With 401(k) plans increasingly the backbone of American workers' retirement savings, new government regulations set to go into effect in 2012 will give participants greater information on the fees that fund managers charge for the plans.
"We are giving workers the tools they need to make the best possible decision" about managing their retirement plans, said Assistant Secretary of Labor Phyllis C. Borzi, who heads the Employee Benefits Security Administration. "Now they will have information about different investment options to help them make wise decisions."
An estimated 72 million workers have 401(k)-type retirement plans totaling about $3 trillion in assets, the department said.
The long-awaited regulations, which come three decades after defined contribution plans were introduced, are intended to let workers see in plain language what they pay for the investment options in their accounts so that they can comparison-shop with other investment choices in their plan, regulators said.
Participants will also receive quarterly statements showing the services and related fees charged to or deducted from their individual plans. Those include administrative fees related to accounting and record-keeping, and expenses associated with a participant's actions, such as taking a plan loan. People will receive an explanation of fees when signing up for an account.
The government regulations were a long time in the making, proponents of the disclosure rules say. Helping bring on the new rules were a series of class-action lawsuits filed against large companies claiming that they violated their fiduciary responsibilities by allowing workers to be charged excessive, undisclosed fees in their retirement plans. AARP filed a friend-of-the-court brief in several of those cases.
The new disclosure rules could lead many people to want lower-cost funds, pressuring employers to offer them if they don't already.
Tim Courtney, chief investment officer for the Burns Advisory Group in Oklahoma City, which advises 401(k) plan sponsors and participants, says workers often don't understand how big a bite plan fees take out over a lifetime of saving. By his estimates, an increase of one percentage point in fees could reduce overall retirement income by as much as 26 percent.
For example, a 20-year-old saving $5,000 a year in a 401(k) and earning investment returns of 8 percent would have about $1.93 million at age 65. Raise the fees by 1 percentage point, and the account would have only about $1.42 million at 65, a difference of about $500,000.
With some plans, "all you see is how much the fund is worth at the end of the day, the quarter or the year," Courtney says. "But those returns have been reduced by the fees taken out over the course of a year. The administration and record keeping have to be paid. Plan providers don't do this for free. But these rules should get participants and decision makers at companies thinking, are these costs fair and appropriate, and that will bring it to everyone's attention in a way that hasn't been done before."
Under the new rules, mutual funds that are offered to 401(k) participants must disclose performance data, including one-year, five-year and 10-year returns. Comparisons to appropriate benchmarks must also be provided for those time periods so investors can see how their funds measure up.
Workers will also get access to a glossary of terms to help explain the investment options, fees and other details associated with their plans.
Carole Fleck is a senior editor at the AARP Bulletin.