A new regulatory measure governing America's most popular retirement vehicle aims to help workers save on fees as they build nest eggs but many experts worry the rule, requiring 401(k) plan providers to disclose hidden costs, could result in new charges.
Plan providers, such as mutual funds, have been able to assess hidden charges without much pushback from regulators, and under current rules it is very difficult to determine how much participants in these company sponsored plans pay in fees.
But last week the Labor Department took two related actions that aim to better inform employees with 401(k) plans about fees. Firstly, the department set July 1 as the deadline for plan providers to disclose fee information to employers, also known as plan sponsors. Secondly, sponsors have until Aug. 30 to pass along that fee information to their employees who participate in 401(k) programs.
Among other things, plan providers must disclose investment-management fees, plus the one-year, five-year and 10-year performance of investments versus their benchmarks.
According to a survey seven in 10 employees were not aware that they pay fees to their 401(k) plan provider to maintain their account. When told of these fees, six in 10 said they were not aware of the amount they pay in fees to maintain their account, according to the American Association of Retired Persons, a Washington D.C.-based non-governmental organization and interest group.
The mutual fund industry is basically ripping off people with 401(k)s, said Ken Himmler, a 28-year industry veteran who is president of Integrated Asset Management in Los Angeles, Calif.
The Labor Department's latest move is intended to encourage employers to shop around and compare costs in hopes fees will become more competitive.
The Investment Company Institute estimates the 401(k) retirement system alone holds $2.8 trillion in assets for more than 50 million individuals. The median fee across 525 different 401(k) plans studied by the institute and the consulting firm Deloitte in 2011 was 0.78 percent of assets.
Reducing fees by even a small amount can provide big returns for retirement savers. For example, a 0.25 percent higher return after fees could increase the cumulative savings of a 25 year-old worker by 10 percent by retirement, the Council of Economic Advisers found.
However, Himmler remains pessimistic and thinks that such regulation will only result in more creative fees.
Honestly, I think they are going to use the airline company rational, Himmler said, referring to how airlines started to charge baggage fees when the oil price went up to cover their expenses.
They made $100 million dollars in extra profit in 2011 from baggage fees, while oil prices were lower than when they added that fee in. They didn't get rid of that fee, but created a new benchmark, Himmler added.
Himmler warned that the mutual fund industry will come back and say they are burdened with extra administration charge because the Department of Labor is now creating this onerous administrative task for them that they have to put on to the 401(k) plan participants, and they are going to charge more.
Very slick on their part, said Himmler.