It might look like junk mail, but the envelopes heading for 70 million 401(k) owners' mailboxes in the weeks ahead are anything but.
Enclosed are figures the financial services industry might rather have kept to itself. Under new rules from the U.S. Department of Labor, which regulates retirement funds, 401(k) plans must disclose details about fees and expenses. Look at the reports closely, for they could be highly informative.
"Most people think they know what they are paying but they don't," says Ed Slott, a retirement adviser who heads Ed Slott and Co., a retirement planning firm. "Nobody is really clear—even the experts are confused, and most laymen have no idea. Every fund does it differently."
With $3 trillion in 401(k) funds, it's clear that the stakes are high, but a federal study found that 90 percent of plan sponsors did not know how much they paid in fees for their employees' funds.
Starting with the next batch of reports on fund performance, all 401(k) participants will get precise figures on what charges are deducted from service providers, and how those costs affect participants' investment income.
The government has mandated simplicity and clear comparisons, but it helps to know what to look for. Here are five questions the new statements can help answer:
1. What is the true cost in "actual" dollars for fees charged to my 401(k)? This the most important change. Instead of fine print that details fee arrangements in percentages, there is a single number stating what you pay for all of your fees. That includes all administrative costs, including, legal, accounting, and recordkeeping services.
2. How are my investments doing compared to fund benchmarks? This is critical because it attempts to put all funds on a level playing field. The plans must give "comparative" reports that show returns net of fees for one-year, five-year, and 10-year periods. That prevents fund marketers from highlighting their winning streaks and ignoring bad periods.
3. Who manages the plan and how do you contact them? The glossy envelopes from 401(k) managers often give sketchy details about who is responsible for the plans. The new rules mandate a website with "clear language" and a glossary of terms and details about who to contact with questions.
4. When does this go into effect? Fund services are already loading up data using the new reporting categories, and have been required to do so since July 1. Funds that use a calendar-year reporting plan must report by August 31. Those that issue quarterly reports could have until November 14.
5. What else can I find out? Besides all the relevant information about investment performance and fees, you will be entitled to see additional options that might be available if you want to find other investments for your retirement fund. Some will have a so-called "brokerage window" arrangements that let you invest your tax-free accounts with a firm other than the sponsor's service provider.
New rules will cost the 401(k) industry an estimated $425 million this year to comply, according to the Labor Department. But it says that for plan participants, the benefit of the new rule will be worth $14.9 billion over the next decade.
It matters now more than in the past, since all kinds of retirement investments are offering paltry returns. With bond yields at all-time lows and stocks struggling to show gains over the past decade, fees are meaningful. If you own funds that match the 3-percent yield of a 30-year U.S. Treasury bond, a 1-percent fee will eat up one-third of your 401(k) income.
Fee disclosure might not reduce that bite. It costs money to administer the accounts. But the reports will clarify the amount paid so fund trustees can shop for the best values in a competitive market.