Transparency Comes To 401(k) Fees
U.S. Department of Labor in October mandated that employer-sponsored 401(k) retirement plans must disclose fees that savers pay on investments and transactions by January 1, 2012. The announcement came a day after Putnam Investments rolled out a program to offer online disclosure of fees and expenses to participants of the 401(k) plans it administers.

Participants new to 401(k) plans must receive an explanation of costs when first signing up for an account, the Labor Department said. The regulations also will require 401(k) providers to give participants enough information to allow cost comparisons with other investment choices and a Web site with additional details.

Putnam's program, which the company said is ahead of the curve in the industry, will allow participants and plan providers who visit its Web site to see the fees associated with their 401(k) investments. The program was expected to be available to 30,000 people by the end of October and to all 50,000 in its plans by year-end.

Boston-based Putnam began making more information accessible online in June, when it made fee schedules available to employers who sponsor 401(k) plans. Making fees available to individual investors, which is being done now, is the next step in that process, says Edmund F. Murphy III, managing director and head of defined contribution plans for Putnam.

Disclosures regarding 401(k) plans are coming under scrutiny as more employers are switching from defined benefit plans to defined contribution plans. The number of workers enrolled in traditional pension plans that provide retired employees with lifetime payments fell from 27 million in 1975 to about 19 million in 2007, even though the workforce increased, according to the Labor Department. At the same time, defined contribution plans such as 401(k) plans increased from 11 million to 67 million.

To find the various fees that apply to their investments, participants would typically have to go through lengthy prospectuses. "That is quite an arduous task," Murphy says. "We will notify each plan sponsor so they can tell participants this information is available. Once an individual clicks on the link on the Web site, a video automatically pops up to explain the fees. We have taken into account that there are various levels of understanding, and we will track participant behavior with a follow up survey (to see how many participants access the information). A lot of this is going to be about educating participants."

The disclosures are important because expense ratios are the most consistent predictor of performance, with lower-cost funds typically beating higher-cost funds, says Laura Pavlenko Lutton, editorial director in the mutual fund research group of Morningstar Inc. Putnam's fees will be updated in real time.

Fidelity Investments, the largest U.S. provider of 401(k) plans, has been enhancing participant statements, its online presentation of fees and its marketing materials to provide more disclosure, said Beth McHugh, vice president of market insights for the Boston-based company. The new features will be ready by the government's deadline at the latest and "will go beyond the regulations," she said.

About 11 million workers have their employer-sponsored retirement plans with Fidelity, which manages $735 billion in 401(k) account assets, the firm said.

Bloomberg News contributed to this article

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