For years, employees have been in the dark regarding fees they pay to invest in 401ks and other work-related voluntary retirement plans. The Department of Labor has finally agreed to turn on the light.
For the first time since the 401k retirement plan began, participants may soon see how much they’re paying in fees. They may not like what they see.
New rules released by the Department of Labor will soon require companies to disclose 401k-related fees in simple terms so employees can see exactly how much they’re paying for each investment fund within their retirement plan.
Employees are often unaware that the mutual funds held within work-related voluntary retirement plans charge management and other fees. That’s because the costs are often deducted from fund earnings rather than being disclosed separately.
The Department of Labor has been studying the problem since December 2007, but the new rules don’t go into effect until July of 2011.
Among the typical fees charged within 401k accounts are charges for investment advisory services, buying and selling securities, record-keeping, administration and management. Taken as a whole, fees range from .2% to 2% or more.
While the percentage may seem small, over long periods of time they can add up to a significant amount – well over $100,000 over a typical career.
I “drive” the point home by using a Ferrari to illustrate the hidden fees in this recent news story. Check it out.
If you sensed a little frustration in my voice as I reported that story, that may be because I’ve been doing it periodically since 1996 – 14 years. That’s a long time to wait for someone to do something to help the 40 million Americans investing in these plans.
The new rules require that any service provider, including brokerage firms, record-keeping companies and plan administrators that receives more than $1,000 in compensation in connection with retirement accounts provide reports to plan participants detailing fees.
“Improving disclosure will mean that plan fiduciaries can make more informed decisions about important plan services, the cost of the services and the potential conflicts of interests that their service providers may have,” said Phyllis Borzi, assistant secretary for the Labor Department’s Employee Benefits Security Administration.
The DOL will be taking investment industry and public comments on the proposed regulations from Friday, July 16th until August 30th. Changes to the proposed rules could occur as a result of the comments. The new rules go into effect on July 16, 2011.
Rep. George Miller, a California Democrat, tried earlier this month to get legislation passed that would require fee disclosure, but those attempts proved unsuccessful. He says that despite the new DOL rules, he will keep trying to make the fee disclosure a part of federal law.
Here’s another 401k story I’ve done several times over the years: Learn how to invest your 401k money in less than 1 minute.