New 401(k) rules in effect: What you need to know
(MoneyWatch) How much does your 401(k) plan cost you? For many retirement plan participants, the answer has been elusive, until now. The U.S. Labor Department has finally said enough is enough and imposed new rules beginning this summer that will require 401(k) administrators, like mutual funds and insurance companies, to disclose the fees they are charging to run retirement plans.
The first step required service providers to disclose required information to plan sponsors by July 1. The providers must also disclose all direct and indirect compensation from any source; the performance of the plan's investments versus the relevant benchmarks; and whether the providers are serving as fiduciaries. (Fiduciaries are legally required to provide services that are in the best interests of all plan participants. Employers already have a fiduciary duty to their workers.)
The second step requires the plan sponsor to disclose the information to participants by August 30. With the change in rules, participants will receive notification of the plan's total investment fees at least annually and then beginning November 14, participants' quarterly account statements must show fees deducted. The first statement will cover the three-month period of July 1 to September 30.
This is good news for the three-decades-old 401(k) plan, which now accounts for $3 trillion of retirement savings. For years, many employers and plan participants knew that 401(k) plans weren't free, but determining just how much they cost was difficult. Every mutual fund or insurance company product charges an annual management fee that is taken out of the money in your account. That fee is a percentage of the assets that you have invested; it varies from investment to investment and is usually buried deep inside the 50-page prospectus that you threw away.
In addition to the investment fees, which often grab the headlines, retirement plans also have administrative fees, which can include costs for record-keeping, compliance, and even for participant loans and hardship withdrawals. The new rules will make it easier to understand the fees you and your employer pay, while requiring that plan administrators report one-year, five-year and 10-year performances for the plan's investment options versus their benchmarks. This will enable you to compare your investments relative to an index. Plan providers will distribute annual statements that disclose all of this information.
More information is better, right? Well, researchers have said greater disclosure may not be all it's cracked up to be. As quoted in the New York Times, Kevin P. Weinfurt, professor of psychiatry and behavioral science at Duke University, said that "often no one knows exactly what to do with the information once they get it." That may be why you could be thinking, "This retirement plan stuff is all wonderful, but I only have so many options when it comes to selecting an employer-sponsored plan. What am I supposed to do?"
Here's the funny thing about the new rules: You may not have to do too much with the information. The requirements could have a great shaming effect. As companies and their employees better understand how much the plans cost, the pressure will mount on employers to have less expensive plans in place.
Still, the new rules are not a panacea for what ails retirement plans today. In addition to the obvious point that people simply have to save more money for retirement, we have created these plans without providing participant education. While the government is rolling out the new rules, how about making mandatory training and education an essential component of all employer-sponsored retirement plans? Additionally, it's time to ban the use of company stock in retirement plans all together. If the government can't make that bold move, then it should prohibit company matching in company stock.
Here's what you can do now to take control and better manage your retirement assets with the following five steps:
1. Educate yourself: go to your retirement plan's web site (in large companies, this is often accessible from the employer site) and familiarize yourself with the basics of risk and investing
2. Take a risk assessment test: most plans have a way to gauge your feelings about risk. BE HONEST-remember how much pain you felt at the depths of the 2008-2009 stock market lows
3. Be clear on your time horizon: As you get closer to needing your money, you need to reduce the amount of risk in your retirement account
4. Choose index funds: When possible, if your plan has index funds available, use them to help reduce the cost of investing and provide overall diversification
5. Lobby your employer for no-load mutual funds: If your plan is using mutual funds that carry loads, or commission, those fees are coming out of your pocket. Try to get your employer to switch to a lower cost plan
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