Most of us look forward to retirement, but retirement planning can be a grind. Seventy million Americans rely on 401(k)s to fund at least a portion of their retirement. Typically our choices are spelled out pretty well, but it’s difficult to understand what we’re paying in management fees for the funds that accumulate by the time we’re close to retirement. 401(k)s are about to get undressed.

Two new Department of Labor provisions going into effect July 1 will require 401(k) sponsors (employers) to use a more transparent approach for disclosing their fees. ERISA 404(a)(5) and 408(b)(2) will uncover historically hidden costs. Together they should provide a long overdue jolt of truth for employees, 70% of whom mistakenly believe they pay no fees for the retirement money managed in their company retirement plans.

Of those who know they pay something, only 39% are aware of how much they pay in management fees. In fact, some employees pay two or even three percent in total fees – including extra loads, wrap fees, 12b-1 fees, and high-expense actively-managed mutual funds. The total of “all-in” these fees generally should be one percent or less.

CPA and fee-only advisor Michael Eisenberg believes these changes are warranted. “People will finally understand that there is no free lunch. Somebody is getting paid to provide these services.” Other advisors, like JP Morgan’s Michael Falcon, think most people will ignore the disclosures “like they disregard nutritional labeling.”

The changes will be a truth-telling bathroom scale for employees, and can also help small and medium-sized employers. Employers are required by ERISA laws to administer their plans in the best interest of their employees, which means understanding their costs and comparative performance figures. The increasing complexity of fee structures has made it difficult for them to compare costs among pension providers.

Some employers may find unfavorable light shined on their fiduciary practices. Recent class action cases won by participants of two retirement plans revealed the employer failed to monitor record-keeping costs, negotiate rebates, select less expensive share classes that were available, and paid above-market costs to subsidize certain corporate services. The company was looking at its own bottom line, which is appropriate except in regard to its fiduciary duty to its employees.

401(k) plan participants will see in their plan statement at the end of the third quarter, generally the end of September. If we don’t like what we see, it’s worthwhile talking to the company’s Human Resources department. The difference between an expensive plan and an efficient one can be substantial.

Mary Beth Franklin, a contributing editor with Investment News, points out the importance of understanding fees with a hypothetical example. Two investors, each with $250,000 in retirement accounts, each desire to accumulate $1 million for retirement. Their accounts are identical except for the fee charged: Investor 1 pays a $199 per month flat fee while Investor 2 pays 1.5% annually, paid quarterly. With a 7.74% compounded annual rate of return, Investor 1 can retire in 20 years, but Investor 2 must wait 23 years and three months to reach the $1 million goal.

Some advisors believe the rules don’t go far enough in making the fees comprehensible. For instance, under the new rules, if your plan offers choices among many funds, the statement will list the cost per $1,000 for each possible fund available at the company. Thus, the employee needs to find in the list each fund in which she’s invested, multiply the balance in that fund by its specific cost per thousand dollars, and then sum them up to find her total management fee. In most cases that shouldn’t be onerous, but Tom Gonnella of Lincoln Trust Company believes investors need this all-in cost, or “personalized expense ratio” to successfully fund their retirement.

Although the new rules apply only to 401(k) plan participants, a new awareness about fees could spill into an increased demand to understand fees in private retirement accounts. Mark Cortazzo, of Macro Consulting Group LLC, thinks the rules will “cause clients to question the fees that they are paying for managed accounts outside their company retirement plan.”

The bottom line is, our eyes are being opened, but it’s our responsibility to actually see. I, for one, do read the nutrition labels, and return the item to its shelf when I don’t like what I see. Raising our voices, whether we’re the employees talking to the HR department, or the HR department to the plan sponsor, may be a more difficult task, but worth it for an amply endowed retirement.

Karen Telleen-Lawton, CFP®, is the principal of Decisive Path Fee-Only Financial Advisory
(www.DecisivePath.com) as well as an environmental and economics author and writer (www.CanyonVoices.com). She can be reached at: This email address is being protected from spambots. You need JavaScript enabled to view it. .

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