401(k) Fee Sticker Shock: What to Do After The New Disclosure Statements

With new rules, for first time you'll know how much you're paying.

ByColumn By
September 27, 2012, 10:58 AM

Sept. 27, 2012— -- If you're in a 401(k) plan, you'll soon be receiving a quarterly account statement unlike any you've seen before. When your fall statement arrives, probably sometime between Sept. 30 and mid-November, you'll see a whole new format — one that shows how much you're paying the companies that provide investments and services to your plan.

For the first time since Congress laid the groundwork enabling these plans in 1974, all of your fees will be disclosed. Previously, these statements typically showed investment return figures after fees were deducted, but did not show the fees themselves — probably leading you to believe that your investments weren't returning as much as they actually were.

Now, because of new regulations from the U.S. Department of Labor, you'll be able to see how your investments have done before fees are deducted because actual returns and fees will be displayed in separate columns.

The new statement format is one of the requirements in a sweeping new set of disclosure rules from the DOL aimed at helping employees get the most out of their 401(k)s by making companies sponsoring these plans responsible for assuring that fees are reasonable. After all, the more you pay in fees, the less of your investment returns you get to keep.

Employees with other investments besides their 401(k) plans tend to be aware that many mutual funds charge fees. Yet the fees charged by the plan providers, the large insurance companies or brokerages that hold these plans, will stun those who weren't aware that their 401(k)s were costing them anything at all. These fees may run as much as 1 percent annually of the amounts invested, sometimes more.

After getting shocked on the way back from their mailboxes, many people will — and should — go to their HR departments the next day and ask what they're getting in the way of services from these plan providers, as well as other service providers. In some cases, this will be a wake-up call for small and midsize companies that may not be aware of the new rules and their responsibilities under them.

But employees also have responsibilities — to themselves and their families — for making decisions on their plans.

All too often, many of these investors don't put much time or attention into their 401(k)s. Indeed, the implications of the new statement format will be lost on those who don't read their statements.

Yet for those who are aware enough to see the difference but haven't been on top of managing their plan investments, the next step is to move from shock and awe to determining just what you're getting for your fees, and whether you're getting your money's worth. Then and only then can you assess the value of your plan.

You can't figure this out from your account statement alone because it's just data without any context to give perspective. The cost of the plan is determined by your company, because as the sponsor, it hires service providers for the plan, including the plan provider. But knowing how to use it to your maximum advantage can significantly increase the value you get out of it.

If the plan is too expensive or includes substandard services, or both, you and your fellow employees can try to influence your company to change service providers. The new rules implicitly require companies to do this anyway if they determine, as part of a mandatory cost examination, that the fees are too high for the services being provided.

To get the most out of your plan, you should:

• Be sure you know how it works. Chances are your company has given you literature on this. If you've lost it, get another set. What are the investment choices the plan offers? What's the maximum contribution you can make out of each paycheck, and up to what amount will the company match it? (The company match is free money toward your retirement, so be sure to take advantage of it.)

• Ask yourself: Given these limits, what the right contribution level (aka funding level) is for you, considering your monthly obligations. Are you spending money on unnecessary items that you could be investing in your retirement plan? Most people are, and they're unaware of the amount that they need to invest to have enough for retirement. Funding levels is a subject that plan providers don't like to address because employees might be discouraged from participating if they realized from the beginning how much they'd have to carve out of each paycheck. It's up to you to confront this issue. Tap into available resources for learning about these plans in general.

• Educate yourself about investing objectives, including asset allocation (spreading your investments over different types of assets) to boost average returns. Make sure your portfolio is diversified by not investing in too many funds that own the same stocks or similar types of companies (e.g., companies of the same size or in the same industries). You can probably get much of this information from your employer, but don't hesitate to investigate further by going to websites that can explain it.

• If your plan is deficient, work with your employer to try to improve it, possibly by putting it out to bid to find a new provider. Your company is the consumer, and many providers would be happy to sell it a plan.

• Become versed in how your other financial circumstances affect decisions you make regarding your plan, such as when you intend to start drawing Social Security payments and whether your spouse has a plan at work. If your spouse isn't using his or her plan, this might mean they're giving up substantial matching money. If they are using the plan and taking advantage of the match, what investments do they have? Are they the same basic ones that you have in yours? If so, the two plans combined may lack the necessary diversification.

Remember, every employer sponsoring a plan and every company providing investments for or services to it is responsible to you as a plan participant, but they're not responsible for you. Ultimately, you are responsible for the choices you make regarding your plan. In this sense, you are your own financial advisor. Do as diligent a job as possible to serve yourself and your family.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

Anthony Kippins is president of Retirement Plan Advisors, Ltd. a Registered Investment Advisory firm that addresses the needs of retirement plans and the employees who invest in them. An Accredited Investment Fiduciary Analyst (AIFA®) with more than 30 years of experience domestically and abroad, Kippins specializes in providing fiduciary advice to retirement plans on governance, investments and educational services. He also advises individual clients on retirement planning and investment management after retirement. Kippins serves as managing director of Institutional Fiduciary Assurance LLC, an organization that provides fiduciary advice to trustees of endowments, foundations, non-profit organizations and charitable trusts. He can be reached at rpa@retirementplanadvisorsltd.com.