Tuesday, May 31, 2011

401k Changes that Affect SMBs

There's a pending rule change in the law that governs 401(k)s. Unlike many of the previous changes, this change will also apply to small and medium-sized businesses that offer 401(k)s to their employees. (Many of the previous laws only applied to companies of a certain size or with a minimum number of participants.) The fees that the plan charges to administer the funds, as of November 1, must now be shared in an easy-to-view location, in the same way plan performance is shared. Here is an excerpt from the article, "A Sense of Disclosure: New 401(k) rules pose a challenge to small and mid-sized companies" written by David McCann for CFO Magazine.


"CFOs at small and midsize companies should monitor new 401(k) plan disclosure requirements. There are several new or forthcoming rules, and one in particular — ERISA Section 404 (a)(5) — could cause headaches. Plan fiduciaries have new obligations that carry substantial penalties and are likely to impose new costs.

Under that new rule, plan sponsors must (for plan years starting on or after November 1, 2011) prominently show on participants' quarterly statements the administrative costs for running the plan, and on annual statements any investment-related fees.

Until now, such information has been buried in fine print, unlikely to be read. Now, the disclosures must be made in the same far-forward area of the statements that describes investment returns. Regulators hope this will improve awareness of plan costs and, where such costs are high, lead participants to push their employers to seek lower-cost plans. While most plans' annual costs come to 1.5% of plan assets or less (in many cases, far less), for some plans the tab can be as high as 5%, says Lou Harvey, president and founder of Dalbar, an advisory firm that evaluates 401(k) providers."


As someone who focuses on the bottom line, I've always paid attention to administration costs. I read the fine print. I do this for the businesses I've been involved in and for myself personally when I invest in mutual funds, whether directly or through IRAs or Keoghs. If you haven't and your company offers 401(k)s, now is the time. Why pay extra fees when you don't have to? If you look at Morningstar fund ratings and compare that to administrative costs, there is no correlation between higher costs and higher performance. If the industry average is 1.5% (as the article implies) and your 401(k) plan costs are 5%, then it is your fiduciary duty to seek a plan with lower costs UNLESS that cost differential can be explained by higher overall returns (VERY rare), better customer service, or some other benefit to your company. Remember, this is NOT the fee your company pays the 401(k) admistrator which, of course, is higher for smaller companies. This is the fee that the participants - the employees - pay the fund to manage and invest their money.

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