401(k) fee disclosure — what is next?
In 2012, the state Department of Labor will begin enforcing new fee-disclosure regulations for defined contribution retirement plans. These regulations were designed to help plan sponsors and their employees better understand the fees in their plans.
The new regulations require that participants receive notification of the explicit dollars of any fees withdrawn from their 401(k) accounts on
a quarterly basis. Many participants will
see these fees for the first time on their
Sept. 30 statements, if they have a calendar-year plan.
The new regulations also require an annual disclosure showing various information on the plan’s investment options, including the funds’ expense ratios (management costs as a percentage of assets) and benchmarks, as well as other investment and plan-related information.
While some participants might see an actual dollar amount on their quarterly statements, many will not understand the relationship to the plan’s investment costs, because the annual notice will be delivered separately from the quarterly statements. Moreover, a participant would need to multiply his or her balance in each fund by the expense ratio of each fund, then add them together to calculate his or her personal investment cost.
Most participants will not perform this calculation, so they probably will never realize that the lion’s share of their 401(k) plan’s fees will come from the investment costs. Even if they understand their total costs, they have no way of determining whether they are reasonable.
How can the fee disclosure be improved?
First, participants would need to know their “all-in” cost. This “all-in” cost would combine the explicit fees from their quarterly statements and the annualized investment fees based on their balances in each of the plan’s investment options. Investment fee calculations could in turn be performed by taking the average daily balance in each fund for an individual participant and multiplying it by the expense ratio for each fund.
This “all-in” fee could be reported in one annual communication to participants and would include some industry-accepted plan cost benchmarking data so participants can determine if their fees are reasonable.
Fees have a significant impact on the growth of a participant’s retirement account, and participants deserve to understand them. The next step in this understanding is to combine all fees into one disclosure and more clearly explain the plan’s investment costs.
Tom Reese is a partner with Conrad Siegel Actuaries and has been with the firm since 1997. He is a specialist in retirement plan consulting, administration and employee communications. Email him at email@example.com.