New rules order thorough disclosures of 401(k) fees
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Although workers have not been receiving itemized bills for fees they pay in their 401(k) retirement plans, those hidden costs may be chipping away at the growth of their nest eggs.
Thanks to new rules set by the U.S. Department of Labor, employees with 401(k) plans will be able to get detailed information about how much they pay in fees as of July 16, 2011.
"Buried fees are like high blood pressure," said Jeff Acheson, a partner at Schneider Downs Wealth Management in Columbus, Ohio. "You don't see it, but it will kill you.
"This new legislation will force full disclosure of what fees are embedded in a retirement plan. Once you know what they are, you can compare if they are reasonable or not and if you are getting value."
The full laundry list of direct and indirect fees that are often buried in fine print or not disclosed at all may come as a shock to retirement savers.
Labor Department officials list 17 distinct 401(k) fees being charged to retirement accounts, including fees for record keeping, legal services and toll-free telephone numbers.
It is estimated that hidden fees of 1 percent can reduce a worker's retirement returns by about 15 percent over 30 years.
For an account of $1 million, that comes to $150,000.
Indirect fees must also be disclosed under the new rules. An example of an indirect fee would be a company sending people to a conference put on by a 401(k) vendor. Vendors allocate those costs to all of its clients' customers, which is reflected in the fees each client pays to the vendor.
"With the new regulations and disclosure, people will find there were a lot of pigs at the trough," Mr. Acheson said.
Financial advisers who work with companies on the 401(k) plans will also need to spell out any possible conflicts of interest.
One example would be when an investment adviser is able to recommend two funds that are comparable but chooses the fund that pays a higher commission even though the other may have lower fees for the client.
Art Hazen, director of retirement plans for BPU Investment Management, Downtown, said the new regulations would spur radical changes within the financial services industry in terms of how major players do business.
"It will bring to light all the layers of compensation. There are a lot of different ways advisers are compensated," he said, adding that some fees have been disclosed in mutual fund prospectuses, but that most investors didn't bother to read the complicated documents.
First Published August 18, 2010 12:00 am
