Wednesday, June 13, 2012

New rules mean better fee reporting on your 401(k) funds

Ever wonder how much the managers of your 401(k) retirement investment money are charging you to manage that money?
A new federal law that kicks in July 1, 2012 is intended to help you figure it out.
The law, first proposed back during the Bush Administration and finally passed through Congress and signed by President Obama last year, requires that employers and their 401(k) fund managers disclose to participants how much they are charging to manage these retirement funds. The federal Department of Labor is the oversight agency administrating the new rule.
Let me take a moment, first of all, to say that anyone working for a business with a 401(k) plan should be enrolled in that plan. It is the best and one of the only ways to save real money for retirement. Many employers will match some of the money you put in the funds. And it GROWS TAX-DEFERRED until you retire...that's a very good thing.
However, in the past there have been some 401(k) abuses especially at smaller businesses of less than 100 employees. Some business owners were managing these funds themselves and investing in wacky things like vacation property, annuities or just charging unreasonably high management fees. Those abuses have mostly gone away and most companies hire a third-party fund manager that can pool smaller 401(k) funds with larger funds. But fund management should be something you regularly check into.
So the good news is that starting July 1, fund managers must explain in clear language what they're charging. The reporting process actually gives employers until Aug. 31 to send out a written report. Some may see this as more bureaucratic paperwork from the Department of Labor that will cost money and bog down administrators. But in this case, I think people need to know what's going on with their retirement investments.
A couple of tips as you look at these reports:
1. Different types of funds....stock index funds, bond funds, international stock funds will have different management fees. An index fund is going to have a very low fee rate while international stock fund will charge more because it takes more administrative hours to manage it.
2. What's the going management fee rate? My view is that the annual fee should be around 1 percent or less….that means a $100 charge on every $10,000 invested. If it's a lot higher than that you might want to ask some questions. AARP has a good tutorial on this.
3. Ideally, this reporting will help you better plan for their retirement and help you make money. A 401(k) is about the only and certainly the BEST WAY to do that. But you've got to pay attention, do some research on the investments that you like and let the money ride....in a diversified portfolio...bonds, stocks etc. Do it over the long-term. Stay away from money market funds...THEY PAY NOTHING!!  Don't get discouraged if markets go down. It's a buy opportunity for long term investors.
To find out more:
U.S. Department of Labor, Employee Benefits Security Administration, Washington, DC 20210. Fact sheet is available upon request: Voice telephone: 202-693-8664; TTY: 202-501-3911.

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