For years, employer-sponsored 401(k) plan participants have received statements that include account balances and changes in values since the prior period. In most cases, fees paid from their account were not mentioned.
Plan sponsors, service providers, and participants face big changes in 2012, starting July 1. That’s when the Labor Department will require mutual funds and plan administrators to disclose details about the fees they are charging employees with 401(k) plans. The long-awaited disclosures cover both direct and indirect compensation that administrators receive – the latter of which often slides under the radar.
A second change involves plan participants directly. Plans must furnish their first set of fee disclosures to participants by August 30, 2012 – 60 days after the July 1st effective date. In addition, fees and expenses paid by participants must appear on the quarterly statement (for fees incurred in July through September) to be furnished no later than November 14, 2012.
A recent AARP survey found that 71 percent of 401(k) participants think they don’t pay any 401(k) fees at all. Seeing these fees for the first time might come as a big surprise to those who had no idea how much they’ve been paying over the years.
Employers need to plan and think about how employees will react to these changes, and how to inform them responsibly to minimize the surprise. Plan sponsors have a duty to evaluate the fees to determine whether they are reasonable and in the best interest of the employees. If uncertain whether the fees are reasonable, your organization might need to benchmark them against what other providers charge.
“In the 401(k) world, benchmarking measures a plan against other plans with the same characteristics in terms of assets, cash flow, number of participants, number of non-participants, average account balance, fees (both stated and unstated), and much more,” says Steven E. Parmelee, President of Westport Benefits Group.
By 1990, 401(k) plans held about $900 billion in assets; by 2011, the figure had swelled to $4.3 trillion.
“The Department of Labor believes that fee disclosure will help reduce the costs of running a retirement plan in the long run,” says Jeff Zobell, Vice President of Alliance Benefit Group – Rocky Mountain. “Not only are the fee disclosure regulations requiring more active oversight by both participants and plan sponsors, they are changing the focus of the conversation to that of retirement preparedness. Participants and plan sponsors will have access to better programs and products because of these lower costs, and a higher account balance at retirement,” he adds.
Transparency is good for employers, participants, and the 401(k) industry.
* Securities offered through LPL Financial, Member FINRA/SIPC.
* This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Consult your financial professional before making any investment decision.
John Raudat is a Registered Representative with, and securities offered through, LPL Financial. Member FINRA/SIPC.
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