DES MOINES, Iowa — Who would choose to buy something without knowing exactly how much it costs? Few people would. Yet that's what millions of investors do when they sign up for a 401(k) plan.
That's about to change.
After years of analyzing, deliberating and gathering comments, the Department of Labor is about to require providers of 401(k) plans such as Fidelity, Charles Schwab and The Vanguard Group to reveal details about their fees — a requirement that currently isn't mandated.
Various bills have been introduced in Congress to force fee disclosure, but none has yet made it through the House and Senate. Labor Department regulations, in the works for a couple of years, are nearly ready for release.
It's widely understood that companies selling 401(k) plans to employers have deals with the mutual funds within their plans. Such deals include revenue-sharing arrangements, and payments for unspecified fees that may include charges for marketing, distribution or other services. The range of fees are seldom spelled out, and are sometimes taken out of the investment returns of the fund, which means plan participants are unknowingly paying them.
If the final Labor Department rules reflect the most recent version, they will require companies that provide employers with 401(k) plans to:
- Disclose in writing all services provided and their related fees stated in a specific amount — a percentage of plan assets or a per-person charge.
- Detail how the company will collect fees, whether it's by billing the plan, deducting fees directly from plan accounts, or skimming a percentage off of the plan's investment return.
Workers who save for retirement will finally know exactly what they're paying for.
"It will be relatively easy to understand," said Pat DiCarlo, an employee benefits expert and partner with the Alston & Bird law firm in Atlanta.
"That's information that has not always been easy to find." Companies offering workers 401(k) plans can shop around with clearer knowledge of the services they'll receive and their cost.
"With increased fee transparency comes better services and better prices, a better bang for the buck," said Marcia Wagner, managing director of The Wagner Law Group in Boston, which specializes in employee benefits.
Criticism over lack of fee disclosure grew as the recession set in and the stock market plunged through 2008 and early last year. Losses in 401(k) plans turned the focus on fees and whether investment professionals were enriching themselves at the expense of workers trying to save for their retirement.
The impact of even slightly higher fees can be dramatic for a worker saving for decades.
The Government Accountability Office studied the fee issue and concluded that just a 1 percentage point difference in fees could cut a worker's assets by 17 percent over a 20-year period.
The GAO report recommended regulatory changes that would require detailed fee disclosure. That was in 2006.
The fee issue also came more into focus in recent years after workers began suing their employers. The lawsuits alleged the employers failed to ensure that workers were paying reasonable 401(k) fees and the companies should have known some fees were hidden.
Such cases have been brought against major corporations including Boeing Co., Deere & Co. and Wal-Mart Stores Inc.
Verdicts have come out on both sides, which means the issue could end up before the U.S. Supreme Court at some point.
Final resolution of fee disclosure requirements by the courts is certainly a ways off.
Some 401(k) industry experts say workers who want to know about fees can find the details on their account website or through a phone call or two.
"I think most will find that the information is already available and it's probably there in an understandable form, said Larry Goldbrum, general counsel for the SPARK Institute, which represents banks, mutual fund companies, insurance companies and consultants that provide and manage 401(k) plans. "The question is whether or not participants have the interest and time to go ahead and seek that out." Some 401(k) providers already disclose fees to workers and their employers offering the 401(k) plan. One is Boston-based Putnam Investments.
"Our view has always been that we think the plan sponsor and the participant are entitled to understand the true value of their 401(k) plan," said Ed Murphy, head of 401(k) plans at Putnam.
One might ask why new regulations are needed if the information already is available. The new regulations will provide a consistent set of rules everyone in the industry must follow. It will provide workers and their employers understandable data that can be used to compare plans and investment options within the plans. It also may help ease a negative perception that the industry is hiding something.
"It will lift some of the cloud that exists that the information isn't being provided or isn't available," Goldbrum said.
Officials at the Department of Labor can't say when the new set of rules would be released, but expect them in the next few months.
The rules likely will give the industry plenty of time to prepare, making an effective date perhaps as far out as 2012.
In the meantime, a few companies gather the available 401(k) fee data from various reports and make them available in comparison tools.
Brightscope Inc. compiles data from several sources to rate 401(k) plans. On www.brightscope.com users can see how their plan stacks up against others in the same industry, including some fees that are currently reported.