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401(k) fees hidden ’til August

By Barbara Whelehan ·
Friday, February 3, 2012
Posted: 5 pm ET

401(k) fee disclosures have been delayed once again. A couple of years ago, we were promised that by January of 2012, we would be told how much our 401(k) plans cost. Then last July, the Department of Labor issued a final regulation, postponing the effective date for 401(k) fee disclosure to April 1 of 2012 for plan sponsors (i.e., employers), and to May 30 for plan participants.

April fool. Yesterday the Labor Department's Employee Benefits Security Administration issued a final rule that pushes back the rule's effective date another three months. That means service providers, such as mutual fund firms and insurance companies, can wait until July 1 to tell their customers the costs of their workplace retirement plans. Meanwhile, plan participants, like you and me, will remain in the dark for another couple of months.

"Plan administrators for calendar-year plans now must make the initial annual disclosure of 'plan-level' and 'investment-level' information (including associated fees and expenses) to participants no later than Aug. 30, 2012, and the first quarterly statement (for fees incurred July through September) must be furnished no later than Nov. 14, 2012," according to a DOL release.

Basically we have to wait nearly a year to find out how much we're getting charged for our 401(k) plans. But hey, we've been waiting for years, even decades, for fee information that we should have been told from the start.

Regulation delayed for several years

Back in March of 2008, I wrote about the DOL's plans to issue regulations after attending a 401(k) Summit sponsored by the American Society of Pension Professionals & Actuaries, or ASPPA. At that conference, there was much hand-wringing among the attendees. Their main concern: How in the world can we possibly explain the complicated fee structures of 401(k) plans to plan sponsors, much less to plan participants, they asked aloud. At that point in time, the disclosures were expected to go into effect in January of 2009.

This past December, ASPPA and the Council of Independent Recordkeepers asked the DOL to postpone the effective date for a full year after regulations were finalized to give providers "enough time to make the required system changes to implement the final rules."

Make no mistake about it -- the retirement industry is extremely nervous about having to make these disclosures. A couple of months ago, like a fly on the wall, I listened in on a webcast conference hosted by that featured several vice presidents from a well-known insurance company. Hundreds of plan administrators and other retirement industry types were on the call.

One of the vice presidents began the discussion by citing the results of a 2011 AARP survey: 71 percent of the population doesn't think they're paying any 401(k) fees at all, 23 percent think they do pay some fees, and 6 percent aren't sure, he said. The vice president predicted that once the fees are revealed to the public, there will be a shake-up in the industry. Between 12 percent and 18 percent of plan sponsors will go to market in search of low-fee plans as a result of the upheaval, he said.

So when they finally get their statement with the disclosures in hand, 85 percent of plan participants will open it and look at it, the vice president said. A high percentage will spend considerable time examining it, and many will be motivated to switch to lower-cost funds.

"This is a paradigm event. In the short term, there's going to be a little bit of sticker shock. In the long term ... what's important is understanding how participants will react," he said.

The vice president recommended that plan participants be given more information, rather than less. That's because in focus groups, participants who were offered more information thought the fees were "benevolent," while those who were offered less information thought they were "greedy and complex."

Just how much are we paying?

Total costs for a 100-participant plan with average account balances of $50,000 range from 0.36 percent to 1.71 percent, according to the 12th edition of the "401k Averages Book." Let's see how these different fees would impact two 401(k) plan participants over time.

In this scenario, both Earnest and Jack's investments earn an annualized rate of 8 percent over 25 years, and both contribute $6,000 a year into a 401(k) plan. Net of plan costs, Earnest's investments grow at a rate of 7.64 percent. But because Jack's plan is more expensive, his funds grow 6.29 percent after fees. At the end of 25 years, Earnest has $416,232 saved up in his plan while Jack has $342,950.

How fair is that? Not fair at all. But worse is the decades-long secret shroud over 401(k) plan fees perpetrated by the retirement industry. We shouldn't have to wait several more months to get this information. It's a retirement planning disgrace.

How do you feel about this?


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Terry Martine
March 29, 2012 at 4:34 pm

Traditional 401(k) providers were incented by the mutual fund carriers. Whereas Registered Investment Advisors (RIA's) offer 401(k) platforms that are completely DOL compliant. They typically use ETF's in an effort to lower costs to 401(k) participants. RIA's offer managed platforms within the 401(k) as well. These platforms rebalance on a quarterly basis. Participants no longer have to sit down and sell rebalance their portfolio on their own. In addition, ETF's give accessibility to alternative asset classes in order to better diversify a portfolio. RIA's are out there offering these transparent plans. The DOL has rightfully insisted the full disclosure of all fees, and any conflicts of interest.
Terry Martine

Barbara Whelehan
February 04, 2012 at 10:35 am

Hello EIEIO,

Individual investors can find out what costs are associated with IRAs and SEPs directly from the service provider. That may be a good reason to do a rollover from a company plan to an IRA, since IRA costs are more transparent. SEPs are generally set up by an employer for the benefit of both the employer and employees, with all contributions made by the employer. Employers can ascertain SEP fees when setting up these accounts; I don't know if they must disclose the fees to workers, but it shouldn't take much sleuthing for workers to find out.

With insurance products such as annuities, fees are not so transparent. Part 2 of the DOL's announcement yesterday involved reducing regulatory burdens of offering lifetime income products -- annuities, in other words -- within workplace retirement plans. But nothing was mentioned about disclosing their fees. Thanks for writing.

February 04, 2012 at 9:06 am

I read that IRA's and SEPS will not have to reveal fee itemizations. I presume variable annuties will not have to provide this information either. Only 401k and 403b investors etc will get the fee breakdown by summer.

Is this true? And if so, do you think it will eventually happen for IRA, ANNUITIES & SEPS?