Disclosure rules for 401(k) fees are on the way (slowly)

The Department of Labor wants 401k plan providers to disclose all the fees and how they collect them in writing. The fees would be disclosed as a percentage of plan assets or a per-person charge. Here’s hoping the rules go through!

Disclosure is good for the retail investor, but if people actually cared to know what these funds are doing they would be forced to disclose the relevant information to win over investors. I find it hard to believe that this information isn’t already available in most prospectus documents anyway.

I have to say that all of this having to protect people because they don’t take the time to read up on things is really getting old. There was an article recently (yesterday or day before) about title loans and how people didn’t realize the percentages, etc. The quote from one guy was how he rushed through it and didn’t read it carefully. Can’t save someone like that from themselves.

Personally, I love the target funds. I know any investing is risky–you want to make sure you will still have your $100 in 40 years, then put it in the bank making .3% or in a coffee can in your closet. People look at the past returns and think that is going to be a given in the future. That is just dumb.

Of course, the 457 plan at our place gives dollar amounts instead of percents and that was a bit annoying too since I had to convert to make a comparison. (And when I tried to do it in my head I got it off by a factor of 100 the first time…) They ALL need to put in the dollar amounts with examples so they can be easily compared in a way that is real and makes sense. (If you had 10K saved, then your fees would be X…)

There are two reasons I have no plans to switch to target-date funds:
1) the fees are higher, which drags down overall performance a lot
2) I don’t trust them! Look what happened two years ago – like April says in the article, lots of people who relied on target-date funds got screwed. They thought that the funds were getting more conservative as they got closer to that target date, when in fact that was not always true. At least when I choose my own allocations through ETFs and bond funds, I am getting what I pay for.

Why should investors have to calculate their own a “good estimate” of what they already paid when the real number is available, and why do the companies need to be required to make the allocations super obvious, and still are allowed to bury the fees?

That describes me 100%. My 401(k) is in the Vanguard 2035 target date fund and our current Roth IRA is in the Fidelity 2040 target date fund. They will stay there for another 15 years at least before I start researching the best options for us 10 years before we retire.

Our next Roth IRA will be invested in individual high dividend, long-term growth stocks like our Scottrade account…that’s done by Mr. BFS since all of that is just too much/boring for me.

I hear what you are saying, but in some cases, a good estimate is just as useful as the exact figure.

At least target date funds are trying to be longer-range oriented. They seem like a better choice than many other options at the moment, but it’s hard for one fund to fit every investor! I spent almost 20 yrs on Wall St; imho most funds are focused on 3 mo or less time horizons (nothing evil – just that’s how often their performance is widely reviewed); most investors have horizons of 10-40yrs or more (if you’re 30, want to retire at 50, expect to live until 80, that’s one 20yr goal and one 50 yr goal). That is some mis-match!

Imho, the best way in the current market regulatory structure for individuals to make wise decisions is
#1, know your goals (2 people with identical $ may have very different risk tolerance) – many advisors gloss over this, and start with $ amounts not hopes/dreams/comfort levels;
#2 follow the money- – pay for wisdom, not transactional churning (that is, either use a fee-based non-trading-compensated investment advisor combined with a low-cost diy investment account, or do your own research if you have the confidence);
#3 check back once or twice a year to see if you need to make adjustments in either goals or holdings (I advocate adjustment through allocation of new$, rather than spending time & fees moving $ from one class/investment to another). Big market swings can often have fixed income & equities acting differently and can really shift your allocation, even if you did nothing…

These aren’t written in stone – I would be interested to hear what other folks’ best practices are. Full disclosure, I am currently working as an in-house analyst for a family business, that is I am not charging anyone for investment advice.

Perhaps, funds like the Vanguard LifeStrategy funds would make it more clear how much risk a fund is taking. For investors who pay attention and would want to decide when to switch to a less risky mix, these would be easier.

And just to be clear, I’m not arguing against knowing how much you’re paying. (I’m downright miserly when it comes to investment costs!) I’m just making the case that it’s (usually) more useful as a percentage than as a dollar amount.

For instance, to answer your question of whether a money market in a 401k would lose money, you’d need to see how the expenses — expressed as a percentage — compare to the yield on the fund.

I think regulation should focus on target-date funds that are allowed in default plans. I think those target-date funds should have a specific name that is different than all other target-date funds. Maybe call them “default-target-date funds.” The regulation needs to focus on allocation and fees. They should only allow low-fee index funds in the target and they should cap fees at whatever Fidelity (or some other non-Vanguard fund) is currently providing.

