Sunlight is the Best Disinfectant
Many parts of the United States had an unexpectedly mild winter and a rather warm, sunny and early, start to spring. This summer should prove to bring even more sunlight, both literally and figuratively, as a new regulation takes effect that aims to provide more transparency to the often convoluted and hidden fees that are embedded in 401(k) plans.
401(k) plans, named after subsection 401(k) of the Internal Revenue Code came to widespread popularity in the 1980s as employers moved away from pension plans. Switching from pensions or Defined Benefit ("DB") plans to 401(k)s or Defined Contribution (DC) plans had the added benefit (from the employer's standpoint at least) of shifting the burden for employee retirement from the firm to the individual.
No longer would employers have to determine how much and how aggressively to invest to hit some future target which would be sufficient to cover obligations. Now employers had the option (but not the requirement) to provide some type of match to employee contributions, but the onus of how much to contribute and how to invest was placed firmly on the shoulders of the employee.
401(k) plans are the number one way most Americans save for retirement. For many workers it represents their entire life savings. Given the importance of this type of account it is shocking that, according to a recent study by AARP, 71% of 401(k) plan participants think that they pay no fees, while an additional 6% didn't know whether they paid fees or not.
Additionally, 32% of plan participants felt that they were not knowledgeable about what impact fees have on their investments, despite 81% of surveyed respondents believing that fees were ‘very' or ‘somewhat important.'
For the complete report, visit the AARP website by following this link: http://assets.aarp.org/rgcenter/econ/401k-fees-awareness-11.pdf
When US Supreme Court Justice Louis Brandeis uttered his famous words, “sunlight is the best disinfectant” he wasn't referring specifically to plan fees, but transparency in general. He would be pleased to know that something is finally being done to address the opaqueness of costs related to 401(k) plans. Effective July 1st the Department of Labor (DoL) has issued a new rule (408(b)(2)) under which plan fees are required to be clearly spelled out to both plan participants and plan fiduciaries.
A summary of the regulation can be found on the DoL website: http://www.dol.gov/ebsa/newsroom/fs408b2finalreg.html and the complete rule can be accessed here: http://webapps.dol.gov/FederalRegister/PdfDisplay.aspx?DocId=25781.
Sunlight, truly will prove to be the best disinfectant, it's only a shame it had to come after so many years of overcast skies after which a great deal of damage has already been done.
About the author: Michael Prus is the President and Founder of Scale Investment Group, LLC, a registered investment advisory firm based in White Lake, Michigan. The company manages money for clients and is a consumer advocate, most notably championing greater transparency of the investment advisory industry and lower fees for investment products as well as portfolio management services. Contact Michael directly at firstname.lastname@example.org.
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