Time to read your 401(k) statements: New regulations aim to make it easier for participants to understand the fees
If you participate in your employer’s 401(k) plan, you may have already noticed a change in the format of the statements that are provided to you, detailing your investments. If you haven’t, keep an eye out – by Aug. 30th, the information provided on there will be changing.
The U.S. Department of Labor is requiring that plan sponsors (your employer) provide more detailed information on fees and expenses related to 401(k) plans. It’s important to note that the fees listed are not new. They’ve always been there. It’s just that now the DOL is trying to make it easier for participants to see the administrative expenses charged for running a program, as well as the individual expenses – or those fees that may have been deducted from a participant’s account based on actions they may have taken, such as redemption or loan fees.
Plan sponsors must also notify participants about the existence of any revenue-sharing arrangements. This is a practice that involves using a portion of the investment-related fees paid by participants to help cover a plan’s administrative costs. It is this type of so-called “soft dollar” arrangement that has been the subject of some debate, and helped prompt the new fee disclosures. (To get a sense of the historical context around the fee debate, read this 2006 column by Bloomberg columnist John F. Wasik, “401(k) Fees Are Still Exorbitant, Buried Secrets.”)
Previously there was concern about administrators passing along fees to participants in the form of individual fund expense ratios, which is an annual percentage deducted from plan assets. The lack of transparent disclosure raised criticism that some plans may have been paying excessive administrative fees, and investors were buying into them without considering other, lower-cost options such as index funds. Other concerns included the potential for conflicts of interest: Plan sponsors and administrators may have an incentive to pick funds that pay more in revenue sharing, instead of evaluating funds for being the best investment. (SmartMoney highlighted this ongoing concern in a May 2012 article, “Will 401(k)s Abandon Revenue Sharing?”)
The new DOL regulation won’t require the breakdown of specific revenue-sharing amounts, but the information provided will still give participants a better sense of how much of the changes in their account balances are related to market fluctuations vs fees. And employees can weigh this information along with a fund’s market performance to make investment choices.
So what does all this this mean from a practical standpoint?
First, read your statements. Sounds obvious, but it’s amazing how many people don’t bother to take a look at them. 401(k) plans are increasingly the way in which all of us are making retirement savings decisions. If we don’t pay attention to the information we’re given, then we’re not giving ourselves the chance to make informed decisions.
“Workplace retirement plans are becoming the primary retirement savings vehicle,” said Mike Shamrell, a spokesman for Fidelity Investments. “This information allows you to make sure you are aware of everything – which fees the company is covering and which ones are passed on to you.”
Second, if you have a question, ask your HR department for help. A Bi-Annual Defined Contribution Investor Survey released by State Street Global Advisors last month found that 61 percent of the more than 1,034 participants queried felt that they didn’t understand fees, and 16 percent didn’t understand how fees impact their investments. Forty percent said they wanted to understand more about fees.
Many plan sponsors (employers) have access to resources to help their employees learn about the options in their plans. Those administration fees often reflect services provided to help support a plan. Find out what types of support services you can get so that you can learn more about the investment options available.
Third, don’t just assume that lower-cost funds are the better investment. It’s natural to get sticker shock the first time you see the fees listed. But remember to weigh all the variables.
“There’s a lot of pressure right now on people to choose lower-cost funds,” said Sean McGarry, vice president, Retirement Plan Services, at Rockland Trust. “Lower costs don’t always mean those funds will outperform a managed fund. Benchmark the performance.”
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About the author
Christine Dunn has almost two decades of experience writing about finance and business issues. As founder and president of Savoir Media, she works with companies and executives on developing strategic, integrated media and marketing programs. Prior to starting her business, she worked at Bloomberg News, where she served as Boston Bureau Chief and ran industry coverage for several national teams of reporters, including consumer/retail, mutual funds and education. To reach her directly, email ChristineODunn@gmail.com or join her on Facebook at www.facebook.com/ChristineODunn.Recent blog posts
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