Lon Jefferies, a Certified Financial Planner™ (CFP), is a fee-only financial advisor and trusted fiduciary at Net Worth Advisory Group in Salt Lake City, Utah. He is dedicated to providing comprehensive financial planning and investment management on a fee-only basis.
Next year, 401(k) plan participants will see the true cost of their retirement accounts for the first time – and many will not be pleased. In April 2012, long-awaited Department of Labor rules designed to improve fee transparency in 401(k) plans will go into effect. Consequently, many employers are changing their 401(k) plan provider in an attempt to lower investment fees and provide stronger investment options.
There is an old myth that 401(k) plans are “free.” In fact, in a 2011 survey conducted by AARP, 71% of plan participants thought they paid no 401(k) fees. For this reason, expect to hear a collective gasp when investors open their quarterly 401(k) statements in April.
This certainly doesn’t suggest that 401(k) plans are poor retirement vehicles. The tax-deferral, automatic contributions, and employer-matching benefits are paramount and should be utilized by nearly everyone with access to a plan. Fortunately, the benefit of the new disclosure laws coming into effect in April is that it forces employers to take more responsibility in ensuring their 401(k) plans offer high-quality investments at a reasonable cost.
Although these new laws have not yet taken effect, they are already beginning to serve their purpose. In preparation for complying with disclosure requirements, many employers are already doing additional due diligence and have discovered that their employees have been paying unjustified and unreasonable fees. Consequently, many employers are already making modifications to their 401k plans, or even changing their 401(k) provider.
Look forward to April 2012. Minimizing investment fees is just as important as obtaining a satisfactory rate of return. Be sure to speak to a fee-only financial planner when you receive your first quarter statement to determine whether your 401(k) plan’s fees are appropriate and to identify responsible actions to be taken.