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More Money Projected for 401(k) Investors


There is good news for the 50 million 401(k) investors in the United States. They are expected to make more money in their retirement accounts.

There is good news for the 50 million 401(k) investors in the United States. They are expected to make more money in their retirement accounts. This is thanks to the U.S. Department of Labor (DOL), which is requiring plan administrators and investment companies to provide more cost transparency; an action many think is overdue. In the past, it has been arduous or even impossible for an employee to determine her or his 401(k) fees.

When the charges, often excessive, are more easily available, the industry anticipates employees will request low cost equivalent alternatives. These unmanaged low cost options like index or corresponding exchange traded funds on average outperform more pricey comparable managed funds, in part because of the expense deferential. The result for the employees that shift to the low cost options will be more money cut out of the pie for them and less for the providers of the plan.

The labor department has been working on the new rule for some time. In July of 2010, they came out with the current version. Plan providers were given 12 months to offer more transparency. However, after resistance from the industry, the labor department extended the deadline to April 2012. Whether or not, that target can be met is problematical.

An essential part of the rule has been taken out by the labor department, almost certainly due to pressure from providers. It was one that would create an easy to understand condensed version of fees to employees. Without this, the rule would be considerably less effective. What happens in this battle between the plan providers and the labor department that directly affects the pocketbook of 401(k) recipients has yet to completely play out. The scrutiny being given to it, however, suggests that things can only get better.

Apart from fees charged for direct administration of the plan itself, there are three basic types of fees that may be charged in connection with investment alternatives in a 401(k) plan. The following fee descriptions are from the DOL site.

Also known as loads or commissions, these are basically transaction costs for the buying and selling of shares. They may be computed in different ways, depending upon the particular investment product.

Management fees

Also known as investment advisory fees or account maintenance fees, these are ongoing charges for managing the assets of the investment fund. They are generally stated as a percentage of the amount of assets invested in the fund. Sometimes management fees may be used to cover administrative expenses.

You should know that the level of management fees can vary widely, depending on the investment manager and the nature of the investment product. Investment products that require significant management, research and monitoring services generally will have higher fees.

Other fees

This category covers services, such as recordkeeping, furnishing statements, toll-free telephone numbers and investment advice, involved in the day-to-day management of investment products. They may be stated either as a flat fee or as a percentage of the amount of assets invested in the fund.

In addition, there are some fees that are unique to specific types of investments.

Sales charges

More reading:

401(k) Expenses in the News Again: How it Can Help You

Smart Investing in Tax-Advantaged Accounts

Contain Expenses to Increase Returns

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Victor J. Dzau, MD, gives expert advice
Victor J. Dzau, MD, gives expert advice