New rules aim to boost transparency on 401(k) fees
Starting July 1, the U.S. Department of Labor plans to implement new rules that will require 401(k) managers to more clearly disclose the fees they charge for their services. The Department says this move will help improve transparency and allow 401(k) owners to better understand how much they are paying for the investments they make through their retirement savings plans.
According to SmartMoney, about $4.3 trillion is currently invested in 401(k) savings accounts, and "rough estimates" place the amount financial management firms siphon off for fees between $30 billion to $60 billion a year.
Although fund managers have defended their fees, many 401(k) savings account participants aren't aware how much their fees are or even that they exist, according to industry analysts. But that will change by Aug. 30 this year, the deadline for fund managers to send information outlining their fees to all plan participants.
The new rules also place more responsibility for tracking the fees on the shoulders of plan providers, which are typically employers. Employers will be required to review fee disclosures, request missing information and report unanswered requests to the Department of Labor within 90 days.
It's not certain how the new disclosure rules will affect "revenue sharing" practices, in which fees are not charged by fund managers to participants. In revenue sharing, fund managers instead earn money by directing 401(k) investments into mutual funds that return a portion of their fees to the manager. According to critics, this process can lead fund managers to be more interested in their own earnings than in how much their clients earn.
It's also uncertain how much the transparency could impact the cost of 401(k) savings account administration. Although one goal is to make the field more competitive and force firms to reduce costs, that result depends on employers being willing to shop around for cheaper administrators who can still ensure a good return on their participants' investments. Participants themselves will still have little influence on the retirement plan their employer chooses.
In response to the new Labor Department guidelines, 401(k) fund managers have asked the federal government for permission to email information to plan participants rather than mailing printed information. Requiring paper statements is expensive and could force fees higher rather than lower, trade groups said.