New Rules Take the Mystery Out of 401(k) Fees

Here’s some refreshing news about your 401(k).

The U.S. Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) has published “Reasonable Contract or Arrangement Under Section 408(b)(2) – Fee Disclosure.” This new regulation requires 401(k) plans to disclose to plan sponsors the administrative and investment costs associated with their plans. It also requires 401(k) plans to tell participants what services they’re charging you for and how much they’re charging on an annual basis. The new rules take effect in late August. SmartMoney has an excellent article on making sense of these changes here.

What’s so novel about these new rules? Until now, plan sponsors and participants have had difficulty finding the true costs of their 401(k) plans. This new regulation essentially offers an itemized receipt.

And while retirement plan experts seem to agree that it’s a great thing, they also concede that it will produce more disclosures that people probably won’t read. What is exciting is the potential effect this could have on the 401(k) marketplace. In fact, Schwab has already announced a new 401(k) offering built around low-cost index funds.
Still, you may be asking yourself, what’s the big deal? Well, what you don’t know can hurt you. In 2009, the Government Accountability Office (GAO) released a report on retirement plans that included this shocker: Over a 20-year period, a 1% point increase in fees and expenses would reduce a participant’s ending balance by over 17%. In other words, if you had an expensive retirement plan, you could be delaying your retirement for years, with a good amount of that money going straight into your 401(k) provider’s pocket. It makes sense that providers have fought this regulation as it makes it harder for them to make as much money as they have in the past.
I believe that investors shouldn’t have to do detective work to find out how much they’re paying to have their investments managed, and this is a big step toward shining the light on fees inside 401(k) plans. Let me know your thoughts or if you need assistance in finding out what your 401(k) plan fees are and how you may be able to reduce them.