401(k)s To Get More Cost Effective

It looks like 401(k) sponsors and participants are finally coming into the home stretch in the race to obtain clearer fee disclosure. The House Education and Labor Committee chaired by George Miller (D-Calif.) has been pushing passage of the 401(k) Fair Disclosure for Retirement Security Act, which differs somewhat from an earlier bill that was sharply criticized by the mutual fund industry -- largely because it required that all plans include an index fund, a less expensive investment option than most other fund offerings.

According to Watson Wyatt, the act would require service providers to provide plan administrators with a disclosure statement showing all annual fees displayed as a total and as allocated among four categories: plan administrative fees, investment management fees, transaction-based fees, and other fees specified by the Secretary of Labor.

Plan sponsors would be required to disclose to participants the fees and expenses of all investment options available in the plan in addition to performance data and benchmark returns.

The act, which Rep. Miller fears still will allow financial firms to hide some plan fees, is likely to become law effective for plan years beginning on or after January 1 of next year. The Wall Street Journal reported that comments on the proposal may be submitted before September 8, but major stakeholder groups agree that the proposal is reasonable and straightforward.

Regulators and benefits consultants estimate that the act will result in major financial benefits to plan participants and beneficiaries who will make better investment choices because of fee transparency. Cost savings will also stem from a reduction in time spent collecting fee and performance information.

But if some plan fees remain hidden, eating into participants' returns, plan sponsors may continue to look for other ways to improve 401(k) performance, such as replacing mutual funds with collective funds, which pool investors' assets but don't have to comply with SEC regulations or market to retail customers -- and tend to be substantially cheaper.