401(k) Plans Step Into the Sunshine

February 6, 2012

In an attempt to encourage transparency between investment fund administrators, employers and employees, the U.S. Department of Labor will roll out new rules within the next few weeks that will require fund managers to disclose their cost structure to investors.  This will prove especially important for 401(k) operators who will be forced to divulge their fee structure to clients, says the Wall Street Journal.

  • The introduction of 401(k) plans took place in the early 1980s when the IRS allowed contributions to be made to the retirement funds without being taxed.
  • By 1990, all 401(k) plans held roughly $900 billion in assets.
  • By 2011, this figure had grown to some $4.3 trillion, which speaks to the large impacts that even the most minor change will have for financial outcomes.

The Department of Labor will require plan administrators to release information regarding the number and magnitude of their fees to participating businesses, which will in turn be required to provide the same information to their employees.  This entire transparency-augmenting process is expected to be completed by the summer.

The overall expected result from this move is that investment companies will be forced to compete to attract clients by lowering those fees that previously went unreported.  Employees will pressure businesses to shop around for companies willing to offer low administrative costs, thereby optimizing returns for investors.

  • According to Vanguard, over a 30 year career a 0.5 percent increase in fees can lower an employee's aggregate savings by 10 percent.
  • A worker who saved $10,000 a year in a fund with expenses of 1 percent would wind up with $829,000, $91,000 less than a worker paying 0.5 percent.
  • In response to these significant incentives, businesses are increasingly seeking out more competitive investment options with lower fees: a November survey of 600 employers found that 67 percent changed their plans, compared with about 10 percent in most years.

Overall, the effort by the Labor Department is expected to be a big win for individual investors seeking to save for their retirement -- they will benefit enormously from lower rates gained through greater transparency.

Source: Kelly Greene and Anne Tergesen, "401(k) Plans Step Into the Sunshine," Wall Street Journal, January 31, 2012.

For text:

http://online.wsj.com/article/SB10001424052970203920204577193444258923460.html?mod=WSJ_PersonalFinance_PF4

 

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