September 26, 2012
In the last post: the Department of Labor issued a final regulation requiring 401(k) plan administrators to provide fee disclosure information to plan participants. What does this mean for employees?
Early this month, employees who are eligible to participate in their employer’s 401(k) savings plan began receiving detailed information on the fees and expenses for the investment options available to them within their 401(k). The fee disclosures were prompted by a final regulation adopted by the Department of Labor — the intent behind the new regulation is that employees armed with this information will be able to make better investment decisions for retirement (view the regulation on WestlawNext at 29 C.F.R. § 2550.404a-5).
Fees and expense section can help participants pick investment options
For years, personal finance experts have been arguing that workers need to consider investment option fees along with performance when they decide which 401(k) options they choose within their employer’s savings plan. For example, annual expenses might range from no annual expense (for an employer’s stock, perhaps) to about $5 for each $1,000 invested. Practically speaking, a worker with $10,000 invested in a higher-fee fund might pay close to $50 each year in fees and expenses. The same amount invested in a lower-fee fund might only cost the participant $10 annually. The difference, $40, invested annually over several decades, could lead to a significant difference in the amount a worker has socked away in his or her retirement account at the time the worker begins to withdraw from the account. Of course, the two plan options might also have significant differences in performance over that same period, but workers now have more data to inform their investment decisions for retirement.
Workers can also expect to receive notices of their investments’ actual performance, as well as the fees and expenses they paid from July through September, in mid-November. As workers begin to see the results of their investment decisions spelled out in black and white, they might lobby for better plan options in their 401(k) savings plans in the future.
What’s the bottom line for plan participants and their employers?
Some personal finance experts say that workers probably won’t read the fee disclosures, but that the disclosures will still have value. Because fees and expenses will now be more transparent, 401(k) savings plans may ultimately become more competitive, driving down fees and expenses for participants overall. Matthew Amster-Burton at Mint.com points to a new 401(k) product made up of low-cost index funds as just one example of this new competition within the 401(k) market.
As plan sponsors, employers also have more visibility to the options they add to the 401(k) savings plan that they offer to employees. Employers can use this information to improve their 401(k) offerings and as another way to distinguish their workplace for current and prospective employees.