However you slice it, the 401(k) is the most popular retirement plan in the country.
So how can it be that no rules anywhere explicitly spell out what employers need to offer their 401(k) participants so they’ll understand what products and services they’re getting and what fees are being charged?
That is about to change—and fast.
By President-Elect Obama’s inauguration Jan. 20—possibly sooner, experts say—a set of detailed rules from the U.S. Department of Labor will become final. The proposed regulations mandate that 401(k) plan sponsors disclose clearly-worded information to plan beneficiaries, including investment descriptions, benchmarking data and fee information.
It's about time, says Los Angeles attorney Fred Reish, who runs the employee benefits practice at Reish, Luftman Reicher & Cohen.
"Here we are, 34 years since ERISA [the federal law that sets minimum standards for most voluntarily established private-sector retirement pension and health plans] was signed by President Ford and we don’t have a rule that says employers have to tell participants in 401(k) plans what their investments are or what fees they're paying,” says Reish.
Here is how Reish sees the changes taking shape for you:
What are employers required to do for 401(k) participants now, in order to be legally compliant?
Fred Reish: ERISA's "Prudent Man" rule says that fiduciaries—[fiduciaries would include plan officers and plan committee members]—have to act with the care, skill, prudence, and diligence of a person who is knowledgeable about participant-directed retirement plans, in this case 401(k)s. You can easily reach the conclusion that they'd have to tell participants what the investments are and explain something about them, but that isn't specified.
Is this a problem?
FR: The system has worked because bundled providers and record keepers put together information about the investments, saying this is a target-date fund, this is an international stock fund, etc. Unfortunately, some providers and some plan sponsors did not have high standards and, as a result, not all participants were receiving the information they needed.
What are the key changes you anticipate as a result of Labor Department's new rules?
FR: In the past the common practice was for plan sponsors, usually through providers, to give participants the bulk of information about their plans when the participant first entered the plan. Under the proposed rules, an overview of the plan—including information about the plan investments, expenses, and the procedures for making and changing investments and taking loans—will have to be handed out each and every year.
What about fee information?
FR: The proposal will require that participants be given, on their quarterly statements, the dollar amounts that were charged to their accounts for administrative expenses like consulting charges to the plan, and transactional expenses—like fees for participant loans.
Unfortunately, for the investment expenses, which usually total about 80% to 90% of the total costs charged to the participants, plans will only be required to give information about the expense ratios—whereby expenses are expressed as a percentage of the participant’s plan assets.
Is there anything 401(k) plan members can do about this?
FR: It is important that participants pay particular attention to the expense ratios, comparing them to the costs charged by well-known and high-quality mutual funds.
If participant has a $100,000 account in a target date fund that charges a 1.5% expense ratio, that participant is paying [fees of] $1,500.00 a year. The participant needs to decide if that if reasonable and fair. If not, then the participant needs to talk with his employer and ask, “Why are the expenses that high?”