401(k) Becoming More Transparent
Most of my living comes from managing investments for people. When someone is considering becoming a client, they are asked to sign a contract that outlines how much I charge for my services. Some people don’t sign the contract because they feel I’m too expensive. That’s the thing about most any business. The business has to charge enough to cover expenses and make a profit. The customer has to determine if the benefits they get are worth the cost. Nothing new there.
But in a very prominent area of the financial industry, a whole lotta folks have no idea—never had any idea—about what their investments were costing them. They (you) are about to find out.
The area I’m talking about is the 401(k) plan. Coming this spring (unless industry lobbying groups are successful in delaying it), plan sponsors (a.k.a., your employer) will have to tell you the fees that you are paying in your 401(k) plan.
“That’s not new,” you may say. “We get those prospectus things all the time.” And you are correct. You are probably investing your 401(k) money into mutual funds and they will provide you a prospectus outlining the funds’ fees. However, those funds are the investments that are inside the 401(k); have you ever wondered what the 401(k) itself costs?
Assuming there is no free lunch, someone has to pay the people (or the programs) that you call to change your plan investments. The quarterly mailing of account statements costs money. And behind all of these are record keepers, accountants, attorneys, and the like. So, who pays for the costs of the plan itself? And how much does it cost? Free? Not a chance.
Well, around April or May of this year, a new set of rules coming from the Department of Labor requires that this information be provided to the 401(k) participants in a clear format that is easy to understand and compare.
If you thought your 401(k) plan was somehow free, you may be in for a rude awakening. That doesn’t mean that the fees are unfair, just that you didn’t know there were fees. Some smaller and mid-sized company plans may indeed show some hefty charges inside them. One reason for this is that those companies often do little comparison shopping when setting up their 401(k) plans. Usually the deal is made between a friend of the owner or senior board member while the two play golf.
Likely though, nothing sinister is going on and the fees aren’t that onerous. But to know, you’ll need to compare your plan’s expenses to others. I know of no good place to go for this information now, but no doubt as these numbers appear with your statements, groups will develop comparison services. At a minimum, you could compare your plan’s fees to those that friends at other businesses pay.
Armed with this new information, I can imagine that employees will start asking their employers what they’ve done to try and get the best balance in 401(k) plan administration and costs. If you’re an employer, it’s probably a good idea to have some answers ready before those numbers are mailed.
This article was published under the title "401(k) plan fees soon will be known"
in the Wichita Falls Times Record News on 01/29/2012
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