Clearer Fee Disclosures Coming to 401(k) Plans

(The Wall Street Journal) - The rules governing America's most popular retirement vehicle are about to change, and that could mean huge savings for millions of workers building nest eggs for the future.

Spurred by the US Labor Department's effort to force plan administrators and investment companies to disclose the cost of 401(k) retirement plans, companies are looking to reduce fees and offer new investing choices.

Under current rules, it is difficult -- if not impossible -- for many 401(k) participants to determine how much they are paying in fees. The fees, which vary by type and size, are not typically disclosed in annual statements to investors. Because of the extended time frame involved in retirement accounts, a small percentage change in an annual fee can make a big difference in the investment performance.

Analysts and companies in the industry say the increased disclosure will allow companies to negotiate better deals and employees to request more cost-efficient plans. Already, the prospect "is putting downward pressure on fees," according to Lori Lucas, leader of consulting firm Callan Associates' defined-contribution practice.

The Labor Department had hoped to roll out the rules by Jan. 31. A department spokesman said it likely would happen within a few weeks.

Fidelity Investments, ING US, Manulife Financial's John Hancock unit and BlackRock in the past few years rolled out low-cost index mutual funds alongside their higher-fee actively-managed funds.

On Jan. 10, Charles Schwab introduced a new 401(k) product consisting only of inexpensive index funds.

Employers, for their part, are shopping around their retirement-plan business more aggressively. Fidelity vice president Beth McHugh said the firm is seeing companies "doing more due diligence to make sure they're comparing what they have with what's available out there in the marketplace."

Kevin Crain, head of Bank of America Merrill Lynch's institutional retirement business, said his firm had a record number of requests for proposals in 2011.

401(k) plans have grown in prominence since an IRS regulation in the early 1980s allowed workers to contribute their own money to the accounts on a tax-deferred basis. By 1990, 401(k) plans had about $900 billion in assets, and by 2011, the figure had swelled to $4.3 trillion.

Yet until now, the industry has been opaque, critics say.

The Labor Department's long-awaited rules will require that mutual-fund firms and other 401(k) administrators disclose to employers details about the fees they are charging to run the plans. Administrators, in turn, will have to disclose the costs to the workers investing in the plans.

Experts said the increased focus on fees should benefit workers. "The fee disclosure regulations may very well turn out to be the most important change in the history of the 401(k) plan," according to Mike Alfred, chief executive of retirement-plan research firm BrightScope in San Diego.

Workers enrolled in plans "are likely to win big," he said.

Read more: The Wall Street Journal