WASHINGTON Dec 8 Companies are shaking up
their 401(k) retirement plans, trimming lists of mutual fund
offerings and shaving the fees workers pay as they prepare for
new federal rules that will put more plan information in front
"This is dramatic. I have not seen anything like this in 25
years of working with plan sponsors," said David Wray,
president of the PSCA, a 401(k) advocacy group made up
primarily of employers.
His group recently reported that, in the last year, 63.8
percent of 401(k) plans changed their investment lineup; in
contrast, fewer than 20 percent did so in 2009.
The spotlight is on plan fees, which have been the subject
of numerous lawsuits in recent years, and which will have to be
disclosed clearly in dollar terms to plan participants,
starting May 31, 2012.
Earlier this week, Wal-Mart Stores and Bank of America's
Merrill Lynch unit agreed to pay $13.5 million to settle an
employee class-action lawsuit claiming the 401(k) fees in the
Wal-Mart plan were too high.
The fees workers pay for investment management, record
keeping and other aspects of 401(k) accounts have not always
been clearly disclosed to them; in some cases the financial
firms running the plan have charged employers little to nothing
for administration while selling costly investments to workers
inside the plan.
Furthermore, employers have a fiduciary duty to ensure that
the 401(k) fees their employees face are reasonable. And those
fees matter. An employee investing just $25,000 at 7 percent
and paying 1.5 percent in fees will retire after 35 years with
$64,000 less than if she had paid 0.5 percent in fees,
according to a Department of Labor analysis. That's a
difference that could put an extra $213 a month into her pocket
for the entirety of her retirement life.
"A lot of companies are chewing up their programs in
advance of the fee disclosures," said Wray, speaking of the
investment lineup changes he is seeing. "They want everything
to be nice and sharp."
Fees are already starting to come down, according to
industry analysts. Among plans analyzed by research firm
Brightscope, average fees fell 0.11 percentage points between
2007 and 2009. Total fees, including record keeping, investment
management and administration, were 0.87 percent for plans with
more than $100 million in assets; 1.25 percent for plans with
assets between $10 million and $100 million, and 1.86 percent
for plans with less than $10 million in assets. Small plans
typically don't have the scale or leverage to get costs as low
as big plans.
Dimensional Fund Advisors, a firm known for its
rock-bottom-priced retirement account offerings, have seen
about a 30 percent increase in employers asking for meetings
and information. "Companies are really digging into their fees
and moving from higher fee solutions to lower fee solutions,"
says Tim Kohn, head of the firm's defined contribution services
Employees may not see evidence of these changes until the
spring of 2012. But here are some they may already be seeing,
and what to do about them.
-- Controlling costs is paramount. Not every employee has
access yet to those clear fee reports, but there are some ways
to see what you are spending. Workers whose plans are covered
by Brightscope can see that information on the Brightscope.com
Website. Workers can ask their human resources department for a
As much as 90 percent of 401(k) costs are in the investment
management fees, reports David Huntley of HR Investment
Consultants. That means the funds you choose have the biggest
impact on what you pay. Typically, index funds charge less than
actively managed funds. Even cheaper options could include
institutional classes of funds or separate accounts that look
like mutual fund portfolios but are created especially for
-- It's not all about the cheapest. It's good to go with
the lowest-cost option that fits your objective. That means you
shouldn't keep all of your retirement account invested in an
uber-cheap money market fund if you need stocks for the long
term. But, once you're choosing among similar stock funds,
you'll probably improve your retirement income by choosing the
-- Less may be more. The average participant in a Fidelity
Investments-run 401(k) plan holds 3.6 funds, but the plan
offers 23 funds. That's down from 25 funds in 2008, and
probably headed lower, says Beth McHugh of Fidelity. Employers
want to "help participants make informed choices and not
overwhelm them with...(too many) options."
The idea that fewer funds will do the job has gained
credence, particularly with employers who worry that the added
complexity doesn't add value for workers, and that if they have
the responsibility of vetting every fund on the list, they
shouldn't have such long lists. Ted Benna, the person credited
with inventing the 401(k) plan, recently told Smart Money
magazine he thought simple two-choice plans served employees
well. J.P. Morgan Asset Management recently unveiled a plan
that could limit worker choice to three funds.
-- More advice is in the offing. New Labor Department rules
that broaden the kinds of retirement planning advice companies
can offer their employees go into effect Dec. 27, and some
companies can be expected to boost the guidance they give
workers. A recent study from Aon Hewitt and Financial Engines
(a company which provides automated retirement investing
advice) found that people who get advice see returns that are 3
percent higher than those who don't.
"You're going to see a lot of movement in that space," says
And with all of the new and improved reports about to land
on employee desks, a little extra advice couldn't hurt.
(The Personal Finance column appears weekly, and at
additional times as warranted. Linda Stern can be reached at