Is there a hole in your client’s or your own 401(k) bucket? 2012 new rules mandate all fees must be disclosed in 401(k)s that’ll likely shake up the few savvy investors who will take the time to read the fine print of their employer-sponsored plan. Up to now, tough-to-track 401(k) plan fees were buried deep amongst the minutia or not disclosed at all, adding to the mystery of ERISA plans.
Incredible, right? Pull out your own or a client’s previous 401(k) quarterly statement and see if you can locate the word “fee” anywhere on the statement. This omission is highly convenient for the large brokerages and insurance companies that provide 401(k) plans because it allows them to charge high fees, paid by investors who have no inkling of the hit their retirement accounts are taking. While these institutions must disclose all fees when asked, federal rules haven’t required them to voluntarily disclose these fees — until now.
The statement you and your clients will receive going forward (effective July 1st) will look nothing like the ones piled up in your drawer. The new, improved 401(k) statements will include an eye-opening table showing fees and actual returns for each investment before the fees are taken out. Fees from plan providers often run more than 1 percent annually — and that’s in addition to the fees you or your client are already paying to the investment companies whose products you’ve selected. One percent may not sound like much, but like the water bill you get from a leaky faucet, it does serious financial damage over time. An independent study found that the total fees paid on 401(k) plans reduce the total retirement accounts of the average American couple by a whopping 30 percent.
In addition to investment fees and plan management fees, many 401(k) plans allow expenses such as education and due diligence trips taken by the human resource staff to be deducted from your or your client’s retirement money.
Many smaller companies may not even know about this new compliance issue for their 401(k) plan. This creates a unique opportunity for you, the advisor, to offer assistance and information about the new requirement. At the very least, inform your clients and have them simply forward this article or mail a copy of it to their human resource department. Be sure to include this link to the Department of Labor to add credibility.
Some 401(k) plans will offer a match to employee contributions. Surely this is an awesome benefit, but many employees are not aware of how to maximize this free money offer. If your clients are not happy or comfortable with the 401(k) plan, you have an opportunity to offer ideas and strategies that will accomplish their investment objectives at the desired level of risk. Many 401(k) plans allow investors to remove their “vested” money and roll them over tax-free into a self directed IRA. This is where you can really help your client and grow your practice. Fewer 401(k) plans offer an alternative for investments into fixed or indexed annuities that provide lifetime income benefits; however, using the “in service, non-hardship” exemption clause, money potentially could be rolled over into an IRA that allows these safer alternatives without the employee having to resign or leave the company. You’ll need a licensed investment advisor to discuss these strategies with your clients and partnering with a professional could only help you grow your practice. Better yet, consider getting securities licensed if you’re not already and expand your market, knowledge and product offerings.