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 of employees.
"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 unit.
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 bottom-line figure.
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 retirement accounts.
-- 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 lower-cost one.
-- 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 Kohn.
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 linda.stern(at)thomsonreuters.com)