American author John Jay Chapman said, “Everybody in America is soft and hates conflict. The cure for this, both in politics and social life, is the same—hardihood. Give them raw truth.” If the truth is hard to hear, then January 1st, 2012 should be a really hard day for all those who participate in a company 401(k).
On January 1, 2012, the new Department of Labor guidelines on fee disclosure take effect, and roughly 72 million Americans will begin to receive quarterly statements concerning the true cost of their retirement. The new DOL guidelines have been in the works for years now and are primarily as a result of the many fees that are commonly associated with the average 401(k). The potential number of people that will see their charges for the first time is staggering according to the study done by AARP entitled, 401(k) Participants’ Awareness and Understanding of Fees.
A Dearth of Information on Costs
What Your Peers Are Reading
According to the study, even though 79% of poll participants made retirement decisions based on cost, 83% acknowledged that they were unsure how much they paid in fees associated with their retirement plan. Cost remains an important factor to people, yet many participants lack the information necessary to make informed decisions.
In my own experience, when I personally ask participants how much they pay for retirement plan costs, “Nothing” is the reply that I receive all too often. Before you rush to judgment, consider that even many with a finance or accounting background scratch their heads over uncovering the true cost associated with their own retirement plan, since many of the asset-based fees do not come in the form of a monthly or quarterly statement, but remain buried within plan documents or in arrangements between providers and mutual fund companies. A recent release by the Government Accountability Office (GAO), addressed the issue of revenue sharing arrangements and the lack of impartial advice from many retirement service providers, saying “such conflicts could lead to higher costs for the plan.”
Revenue sharing is defined as compensation paid to plan service providers out of the retirement plan assets. Some of the more common forms of revenue sharing include 12b-1 fees, which offset the cost of sales and/or marketing materials; sub-transfer agency fees, also known as the sub-TA, which many times goes to pay the record keeper of a retirement plan; and fees paid to a broker-dealer as a commission for meeting sales targets.