New 401k Fee Disclosure Requirement Summary

New 401(k) plan fee disclosure requirements from the US Department of Labor are coming soon. This includes defined benefit, 401(k), 403(b), profit sharing, and other retirement plans. I was getting confused myself, so I wanted to summarize some of the basic deadlines. First, there are three main parties involved:

  1. Plan service providers. For example Vanguard, Fidelity, or numerous smaller local providers.
  2. Retirement plan fiduciaries. Basically, your employer.
  3. Plan participant. The employee.

First, there is a new requirement for fee disclosure by service providers to the fiduciaries (i.e. from Fidelity to the employer). These regulations become effective on July 1, 2012. The idea is to get fiduciaries to understand the services received from providers and to determine the reasonableness of the costs incurred. You’d think that your employer would already demand to know what they’ve been paying for all these years. Why don’t they? All too often, you, the employee are the one paying for it out of your investment balances and earnings!

Which brings up the next stage, the fee disclosure requirement from plan fiduciaries to participants (i.e. from employer to employee), which becomes effective August 30, 2012. Now, your employer is legally required to tell you what fees you’re paying, including both investment management fees and administrative fees for things like record keeping, accounting, and legal services. However, this is likely be wrapped up into just an overall percentage for each investment option, or worded as dollars charged per $1,000 invested.

The basic problem remains. Employers choose 401k plans with high fees often because they it doesn’t affect their bottom line – most are smaller companies with plans that shift the cost burden onto the employees. However, by simply shining a brighter light on these fees and allowing easy comparison between employer plans, it lets employees have more information to affect change. Indeed, it appears this forced transparency is working already, as the WSJ reports:

Employers “have been polishing up their plans in anticipation of fee disclosure, making sure the fees are appropriate,” says David Wray, president of the Plan Sponsor Council of America. He says nearly two-thirds of 401(k) plans changed their investment lineup last year, and 57% did so the year before, compared with a “normal number” of about 10%.

More reading: Department of Labor, NY Times, Employee Benefits Law Report

Comments

  1. Plan_Sponsor_Adviser says:

    I’m in this industry and it blows my mind how much many employees are paying that they have no idea about. I think the responsibility lies with the employer, but they love to play dumb. The employees also need to take some responsibility to learn more about their plan. Most service providers charge fair price, but there are plenty that have extremely high fees and get away with it because no one ever thinks to dive deeper and ask the tough questions.

  2. Anything that requires employers to do a better jog administering 401k plans is good news. My employer is absolutely awful with our 401k: applying funds late and haphazardly amongst other things. The whole system should be scrapped. It is insane that this is supposed to be the great alternative to pensions and Social Security. There are too many irresponsible people like my employer in charge of other people’s money.

  3. It would be wonderful to know the true cost associated with 401k. Even though employers do not need to disclose itemized costs, a summarized number would be almost as good. I have been assuming all these years that my employer and plan admin have been doing a good job at keeping costs low – I guess I will know this fall.

    How loophole-free this bill is? Are there any fee/costs that can still be masqueraded and not disclosed?

  4. I can’t wait for the fee disclosures to go into effect to see how shocked people are but in the end I feel like nothing will change since most people still need/want the match that comes with the 401(k)

  5. I can not get my bank account linked with serve for nothing…. never get the deposits and serve does not answer my emails. ?????????????

  6. oops… wrong one, sorry

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