If knowledge is power, employers and employees are about to become more powerful in administering retirement plans such as 401(k)s as the new U.S. Department of Labor (DOL) regulations demanding more transparency for fees become effective this spring.
The implementation date is unknown, but probably by May 401(k) retirement plan providers will have to disclose all fees associated with the plans to employers who offer them to their workers. Employees also will then have to be informed and reports will be required on a quarterly basis.
Currently, most 401(k) participants and many plan sponsors for smaller companies do not know the breakdown of fees for their retirement plans, say financial advisors who work with employers and 401(k) plans. More than 72 million participants have $3 trillion invested in 401(k) plans, according to DOL.
The new rules will require an explanation of any administrative expenses and individual expenses charged to the accounts. The information can now be ferreted out by participants and plan sponsors, but the new regulations will require it to be offered regularly by the plan providers.
Implementation of the new regulations has been postponed a couple of times, but those involved say it will probably be around May that the new rules become effective. At first they will require more work by small employers, but once the system is in place it will be advantageous for both employers and employees, the advisors say.
Many plan providers are already providing additional information, according to the advisors.
"This is an excellent change," says David Loesser, CFP, and president of The Estate Planners Group in Washington Crossing, Penn., which has many retirees as clients and deals with 401(k) and other retirement plans. "It is going to make 401(k) plan providers more competitive because you will be able to compare fees."
Most 401(k) plans include mutual funds and fees can be very high, says Matt Zagula, of First Financial Partners in Pittsburgh. Fees can vary widely by basis points to percentages for the sponsors and the participants.
"No one knows what they are paying now because the hard costs are never broken out," says Zagula, who predicts a shift to ETFs and other kinds of allocations once the cost of mutual funds are better known. "I think this is good because I want more transparency in the plans."
Some small employers now use companies like R.T. Jones to manage the accounts for participants who may not be equipped or have the time to sort through the many options available, says Bob Jones, founder.
"Overall, these new regulations are going to be good for the industry as a whole. Plan providers are not in favor of it because it makes them more competitive and makes more work for them, but participants will know the various components that will help them better understand what they are offered," he says.
"The new regulations will enable plan sponsors and participants to scrutinize the available services and accounts and know what they are being charged, Jones says. "Then they can judge whether the charges are worth it."
David Wray, president of the Plan Sponsor Council of America, an industry group for retirement plan sponsors, notes there will be a "transition period, but once we are through that the system will be better off.
"Employers will be given more detailed and more easily understood information about what they are getting for their fees. The employers are the fiduciary, and it will be advantageous in the review process to have this kind of disclosure to know they are providing the best plans possible," Wray says.
-Karen DeMasters