401k fees exposed -- finally
For years, employees have been in the dark about the fees they pay to invest in 401k's. The Department of Labor has finally agreed to turn on the lights.
For the first time since the 401k retirement plan began, participants may soon see how much they're paying in fees. They may not like what they see.
I "drive" the point home in this recent video by using a Ferrari to illustrate the hidden fees. Check it out, and meet me on the other side and learn about the new changes.
If you sensed a little frustration in my voice as I reported that story, that may be because I've been doing it periodically since 1996 -- 14 years. That's a long time to wait for someone to do something to help the 40 million Americans investing in these plans.
New rules released by the U.S. Department of Labor will require companies to disclose 401k-related fees in simple terms so employees can see exactly how much they're paying for each investment fund within their retirement plan.
Employees are often unaware that the mutual funds held within work-related voluntary retirement plans charge management and other fees. That's because the costs are often deducted from fund earnings rather than disclosed separately.
The Department of Labor has been studying the problem since December 2007. The new rules won't go into effect until July 2011.
Among the typical fees charged within 401k accounts are charges for investment advisory services, buying and selling securities, record-keeping, administration and management. Taken as a whole, fees generally range from 0.2% to 2% or more.
While the percentage may seem small, over long periods of time they can add up to a significant amount -- as you saw in the video above, well over $100,000 during a typical career.
The new rules require that any service provider, including brokerage firms, record-keeping companies and plan administrators, that receives more than $1,000 in compensation in connection with 401k and other work-based, voluntary retirement accounts provide reports to plan participants detailing fees.
"Improving disclosure will mean that plan fiduciaries can make more-informed decisions about important plan services, the cost of the services, and the potential conflicts of interests that their service providers may have," said Phyllis Borzi, an assistant secretary for the Labor Department’s Employee Benefits Security Administration.
The DOL is taking investment industry and public comments on the proposed regulations until Aug. 30. Changes to the proposed rules could occur as a result of the comments. The new rules are to go into effect July 16, 2011.
U.S. Rep. George Miller, D-Calif., tried earlier this month to get legislation passed that would require fee disclosure, but that attempt proved unsuccessful. He says that despite the new DOL rules, he will keep trying to make the fee disclosure a part of federal law.
Here's another 401k story I've done several times over the years: "Learn how to invest your 401k money in less than 1 minute."
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