investment choices.

Investors will be able to:

  • View plan costs and comparison charts. Costs must be explained and compared with other investment options for new participants.
  • Evaluate fees in light of service. Is the plan the best it can be? What are you getting for these fees? Investors could find themselves paying 12b-1 fees for funds that didn't do better than cheaper Standard & Poor's index funds. The data will help workers push for better service or lower costs. "But don't jump to conclusions," Roberts says. "You may need lots of additional information."
  • Receive detailed quarterly statements for 401(k) investments. This information, which will include plan expenses and fees, will be printed and available online. It will show the dollar amount of plan-related fees deducted from the account, along with comparison charts of other plan investment returns.

Will more disclosure push 401(k) plan fees down? If the past is any indication, probably not by much if at all. But the bonus is clear data for making sharper investment decisions.

"Participants can effect change," says Roberts.

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