MONEYMATTERS:New 401(k) regulations to help investors

By Kevin Fusco

The Daily Record Newswire

Determining, and actually accumulating, adequate retirement savings has never been an exact science, and many investors and workers have become increasingly frustrated by not only the performance of their 401(k)s, but also other detractions that have tarnished the nation's most popular retirement savings vehicle.

Since its advent in the 1980s, the 401(k) has been a favorite, and relatively easy, way to save for retirement, with employers eager to shift the responsibility for post-work savings away from corporate pension plans and onto their employees.

For their part, workers have also recognized the importance and benefits of pre-tax savings, and currently more than half of U.S. households use a 401(k), or similar, account. Yet familiarity breeds contempt, and in the wake of a flat decade for the equity markets bookended by two prolonged and volatile down markets, many plan participants have begun to weigh the benefits of a 401(k) against the drawbacks.

Most workers will find that the benefits more than justify tolerating the downsides of 401(k) investing, but the most common complaints from participants are valid.

Given the immense size and scope of the world's equity, fixed income, commodity and currency markets, the paltry number of investment options offered by most plans is almost insulting. The average number of investment options available to plan participants in 2010 was 18, and this usually includes some combination of actively managed, indexed, target date and stable value investments. Unfortunately this number falls far short of representing a truly diversified asset mix, and it is common to see some major asset classes, such as high-yield bonds and mid-cap equities, routinely absent from fund lineups.

In addition, there exists a downside that many participants don't even realize, and that is cost. In a 2011 AARP survey, 70 percent of respondents believed that their 401(k) plans were free. Nothing could be further from the truth, yet is easy to understand how many participants feel that they are getting something for nothing.

Things to change by fall

Historically, fees and expenses have not been disclosed to participants since there was no obligation for plan providers to do so. By this fall though, that will change.

The U.S. Department of Labor recently released final regulations that will mandate that 401(k) providers disclose all fees and expenses to not only plan fiduciaries, such as employers, but also all plan participants as well. For the first time since the inception of 401(k) plans, workers will know what they are being charged for the administration and management of their retirement plan.

The enhanced disclosure will provide for better overall transparency, a goal of 401(k) critics for many years that was also recently championed by the Obama administration. This transparency aims at revealing not only the internal costs of investment options, but also the fees being charged by plan investment advisors and the plan providers as well.

It is the latter two that most plan participants do not even realize that they are paying, and more than likely the first to decrease if the intended consequences behind the regulations take hold.

The Department of Labor and the administration are hoping that the disclosure of fees and expenses will lead to more competitive pricing, which should benefit all participants.

It is important to note that participants often do not have a direct say in negotiating fees, as this responsibility lies with the employer, and unfortunately almost no employer offers multiple pre-tax savings vehicles that would allow participants to decide between options with different costs. Participants' best hope for lower fees will probably come from pressure felt by employers to address the costs that to this point had remained hidden.

It will also serve as an opportunity for many employers to ensure that they are benefitting from the most cost-competitive options, while at the same time continuing to meet their fiduciary duty.

As of 2010, more than 65 percent of companies retained an investment advisor to provide guidance to their plan and help with the employer's fiduciary responsibility. The costs for these services are included in the plan, and passed on to participants. While professional guidance is certainly a good idea, the cost for these services can vary greatly, and the same competitive price pressure should apply in this arena as well.

The new regulations will require that service providers, ranging from brokers to third-party administrators, who expect to earn more than $1,000 in regards to a plan, must disclose their total direct or indirect compensation to both employers and participants.

Do your part

Participants need to do their part as well by taking advantage of higher contribution limits and company match programs. For 2012, the maximum annual contribution allowed into a 401(k) plan was increased to $17,000, with participants older than 50 permitted to contribute an additional $5,000 per year. In addition, every eligible employee should strive to contribute at least what their employer is willing to match.

For the average American, employer-sponsored retirement plans remain one of, if not clearly the best, way to save for retirement. Regardless of the numerous drawbacks, workers should take advantage of the benefits of pre-tax and tax-deferred investing provided by 401(k), and similar, plans.

New disclosure regulations should help enhance returns by lowering costs, and will hopefully be the first step toward further changes in how plans are administered and the benefits afforded to participants.

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Kevin Fusco is senior vice president of Fusco Financial Associates Inc. of Towson. He can be reached at 410-296-5400, extension 109, or Kevin.Fusco@LPL.com.

Published: Thu, Feb 16, 2012

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