Ask the Expert

When you buy a gallon of milk, you know that in return for your $3.89 you will receive 16 cups of milk. Even with the fairly convoluted process of buying a car, you ultimately know your drive-it-off-the-lot price. But for years, the vast majority of 401 (k) participants have had no idea how much their 401(k) plans cost. Now, thanks to a new ruling by the Labor Department, that’s about to change. 

Under the new rule, scheduled to go into effect on January 12, 2012, 401(k) providers will be required to reveal a detailed breakdown of their fees — something not currently required. For millions of American workers, this could be the first time they fully understand how much they’re actually paying for their 401(k) plans.

After the financial market meltdown in 2008, losses in 401(k) plans placed a new focus on the lack of fee disclosure and whether 401(k) providers were benefiting themselves at the expense of workers. High 401(k) fees can dramatically impact a worker’s assets over the course of time, as lower costs directly translate to high returns. Indeed, a recently published report by the U.S. Government Accountability Office exposed some interesting facts, including:

• Biased Advice — 401(k) service providers sometimes guide plan participants to investments that are in the service provider’s best interests, not the participants’.
• Inappropriate Education — Under the guise of investor education, service providers often lead participants to investments that benefit the service provider, not the participant. While technically not considered advice, this “education” can lead participants to select investments that benefit the provider and not the participant.
• Not All “Advisors” Are Fiduciaries — Some service providers talk extensively about fiduciary responsibilities, but structure their contracts to clearly disavow any responsibility to act solely in the best interests of plan participants.

Based on these and other findings, it may come as no surprise that Wall Street has been fighting the new 401(k) regulations. Let’s hope that come January, despite Wall Street’s opposition, 401(k) plan participants will finally be able see a clear accounting of what fees are hitting their plan. Subsequently, we may see a lot of plan sponsors and participants making a change in their plans. 

Scott Pritchard is Managing Director at Advisors Access, a service program of BAM Advisor Services, one of the nation's largest turnkey asset management providers for independent Registered Investment Advisors, with more than $11 billion in assets under administration. For more information about our firms, please visit our corporate sites at www.bamservices.co and www.advisorsaccess.com.