Four Ways to Take Advantage of New 401(k) Transparency Rules

Aug. 15, 2012— -- When you go shopping, you buy things knowing exactly how much they cost. But when it comes to your 401(k) plan, this probably isn't the case.

You're paying fees for your plan, but like the overwhelming majority of 401(k) investors, you probably don't have the vaguest idea how much. Many people aren't even aware that they're paying for these plans.

That's right: Fees, one of the biggest factors affecting whether your 401(k) plan prepares you adequately for retirement are a big question mark. For decades, this has been an area of neglect among employers, employees and federal regulators.

This state of affairs has been fine for service providers, including the large insurance companies that provide these plans. After all, less disclosure means less attention paid by investors and employees, and higher fees for lack of comparison shopping.

Because of new federal rules that expand and reinforce existing regulations and reverse years of lax enforcement, all of this is changing. You'll soon be informed of exactly how much money is being deducted from your 401(k) plan to pay fees of service providers.

By Aug. 30, your employer is required to send you a simple document showing these fees in an easy-to-understand format. Employers are also required to determine whether these fees are reasonable relative to the broad market.

But first, employers must know the amounts of these fees — the percentages that service providers are taking from your account — and the services they cover. Often, employers don't have this information because disclosure by plan providers hasn't been required -- even though 401(k) plans are the principal retirement income vehicle for most people.

By adopting and enforcing the new rules, the U.S. Department of Labor is shedding light on not only the fees service providers charge for these plans, but also their quality.

For example, if your plan is paying significant fees to an advisor but you receive little, if any, education on how to construct and maintain your portfolio, this makes it the worst of all possible worlds: high fees and poor service, resulting in low potential for good investment returns.

Without reasonable fees and knowledge of how to use your plan, you can't be effective in serving as your own financial planner, which is essentially your role as a 401(k) investor.

Employers are required to prepare the newly required disclosures from information they're receiving from plan providers that package up plans with investment options and supply them to companies that sponsor 401(k) plans for their employees.

But don't hold your breath on the way to your mailbox at the end of the month, expecting the fee disclosures to be there. Many employers, especially small to midsize companies that don't have large HR staffs to handle such matters, unfortunately aren't aware of their responsibilities under the new regulations.

If you don't receive the fee disclosures by the end of August, you'll still get them in your quarterly statements in the fall. (Many account holders will get these statements at the end of September.)

For the first time, the statements will itemize fees. Previously, they have not disclosed all fees; instead, they've merely stated investment returns after fees have been taken out.