Five things you need to know about new 401(k) rule

(CBS News) Starting on August 30th,a new federal mandatebegins, requiring companies to disclose more information about the costs and fees of their employees' 401(k) plans.

Americans have more than $3 trillion invested in these plans, and companies are notoriously bad about disclosing their costs. A retirement account typically has two main fees, the management fee, charged by the mututal fund company, and the administrative costs of running a retirement plan. Now that the fees must be revealed, many expect there will be new pressure on companies to keep fees to a minimum.

"Soon we'll be finding out what we're actually paying," CBS MoneyWatch.com executive editor Jack Otter, said on "CBS This Morning" Wednesday. Otter, author of Worth It....Not Worth It, spoke with "CTM " co-hosts to relay the top five things employees should know about 401(k) plans. He touched on the new rule, the importance of fees, index funds and diversification.

Here are Otter's must-read 401(k) basics:

  • Company must disclose fees. Employees have a right to know both the management fee charged by the mutual fund company and the administrative cost of maintaining their 401(k).
  • Fees are more important than you think. Look into your expense ratio. The less you pay in fees, the more you get in retirement savings, so examine your plan to protect against lost earnings as a result of paying a higher fee on a mutual fund or steep administrative expenses to your company.
  • Invest in index funds. Unlike actively managed funds, which are comprised of stocks hand-picked by portfolio managers, index funds own all the stocks in a given market. While it sounds counter-intuitive, index funds actually outperform most actively managed funds, because even most pros can't beat the market, and the expenses they charge reduce returns. 
  • Diversify your portfolio. Invest in a broad index of stocks as well as bonds, and maybe some commodities and real estate. Don't try to guess where the market is headed, just choose an asset allocation and stick to it.
  • Invest in target date funds. Target date funds can be a good bet for anyone who does not want to choose mutual funds themselves. Target date funds are mixtures of stocks and bonds designed to get more conservative as you get closer to retirement age.

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