New 401(k) Fee-Disclosure Rule Impresses Few

By Richard Burnett, Orlando Sentinel

April 14--Nearly eight months after taking effect, the federal government's 401(k) fee-disclosure mandate, designed to help workers and their employers better understand the costs of their retirement plans, appears to have lost something in the translation.

The new federal rules call for companies that administer 401(k) plans to show workers and their employers exactly what fees are taken from their investment returns to pay for the operation of the programs -- fees that can drain thousands of dollars from their accounts through the years.

But local financial advisers say many Central Floridians have ignored or given up already on the new disclosures, which are to be sent out annually and, to some extent, included in quarterly statements. Although some disclosures present the new fee information clearly, others are lengthy, confusing and full of jargon, they say -- a big turnoff for the average employee trying to make sense of retirement savings.

The rules have already generated dozens of complaints to federal regulators about alleged violations.

"Most people don't read those kinds of things anyway," said Cary Carbonaro, a certified financial planner in Clermont with United Capital Financial Advisers. "And if there's anything confusing in it, they'll just toss it in a pile to go in the trash can."

The rules' lackluster effects so far are frustrating personal-finance experts who had hoped they would lead to greater transparency and, in doing so, energize workers' retirement planning. Instead, the disclosures have been problematic for investors while creating more paperwork for employers and plan-management companies, said Jason Chepenik, a certified financial planner and managing partner of Orlando-based Chepenik Financial, which manages 401(k) plans.

"We handle plans for more than 25,000 [employee] participants across the country, and we cannot find one person that has asked a question about this fee disclosure," he said. "It's been like a big waste of time so far."

The Labor Department rules require 401(k) companies to disclose their fees for plan-management services such as administration, record-keeping and accounting; until this past August, such costs were "hidden" in the expenses charged by each investment fund in a 401(k) plan. They also require companies to state in dollar terms each fund's expense ratio, so employee-investors can see how much of their investment returns are being surrendered to cover operating expenses.

The agency confirmed last week that regulators are looking into nearly 50 complaints nationwide from employers and financial advisers who have reported violations of the disclosure rules. It said officials are trying to determine whether the financial-services companies involved violated the requirements willfully or by accident.

Citing the agency's confidentiality policy, the agency would not provide details of the complaints. It noted that the number filed so far is very small given that there are nearly 500,000 employer-sponsored 401(k) and 403(b) savings plans nationwide.

"The department is reviewing the new fee disclosures as part of the normal investigative and auditing process," an agency spokesman said in a prepared statement. "Our primary focus is to work with employers and service providers to encourage and bring about voluntary compliance with the new requirements."

If investors think a plan administrator has violated the new rules, they can file a complaint with the U.S. Employee Benefits Security Administration by calling 866-444-3272 or going online to askebsa.dol.gov.

It's no surprise the Labor Department is taking a cautious approach to enforcement of the fee-disclosure rules, given their newness, said Bryant Kirk, chief operating officer of the Newport Group, a Heathrow-based company that manages 401(k) plans for small and midsized businesses.

"There will be a self-compliance period, when people are left to correct their own mistakes," he said. "But before long, the Department of Labor will start auditing these things, issuing opinions and interacting with people to create more regulatory enforcement."

Despite the rough edges on the new rule's rollout, it has generated some benefits for employers and plan administrators that, in turn, indirectly benefit employee-investors, financial experts said.

"I'm sure some of these companies made it as confusing as possible," said Joe Nunziata, chairman of FBC Mortgage LLC, an Orlando-based mortgage lender that offers its employees a 401(k) plan. "But our company, Nationwide, has been pretty good; they've disclosed the information properly and made the fees very transparent."

Also, with plans' management fees now separated from the fees charged by the individual investment funds inside the plans, an employer can now accurately compare the cost of its plan with others, creating a more-competitive market for plan services.

"In some cases, it's almost like a pricing war out there," said Al Baker, a certified financial planner at Resource Group in Winter Park. "Fees are getting lower at a lot of the 401(k) plan companies, and there are a lot of financial advisers who are scrambling to find out who the winners are going to be."

Some management companies raised their fees because of the new rules, citing added paperwork, but the overall effect has been positive, said Tim Caldwell, a consultant for the Altamonte Springs office of Pension Investors Corp., which manages employer-sponsored plans.

"The real abuses in fees came from some of the deals that plans had with investment advisers whose firms were receiving money back in the form of marketing fees and other payments," Caldwell said. "Those fees were never broken out, but were hidden inside the plan.

"But now they have to be shown so people will understand it," he added, "and that has caused many companies to get rid of those kinds of arrangements -- because they don't want to disclose it."

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Making sense of your 401(k) fees

Once past the jargon of these annual disclosures, look first for the tables that show the investment funds in your plan. There should be two types of tables: One shows the investment performance of each fund as percentage returns for one, five and 10 years, compared with industry benchmarks such as the S&P 500 stock index. The other shows each fund's expense ratio, stated both as a percentage of the money in the fund and as a dollar value for every $1,000 invested. The best expense ratios run about 1.0 percent or less. But that's not the only factor to consider: You may have funds with low expense ratios but weak returns -- or even losses. That may be a sign to look at other funds in the plan, perhaps with higher expense ratios but much better returns. Ideally, you want consistently good rates combined with low ratios. High ratios plus poor investment results may mean you're being gouged.

Next, look for the section labeled something like Plan Administrative Fees; it may be in the form of a table or just a couple of paragraphs. The best ones tell you right away how much you are paying quarterly or annually to the company that your employer has hired to manage the plan. But that's only one of the fees that has to be disclosed -- even the best disclosures will refer you to your quarterly 401(k) statement to see the other fees, which are charged for administrative, record-keeping, legal or accounting services. Typically, these combined fees don't take a big bite out of your return -- typically less than 0.2 percent of assets -- but because you lose the benefits of compounding over time, they can have cost you thousands of dollars when you retire and start withdrawing your funds. If these fees even approach 1 percent of your assets, you may be getting gouged.

Richard Burnett

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