(Capping at what Vanguard provides is unreasonable for profit-seeking funds– hopefully competition will drive those fees down on average as these grow more popular. But, if fees aren’t capped, those numbers are going to go way out of kilter in some plans with limited options– it’s a possibility for fraud. Using current limits for a respected company proves the number can be done while limiting opportunities for preying on ignorance.)

Non-default target-date plans can be kept unregulated. Except– I really really want fees on all of these darned retirement plans to have to be shown and have to be in the same format so they can be easily compared. That drove me crazy recently when trying to figure out which plan to switch to. Some example with money amounts of fees for different savings amounts would really drive down the fees that say, Ing, charges. And the fact that Ing charges an additional 0.7% extra on top of whatever you pick needs to be prominently displayed on something that is signed. (Yes, I’m bitter. But I’m about to move my retirement funds. )

And it is important to explain that stocks can lose value and neither returns nor principal are guaranteed by the government. But that shouldn’t apply solely to default plans.

And just because it is a low expense ratio doesn’t make it alright that consumers have no idea what the actual amount ended up being.

401(k)s are worse, because there are fees other than the expense ratio for each fund that I also cannot see! It makes me wonder when I put anything into a “safe” fund like the money market one with a tiny return, if with all the fees I am losing money (I have since taken all money out of the money market one, for supposedly risk free investments, I don’t use my 401(k)!).

And why WOULDN’T I want to know how much in fees I pay?

Why not just look for funds that have low expense ratios?

Thanks! But, there is no way I will ever figure out the exact amount, and I consider myself fairly math-saavy.

If my “holdings” change, the amount charged changes. I would have to do this calculation every time I add money to the funds, which is automated, and probably have to do it every time the market value changed? It is very difficult for the average invester to get this amount, but the fund’s company HAS this information already, but isn’t showing it.

If someone doesn’t understand a target date fund now, more disclosure isn’t going to make it any clearer.

All these new rules will accomplish is a rise in fees by the fund companies to cover the extra paperwork. And, of course, the justification of needing more government employees to oversee and protect us meek and needy individuals from the big and bad finance industry.

However, I am still confused by the fees. When are they taken out, how much exactly, etc. Yes, you can dig around and find that %, but you still don’t know the actual amount you paid.

If nothing else, investors should have a clear idea of what their asset allocation and risk level is. This isn’t obvious with target funds and when fund companies make mistakes, then the investors lose out.

For most people, target funds are ok, even if you don’t know what is inside them. If you are approaching retirement however, you better make sure you know what your funds are investing in.

Interestingly, the criticism of Target Date funds in a recent GRS post and, more so, in the comments, was that they are TOO SIMPLE. That people should look into more complex investments because then they might make better investment decisions. Here, the funds are too hard to understand how they change over time “according to some” … there they were too simple a tool for necessarily complex optimal retirement planning.

In fact, as JD mentioned in “Your Money: The Missing Manual”, Target Funds generally balance:
(1) complexity (diversified, shifting allocations over time) and
(2) “invest and forget” simplicity.

It is a BRILLIANT idea to allow these funds as “Qualified Default Investment Alternative”! This is exactly the type of policy that is suggested by behavioral research as outlined in “Nudge: Improving Decisions About Health, Wealth, and Happiness by Richard H. Thaler (Business) and Prof. Cass R. Sunstein (Law). Personally, I’m working to make these (Vanguard) funds available and recommended as defaults for employees at my office for the low fee and “invest and forget” simplicity … as opposed to the high fee funds currently recommended which never shift their allocations unless people decide to drag themselves to HR to make the change.

Most of the SEC education requirements are already included in each fund’s prospectus. If investors read and understood the fund’s prospectus, they would have been aware of how the fund operates. This is additional legislation to provide information that will yet again be ignored or misunderstood by the majority of investors.

I like the idea of target date funds; I believe we’re using them with the kids’ 529 accounts.

I’m not big on the retirement investments either, April — my husband had a job in finance for a while, and liked it, so I let him make most of those picks.

Most of these disclosures appear to be from suggestions made in John Rekenthaler’s testimony to the Senate Committee on Aging. (Rekenthaler is the VP of research for Morningstar.)

Unfortunately, they don’t appear to have picked up his suggestion about more prominent disclosures for fees. Vanguard’s target date funds charge 0.19% per year. The next cheapest target date funds carry an expense ratio of 0.64% — more than 3 times as high!