[author: Philip A. Diamond]

Whether you are the owner of a company that sponsors a qualified retirement plan, a human resources professional, or simply someone who participates in a 401(k) plan, you have probably seen a number of recent news articles discussing 401(k) plan fees.   

Why has there been a focus on this recently?

The short answer is that a Department of Labor rule requires certain information about retirement plan fees, expenses, and investment information to be disclosed to plan participants. In fact, this rule requires these disclosures about fees and other plan information to be made to millions of 401(k) plan participants across the country by August 30, 2012.    

What is the reason for the new rules?  

Fees and expenses reduce the amount that plan participants ultimately will have available for their retirement. The Department of Labor provides the following example:

Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow only to $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.

These rules are intended to increase transparency and encourage plan sponsors and plan participants to review the fees that they are paying. The rules are intended to help retirement plan sponsors and participants make more informed decisions so that participants can take action now to control costs and, ultimately, have more funds available for a safe, secure retirement. 

What retirement plans are impacted by this rule and when does it take effect?  

The new rules apply to retirement plans where participants are permitted to self-direct all or part of their investments. That is, the participants choose between a number of different investment options. This could include 401(k) plans, profit sharing plans and 403(b) plans - if participants have the right to choose investments. The first annual disclosures must be made by August 30, 2012. 

What specific information about the plan and the plan's investment choices must be provided with the annual disclosures?  

A complete listing of information that must be provided is detailed in Department of Labor Regulations Section 2550.404a-5(c).  However, some of the more significant information that must be provided is as follows: 

General information about the plan  

• The designated investment alternatives that participants may select must be listed.   
• Information must be provided describing how to select among the designated investment alternatives, including restrictions on changing investments.

Administrative expenses

• Administrative expenses that might be charged among all participants, like recordkeeping costs and audit fees, must be listed along with a description of how those fees are determined.
• Administrative fees that might be charged just to some individual accounts that are not already included in the plan-wide fees also must be listed. This includes items such as the fees to process plan participant loans, individual investment advisory fees, and fees to process Qualified Domestic Relations Orders (QDROs).

Information about plan investments

• Charts listing the names and types of investments (e.g. XYX Growth Fund-Large Cap Growth Fund) 
• For investments with variable rates of return, such as mutual funds:
  • 1, 5 and 10 year rates of return and comparable returns for benchmarks in that category
  • operating expenses for the fund stated on a percentage basis and on the basis of dollars per thousand dollars invested
  • other fees like sales commissions and redemption fees
  • purchase, transfer and withdrawal restrictions
• For investments with fixed rates of return, such as certificates of deposit:
  • the annual rate of return
  • term of the investment
  • other fees similar to those listed above
  • purchase, transfer and withdrawal restrictions

What specific information must be provided with the quarterly disclosures? 

• Dollar amounts charged to participants' accounts
• Description of services rendered in exchange for the amounts charged to the accounts
• Explanation of any relevant administrative expenses paid from operating expenses of plan investments

What should employers and plan participants be doing now? 

Many (if not most) required annual disclosures already have been prepared and distributed. If you are an employer who sponsors a qualified retirement plan, check with your plan providers to confirm that the necessary disclosure documents have been, or will be, provided to plan participants before the deadline. Plan sponsors also should review any disclosures before they are distributed to confirm the accuracy and completeness of the information because employers have a fiduciary duty to ensure that these rules are followed.  

Employers should anticipate that participants will have questions about these disclosures, and should anticipate and research any expected questions in advance. Just as importantly, it is simply a good business practice for employers to review the disclosures and use that as an additional resource to determine whether changes should be made to retirement plans that they maintain. Although employers should continually monitor the plans that they maintain, these disclosures provide a good opportunity to review important plan information - especially because more participants will be focused on that information now and may raise new points about plan issues. 

This also is a timely opportunity for plan participants to review important details about their retirement plans. 

There will be challenges with this process, but there also will be opportunities. There are many reasons to establish 401(k) plans - not the least of which is to help employees save for retirement. Similarly, there are many reasons for employees to actively participate in available retirement plans. By making retirement plans more transparent, both employers and employees can benefit by reducing expenses and strengthening employee retirements.