After several delays, the Department of Labor has at last issued final rules requiring 401k plans to provide key information to plan participants. Specifically, these new rules will require 401k plan sponsors to disclose detailed information about plan features, investment options, and fees and expenses to participants, beneficiaries, and even workers who are eligible to participate in a plan but don’t.
Implementation of these rules, known as rules 408(b)(2) and 404(a)(5), involves two steps. The first step requires plan service providers to disclose required information to the plan sponsor by July 1, 2012. The next step requires the plan sponsor to in turn share this information with plan participants by August 31, 2012.
These new regulations are expected to have a large impact on how 401k plans are managed and the costs plan sponsors and participants pay to the service providers hired to run these plans. Plan fees are typically rolled into the management fee for the mutual fund options in the plan. This fee is then shared among service providers. This practice of “bundling” services makes it difficult to know how much each service provider is charging and whether that fee is reasonable or not. It also saddles plan participants with a fixed embedded cost that is deducted from the assets they invest in the plan. By requiring full disclosure, the expectation is that service providers will be forced to lower their fees and improve services in order to avoid being dropped by sponsors trying to meet their fiduciary duty to ensure that plan costs are reasonable. We will see if this is in fact how things play out.
As a result of these changes, employees will receive two surprises with their October statements this year. The first is the news that they have been paying the bulk of the cost of running their employer’s 401k. Few, if any, employers have made this fact clear and will now have the unenviable job of having to break this news to their employees. The other surprise employees will receive is learning how much of their savings have been going to pay for the maintenance of their plan.
So what can you do if you do not like what you see on your 401k statements later this year? Politely, but clearly, express your feelings to your benefits department. The more employees speak up, the greater the chance that changes will be made. Plans with relatively high costs and mediocre investment choices will be under great pressure to make improvements or face the possibility of incurring fines or even being sued for breach of their fiduciary duty to participants. If speaking up does not work, consider limiting your 401k contributions to the maximum amount matched by the employer. Then direct the rest of your long term savings to deductible IRAs and/or Roth IRAs, depending on your eligibility. IRAs allow you to invest in a broader array of mutual funds than the typical 401k. If you choose index funds that have low investment management fees, you will wind up with a low cost do-it-yourself retirement plan that is in many respects better than what is available through many of the 401k plans offered today.