In an attempt to improve transparency for employees with a 401(k), new federal rules will now require that plan providers clearly and accurately disclose fee information to consumers regarding charges to their accounts.
From management fees, administration charges, investment returns and direct costs of the plan, brokerages must make the information available to participants by August 30. The U.S. Department of Labor hopes that this ruling will help consumers, both employers and employees, compare plans with a greater understanding of where their money will be going and just how much of their savings they are actually going to see come retirement.
Why the charges may seem small to an untrained eye, the total percentage of savings lost to fees will certainly add up by the time the employees cash in. So, what exactly does this mean for consumers, their retirement and duty as of now?
If the ruling has its desired effect, employers and employees will become more informed of the breakdown of their plans, making them better investors who are able to feel more confident in their 401(k) decisions.
In an interview with Rick Ashburn, a financial analyst with over 25 years experience in the field, it was made clear that the responsibility of understanding fees fell equally amongst the three entities involved: the brokerages, employers and employees.
“The rule requires companies that provide 401(k) plan services to provide detailed cost information to the employers,” he said. “The employers, in turn, must provide that detailed cost information to plan participants… [They] must receive a statement, at least quarterly, of every expense charged to [their] account.”
In order to improve transparency, Ashburn explained that the information provided down the line of entities must be broken down into general administrative costs and fees applied specifically to that particular consumer’s account, based on the actions they take with their investments. The fee information regarding their specific investment decisions must be provided in both dollars-per-thousand terms and percentage terms, as well as in a graphical format that compares their various choices.
Finally, Ashburn talked about the employer’s fiduciary duty to “shop around from time to time and get proposals from various brokerages.” For example, he explained how index stock funds charge drastically lower fees than do actively-managed stock funds. “Over time, only a small fraction of active funds outperforms index funds,” he said. “Still, it will ultimately be up to the employee to manage expenses within their 401(k)… and choose low-cost offerings.”
Ashburn’s advice to consumers: “Read the material. The employer and brokerage will provide it. If the employee doesn’t take time to read it and figure it out, they’re not doing what they need to do.”
To read the Department of Labor’s “Fact Sheet” detailing the specifics of the ruling, visit http://www.dol.gov/ebsa/newsroom/fsparticipantfeerule.html.