After years of delay and controversy, a mandate for transparency in employer-sponsored 401(k) plans has finally arrived.
In October, the Department of Labor issued new 401(k) regulations with teeth. By January 2012, a company retirement plan must disclose all of its fees and costs to employees.
This ruling affects about 72 million employees who participate in 401(k) plans with about $3 trillion in assets, according to Department of Labor estimates.
For decades, 401(k) plan fees were mostly invisible, even to employers who offered these retirement plans to their workers. In fact, a separate rule issued by the DOL last summer requires plan providers to disclose to plan sponsors all direct and indirect compensation related to 401(k) plans -- effective July 2011. And there are plenty of ways these plans can get dinged by fees, many of which get passed on to workers.
The upshot for plan participants: They will have more data to make better 401(k) investment decisions. Fees for 401(k) plans run the gamut and can include record keeping, legal, management services and administrative charges. Additionally, 12b-1 fees, which cover marketing and distribution costs, are sliced off the top of mutual fund investments.
"Employers and service providers benefited from this opaque set-up," says Russel Kinnel, director of fund research at Morningstar.com. "Now, it's more clear what employees are actually paying."
Costs will be spelled out in plain English and expressed in dollar terms. And each 401(k) enrollee must get quarterly statements detailing investment performance, along with costs.
"Right now, you only see a net return," says Nevin Adams, editor in chief of Plansponsor magazine, which covers workplace benefits. "It's not easy to know what you're paying."
Beginning in 2012, he says, employees will see lots of data.
That's good news. More than half of all 401(k) money is invested in mutual funds, according to the Investment Company Institute, a trade group. The ICI says enrollees paid slightly higher expense ratios for stock and bond funds in 2009 than in 2008.
"Most employees don't think they pay these 401(k) expenses -- that employers do," says Jason Roberts, a partner at Reish & Reicher law firm in Los Angeles. "That's the biggest eye-opener."
Some plan providers, such as Putnam and Fidelity, are already taking steps toward disclosure, says Adams. For example, Putnam announced it has begun releasing details about 401(k) plan fees, such as those pertaining to transactions and services, in employees' online accounts.
"Nobody thought that you could put the genie back in the bottle," says Adams. "Providers will start (itemizing costs) before 2012."
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.