New 401k Fee Disclosure Requirement Summary

New 401(k) plan fee disclosure requirements from the US Department of Labor are coming soon. This includes defined benefit, 401(k), 403(b), profit sharing, and other retirement plans. I was getting confused myself, so I wanted to summarize some of the basic deadlines. First, there are three main parties involved:

1. Plan service providers. For example Vanguard, Fidelity, or numerous smaller local providers.
2. Retirement plan fiduciaries. Basically, your employer.
3. Plan participant. The employee.

First, there is a new requirement for fee disclosure by service providers to the fiduciaries (i.e. from Fidelity to the employer). These regulations become effective on July 1, 2012. The idea is to get fiduciaries to understand the services received from providers and to determine the reasonableness of the costs incurred. You’d think that your employer would already demand to know what they’ve been paying for all these years. Why don’t they? All too often, you, the employee are the one paying for it out of your investment balances and earnings!

Which brings up the next stage, the fee disclosure requirement from plan fiduciaries to participants (i.e. from employer to employee), which becomes effective August 30, 2012. Now, your employer is legally required to tell you what fees you’re paying, including both investment management fees and administrative fees for things like record keeping, accounting, and legal services. However, this is likely be wrapped up into just an overall percentage for each investment option, or worded as dollars charged per $1,000 invested.

The basic problem remains. Employers choose 401k plans with high fees often because they it doesn’t affect their bottom line – most are smaller companies with plans that shift the cost burden onto the employees. However, by simply shining a brighter light on these fees and allowing easy comparison between employer plans, it lets employees have more information to affect change. Indeed, it appears this forced transparency is working already, as the WSJ reports:

Employers “have been polishing up their plans in anticipation of fee disclosure, making sure the fees are appropriate,” says David Wray, president of the Plan Sponsor Council of America. He says nearly two-thirds of 401(k) plans changed their investment lineup last year, and 57% did so the year before, compared with a “normal number” of about 10%.

More reading: Department of Labor, NY Times, Employee Benefits Law Report