How the New 401(k) Disclosure Fees Are Providing Clarity to my 401(k)…Kind of

Earlier this year the Department of Labor released their final ruling to improve transparency of fees and expenses to workers*.  The approved regulations are set to provide more clarity to 401(k)s and how expenses are being rolled into these plans with or without your knowledge. In all honesty I didn’t give much thought to the notices at first for two reasons. One, I didn’t believe they would actually get implemented considering how strong the investment lobby is.

Second, and more importantly, they changes won’t really affect me all that much.  I am not my firm’s plan sponsor and I can’t imagine myself going to my firm’s sponsor and having a conversation about the newly disclosed fees.  Notwithstanding, according to the New York Times the Department of Labor hopes I am in the minority,

The new rules are intended to ensure that the fees in 401(k) plans are reasonable. The Labor Department says it hopes that the disclosures will help investors compare various investment offerings and see how costs eat away at account balances.

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Plan sponsors are supposed to use this information to analyze whether the fees in their plans are too high. But they won’t have to pass along all of this data to participants. Instead, the sponsors will be required to calculate expense ratios for the investments offered in a plan, showing participants the charges per $1,000 invested.

I think I get so annoyed by the topic since the lack of clarity is on purpose.  For example, I know all the fees associated with my covered call based IRA.  My broker, makes them clear, so why do we need a government agency to get the 401(k) in line?

My 401(k) New Disclosure Information

I hadn’t really thought about this topic since February when it was announced until I actually received my Department of Labor mandated 401(k) expenses and fees transparency sheet:

Administrative Expenses

XYZ completes the third party administration duties necessary to maintain compliance with regulatory authorities. The cost for these services fluctuates each year based on the number of participants within a tiered schedule. These fees may be charged to the 401(k) plan on a pro-rata basis (i.e. based on the relative size of each account) against each participant’s account.

Recordkeeping Expenses

XYZ completes the recordkeeping and participant account maintenance services. The cost for these services will be charged directly to the participant’s account each month. They will typically be $3.00 or $4.00 per month.

Custody and Trading Expenses

XYZ Trust serves as the Custodian for the 401(k) plan. As an agent for the Plan Sponsor, XYZ Trust shall hold, invest, execute trades and distribute assets based on the authorized direction of Plan officials and participants. The cost for these services is 7 basis points (0.07%) and will be deducted from the participant’s account on a monthly basis based on the average daily balance for the preceding month. The monthly custodial and trading fee is roughly 0.00583% (.07%/12 months).

Sub-Transfer Agency Credit

The recordkeeping expense prior to 7/1/2012 may have been paid by the investment companies to XYZ to provide participant accounting and maintenance services. These are referred to as “sub-transfer agency fees”. These fees were previously retained by XYZ for these services but may now be deposited/credited back into the participant’s account. The frequency in which you may see the deposit is typically on a quarterly basis. It is dependent on the frequency when the investment company pays XYZ the sub-transfer agency fees.

Individual Expenses

The plan imposes certain charges against the participant’s account, rather than against the plan assets as a whole, when the individual participant incurs the charge. These charges may arise based on your use of a feature available under the plan (i.e. participant loans). The following charge has been added effective 7/1/2012:

Annual Loan Maintenance Fee:

An annual fee of $50.00 will be charged for all loans on a per participant per loan basis. The industry standard charge will occur on the anniversary of the loan and will be deducted from the participant’s account.

Trading System Transition

We have been informed by XYZ that the existing trading system will no longer be supported by various fund companies. As a result, our plan will be moving to a new trading system with greater flexibility and the addition of more fund options in the future. The one-time fee to change trading platforms is $500.00.

This fee may be paid from plan assets. The fee would be taken out of the participant’s account based on the ratio of the account balance to the total account balance of the plan. For example, if your account balance is $2,000 and the total plan assets are $100,000, you would pay 2% ($2,000/$100,000) of the $500 fee equaling $10.00.

Pending Transactions

One other important note to share, on a monthly basis you may see the fees processed from your account. When those transactions are being processed you will have a pending transaction on your account and you will not be able to process a fund transfer or rebalancing until that fee transaction is completed.

So I am looking at fees of:

• .Administration Fees – Won’t know till it happens
• 07% of Assets under Management – changes monthly
• Some portion of a Trading System transition – won’t know till it happens
• Record Keeping of $4.00/month – Which apparently the investment company was just keeping previously lol

Doesn’t seem like the notice provided any real information, however, that will likely change when I get my next quarterly statement and the real numbers are glaring at me. I’ll probably have to write a post on how pissed off I am but there is nothing I can do lol.

*I always find it funny when a government agency releases final rules pertaining to anything.  The IRS does it all the time and I always think to myself, “Yes, final until they want to say something else on the matter or case law doesn’t go their way.”