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.

Now, finally, many employees will see just how much their accounts have been whittled away by fees — fees that, in this market especially, can spell the difference between making money and losing money in a given investment.

Regardless of their size, companies that fail to comply with the new rules may be hit with severe fines and other sanctions.

Many people aren't aware that when it comes to their 401(k) plans, employers and employees are basically in it together. Companies don't benefit from substandard or overpriced plans. Indeed, top managers suffer because they invest in these plans themselves.

At this critical juncture for 401(k) plans, you can improve your plan, and your prospects for retirement security, by:

• Resolving (if you haven't already) to pay more attention to your plan and your responsibilities under it.

• Checking with your company's human resources department to see if preparations are under way to send employees the required fee disclosures by Aug. 31. If so, is the company making progress at determining whether these fees are reasonable?

• Volunteering to work with your employer by serving on committees being created to consider changes, potentially including seeking new service providers with more-reasonable fees and improved plan education, so employees can make more informed investing decisions.

• Seeking to learn more about your plan's investment options and how to best choose from them to assemble and maintain a portfolio that meets your goals, age and risk tolerance.

After all, it's your retirement, not someone else's. By working with your employer, you can be part of a national 401(k) awakening aimed at increasing the average person's chances of retiring with dignity.

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.