On July 15, the Department of Labor lived up to the motto emblazoned on the 50-foot-long bronze sculpture in the lobby of its Washington office: "Protecting the Rights of American Workers." The department finalized fee-disclosure regulations that should lead to more informed decisions on the part of retirement plan decision-makers -- company owners and officers who control more than 700,000 plans and $3 trillion.
This will end today's hidden costs and increase retirement nest eggs over time by as much as 20 to 30 percent.
For 30 years, the financial services industry has had sales people running around saying that their 401(k) plans were "free." Fees were automatically deducted daily so that nobody ever got a bill or wrote a check. Through the 1980s and 1990s -- a 20-year period when the stock market had an average annual return of 16 percent -- nobody cared if their net return after hidden costs was, say, 14 percent.
Back in 1998, I created something called the "Butler Index" which pointed out that the total cost of a typical 401(k) plan could have a range of 600 percent between the cheapest and the most expensive. The "high priced spread" in my published research offered an average level of service and inferior investment performance thanks to the inflated charge to participants. My eight-page cover article in Money magazine at the time was titled "Beware Retirement Plan Rip-off." After that, I was invited back to Washington to testify at Department of Labor hearings on the subject. Then, nothing happened for 10 years.
Was anyone listening? Apparently not right away. I was called back to explain things once again to Rep. George Miller's (D-Martinez) Committee on Education and Labor in March of 2007, and the wheels of justice started grinding once again with the results finally apparent as of July 15, 2010.
What it all means is that we will now be told what a retirement plan is charging us as of July 15, 2011. Every cost component of the plan must be exposed to the light, and company decision-makers (known as "fiduciaries") must ascertain that what employees are paying for different services is "reasonable."
The definition of a "fiduciary" is one who makes all decisions in the sole interest of the people they represent -- in this case, the participants in the retirement plans the company provides. A retirement plan decision-maker treating his or her fiduciary role casually can be held personally liable (i.e. they could lose their home) if they allow unusually high charges to persist after the disclosure rule takes effect next year.
Not everyone has been waiting for the regulation to be passed. Major class-action lawsuits against Walmart, Honda USA, Boeing, and other major companies have contended that participants were overcharged. In some cases the companies were receiving "free" human resource services and what some would call "kickbacks" in exchange for allowing needlessly expensive investment products to be sold in the 401(k) plan.
In a perfect world, the best 401(k) plan would be one in which all costs of operating the plan are paid by the company as a tax-deductible expense. Employee participants would receive pure investment returns based solely on what the mutual fund collection of stocks and bonds generated. There would be no expense charged against the earnings of the plan that can otherwise compound tax-free.