In recent years, 401(k) plans have become the primary vehicle for many Americans' retirement savings. But as more and more investors prove unprepared for retirement, legislators are scrambling to make these plans more attractive for users. As a recent Ignites.com article noted, some observers fear that these efforts may ultimately end up hurting the same investors they're trying to help.
At a recent conference in Washington, D.C., industry lawyers met to discuss the need for additional fee disclosure within 401(k) plans. Far too many investors don't realize how hidden or undisclosed fees can eat away at their savings. Just a small percentage point in fees can translate into tens of thousands of dollars in lost revenue over many years.
The conferencegoers concluded that resolving the issue would likely require more regulations and legal actions. They also expressed concern about a recent government suggestion to move toward more plain-vanilla investments, such as index funds, within 401(k) plans. In addition, conferencegoers worried that too much additional fee disclosure could end up confusing 401(k) participants, ultimately clouding their investment decisions.
Too much of a good thing?
It's almost certain that new laws will ultimately require 401(k) plan administrators to more thoroughly disclose fees in the future. That's good news for ordinary investors, since many 401(k) participants have no choice but to invest in needlessly expensive plan options. The companies providing these plans have a fiduciary responsibility to their employees to provide the best possible options, conducting periodic reviews of fund options and their relative fees.
However, there's a small but significant risk that overzealous lawmakers could require too much disclosure from fund companies. Investors deserve better 401(k) fee information, but too much fine print tends to make their eyes glaze over. Any additional mandatory disclosure may discourage more employees from pursuing 401(k) plans altogether.
Crazy for indexing
Though I agree it's not a great idea, I don't think we'll see 401(k) providers offer more index-based investments in their plans. There's simply too much money at stake for the fund industry to knuckle under here. With more than $2 trillion tied to the 401(k) market, fund companies will fight tooth and nail to keep their actively managed funds on investment-plan menus.
Still, some plans might benefit from a move to index funds. When investment options are both limited and expensive, index funds could offer participants a cheaper, more direct way to invest their savings in high-quality stocks such as Verizon
Overall the drive for increased fee disclosure seems to be moving in the right direction. It remains to be seen how any proposed changes will turn out, but 401(k) investors should welcome any added clarity new laws provide. I wouldn't worry too much about increased disclosure rules hurting investors. These changes usually happen incrementally, and it's very unlikely that regulators will cause more harm than good. In the meantime, investigate your own 401(k) fund expenses -- you'll be one step ahead of the government, not to mention most other 401(k) investors.
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