With 401(k) disclosure, some fees still hidden


Savers get more information but forms are long, dont detail all costs

By Andrea Coombes, MarketWatch

Last Update: 12:01 AM ET Jun 25, 2012

SAN FRANCISCO (MarketWatch)You may have heard that new rules require employers to better disclose 401(k) fees. You could be disappointed when you see the results.

The new annual disclosure form, which the U.S. Labor Department said employers must provide to workers by Aug. 30, may run more than 15 pages long, wont provide a simple figure for the annual cost youre paying and some employers will bury the plans administration costs in with investment expenses.

Its a good start and theres a way to figure out what youre paying, but its not going to be an easy-to-read one-page summary that says, Youre paying this for your 401(k), said Scott Holsopple, chief executive of Smart401k, an Overland Park, Kan., firm that offers plan advice to savers.

The Labor Department rule imposes no limit on the length of the form. Some employers already are providing the disclosures, and theyve ranged from 13 to 16 pages long.

The new form will list, as a percentage, the annual operating expense for each investment offered in your plan. Its basically a price list, said Dave Gray, vice president of client experience for Schwab Retirement Plan Services, in Richfield, Ohio.

To figure how much youre paying for your 401(k) investments, multiply the balance you have invested in each option by the expense ratio listed for that investment, then add up your cost for each. (The new form also will describe expense ratios as a dollar figurethe cost per $1,000which makes cost-comparisons easy.)

To get the full cost of your 401(k), youll need to add in any plan-administration expensesfor record-keeping, legal and other servicesthat your employer requires employees to pay, plus any transaction costs, such as some plans charge to savers who take out a loan or distribution.

The annual disclosure form will provide a general description of what your employers plan charges for such transactions, and, in some casesdepending on how your plan is structuredthe form will say what employees pay for plan administration.

But the list of investment expense ratios on one form, despite its length, is potentially the biggest eye-opener for savers, Gray said. Investment expense is the lions share of expense that a participant pays, he said.

This information has always been available to investors who hunt for it, but now its being consolidated and pushed out to the participant automatically.

Separately, the Labor Department rules require that by mid-November, 401(k) quarterly statements must detail any fees deducted from a savers balance, such as for services the saver tapped, like a loan, or for plan administration costs. But the new rules dont require that your quarterly statement detail your investment expensesyour account balance is already reduced by those costs.

Some fees still hidden

Neither the quarterly statement nor the annual disclosure will detail the plans administrative costs that are paid via revenue-sharing arrangements, in which those costs are offset through the plans investment options. For example, some 401(k)s are set up such that an investment manager agrees to pay a 401(k) service provider a portion of the fees it collects from plan participants who invest in its mutual funds.

If your plans costs are paid in this manner, the new rules require that to be disclosed in general wording on the quarterly statement. But the precise amount youre paying through this revenue-sharing agreement wont be made explicit. Still, these costs are counted in the funds operating expensesthat is, in the expense ratio detailed on the new annual disclosure form.

Think of fees in two buckets. One consists of fees charged to manage the investments and one is fees to manage everything else, including record-keeping, legal services and more, said Mark Davis, a financial adviser with Captrust Financial Advisors in Westlake Village, Calif.

If those buckets are combined by a service provider, the employer faces fewer explicit disclosure requirements. Some argue that knowing the expense ratio is sufficient for saversbut Davis disagrees.

When a plan sponsor shifts the cost of running a plan from the sponsor to the participant, then the participant has every right to know whats being paid for the various services of the plan. These disclosure regs will not lead to that, he said.

Other costs will remain hidden, too. For instance, expense ratios dont include trading costs generated when the fund manager buys and sells stocks. These costs can vary widely. Still, they are reflected in a funds net performanceand funds past performance is detailed on the disclosure form.

News you can use

The new disclosures can help workers seeking to improve their 401(k) plan. Challenge the benefits department, said David Kudla, chief investment strategist at Mainstay Capital Management, a Grand Blanc, Mich. advisory firm.

Workers might ask, he said, Why is our average expense ratio this high? What are the revenue-sharing arrangements that I dont know about?

Employees arent alone in gaining more information. By July 1, 401(k) service providers must give employers clearer disclosures about who gets paid what relative to the plan.

Were already seeing fees coming down in preparation for fee disclosure, said Mike Alfred, chief executive of 401(k) ratings firm BrightScope. That will continue because the increased data will make the market more competitive.

Keep in mind that cost alone shouldnt drive your decision-making. Stick to your asset-allocation strategy, but find the cheapest investments that match your long-term plan within each asset class.

If youve already made your investment selections in your plan and youre comfortable with those, you may not necessarily need to do anything, said Krista DAloia, vice president and associate general counsel at Fidelity Investments.

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