Your Takeaway for New 401(k) Fee Disclosures

Watch your in-box for new retirement plan information

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Roger Wohlner

Round One (my term) of new required fee disclosures by 401(k) sponsors (mostly via the plan providers) to plan participants has now been delivered to most workers around the country. They include disclosures that outline the expenses connected with the various investment options offered within their plan; these, in many cases, will be the mutual fund expense ratios. Other fees, such as those for distributions or calculating a Qualified Domestic Relations Order (usually in connection with a divorce) are also disclosed.

Round Two will be coming with the participant account statements after the quarter ending September 30. Here, the actual dollar amounts deducted from the participant’s accounts to cover the costs of administering the plan will be shown. Some of these disclosures could prove interesting including the costs associated with a representative that is paid to “place the business” but provides little or no other tangible support to the sponsor or the participants.

Here’s what you should take away from this new information:

On the positive side:

  • Plan participants now have a uniform way to compare the costs of the investment choices offered to them in the plan, including a cost per $1,000 invested, which provides a good way to help visualize expenses.
  • Trailing returns are shown against a relevant benchmark. While this is not different than what many participants have already seen, the fact this information is required to be presented along with the expenses will hopefully put some emphasis on the importance of this information.
  • Some shortcomings:

    • Like anything, you can’t force participants to read materials that are sent to them.
    • The information in and of itself really doesn’t provide meaningful help in making investment decisions. Hopefully participants will take notice, especially of funds that appear to be a bit more on the expensive side, and do some further digging.
    • If nothing else, the whole disclosure process has raised awareness on the part of plan sponsors and participants. I know that much was written in the months preceding these disclosures about plans reviewing (and in some cases revamping) their investment lineups in anticipation of these new fee disclosures.

      I can say that during the last part of 2011 and the first quarter of this year I made a concerted effort to review all of my plan clients to ensure their investment menus contained the lowest cost share class of each fund available to us. While this something that I have done routinely as part of ongoing expense reviews, there were a few instances where we were able to upgrade fund share classes. Some providers seemed much more receptive to this than in past years. The savings might seem minimal, but they do add up in terms of participant returns over time.

      Moreover, in the case of a couple of clients, their big name fund company or plan provider offered to put them in lower cost shares of the same funds. It didn’t hurt that we had made requests of this nature over time with other funds in the plans.

      So is fee-disclosure a good thing? I definitely think so and we should be able to tell more after the next round of disclosures this fall. Anything that highlights the need to provide lower cost retirement savings options for American workers is in my mind a positive. I’m hopeful the disclosures and the information required will continue to evolve.

      Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. Read more about Roger here.