New 401(k) rules could help you make more money

The U.S. Department of Labor recently issued final regulations that require 401(k) providers to disclose their costs to 401(k) plan fiduciaries, and for participants to receive simplified disclosures that show investment and administrative expenses. The Obama Administration is touting these rules as part of its Blueprint for an America That's Built to Last initiative, and the rules are indeed a step in the right direction.

By Aug. 30 of this year, most 401(k) plan participants will be able to see disclosures that spell out the investment and administrative expense ratios for the funds that are offered in their 401(k) plans. This heightened focus on plan fees will continue the fee reduction trend, which will put more money in your 401(k) accounts.

The trend to reduce fees has been going on for several years at many large 401(k) plans -- those with 1,000 or more participants. Finance and HR professionals have been using their buying clout and analytical resources to shop and negotiate for the best deals on your behalf. In fact, many of these plans have voluntarily been providing the information that's now required by the new Labor Department regulations. Participants in 401(k) plans of smaller employers often haven't enjoyed these benefits, since these employers don't generally have the resources and clout of larger employers. The new fee disclosure rules, however, will put pressure on 401(k) plans of all sizes to continue to reduce fees.

As fellow CBS MoneyWatch bloggers Allan Roth and Larry Swedroe have often demonstrated, funds with active management -- and resulting high fees -- usually under-perform index funds with lower fees. Fund expenses have been identified as one of the most influential drivers of net fund performance.

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When you receive your fee disclosure statement that's due by Aug. 30 of this year, look at the percentage of your funds that are paid as expenses each year, called the expense ratio. Compare the expense ratios of your funds to the following averages from the 2011 Investment Company Fact Book:

Equity funds:

-- 1.4 percent median
-- 0.84 percent asset-weighted average

Bond funds:

-- 0.92 percent median
-- 0.64 percent asset-weighted average

Hybrid funds, such as target date and balanced funds:

-- 1.21 percent median
-- 0.83 percent asset-weighted average

For a brief statistics refresher, half of all funds have expense ratios above the median rate, while the asset-weighted average puts much more emphasis on the largest mutual funds. The above statistics demonstrate that there are plenty of funds with high fees, but that the largest funds tend to have lower fees. I'd look for expense ratios in your 401(k) plan that are below the asset-weighted average -- and the lower the better.

What if you discover that your plan has high expense rates? What should you do? First, diplomatically approach your HR department about the high level of fees in your plan. Companies often respond to constructive comments from their employees.

Second, definitely contribute the maximum amount that your employer matches, because the matching contribution will outweigh any negative impact of high fees.

After that, if you want to contribute more than the maximum amount your employer matches, the answer gets more complex. You might want to consider not contributing any more if your plan's fees are much higher than the weighted averages shown above and you have the discipline to use other places where you can effectively invest your retirement savings. On the other hand, if you can't keep your hands off the money, use the forced savings with your 401(k) through automatic payroll deduction, because you're better off saving the money compared to spending it.

One interesting strategy: In most situations, you can withdraw your 401(k) accounts at age 59-1/2, even if you're still working, and roll these accounts over to an IRA. If you're close to age 59-1/2, go ahead and contribute, knowing that you'll soon be able to rescue your money from your plan's high fees.

As with all aspects of retirement planning, doing your homework and taken any appropriate actions based on your due diligence will pay off in your later years. The new fee disclosure regulations are welcome news in this effort.

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.