I recently came across this article in WSJ that brought out some of the more interesting reasons that the 401(k) Fee Disclosure legislation is important… There are two bills under review, one in the House (HR 1984) and one in the Senate (S 401), which aim to improve disclosure of fees within 401(k) plans. These two bills also address the issue of the qualities that are appropriate for folks who are providing advice to plan participants – which I wrote about in this article. A brief summary of the WSJ article follows:
It should not come as a shock that there are certain costs involved in maintaining a 401(k) plan – there is a degree of back office activity, such as signing up participants, tracking accounts, maintaining changes to accounts, distributing statements, and the like. In addition, the plan administrator must provide certain reports to the government, along with required annual reports for participants (that annual Summary Report, written on tp, that you get in the mail once a year and promptly toss in the trash), as well as reports to the management of the sponsoring company on plan participation rates and such.
You would likely expect to share in the cost – after all, it’s benefiting your account, right? – and it seems like that sharing should be based on your account balance or at best evenly distributed among all participants. However (and there’s always a however in life)… depending upon your fund choices, you may be paying more toward those back office activities than the guy in the cubicle next to you.
Turns out, the more inherent fees in an investment choice, the greater portion of the overhead you’ll be taking on (in general). If you’re in a money market account or (shockingly) the company stock, you might not pay any overhead. If you are in a managed mutual fund, you could be paying as much as 0.6% in annualized overhead fees. As with most things surrounding 401(k) fees, it’s not very clear just how these costs are allocated – and quite likely not very fair in the long run.
Hopefully the Fair Disclosure legislation will find appropriate legs and make its way to law, giving us all a much-needed view into the costs of our plan choices. Well, we can hope, right?
Photo by Faithful Chant
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I can learn from you, you can learn from me - please leave your comments and links!Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 25 years of experience in the industry. Read more from this author
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