Retirement Plan Fees in Spotlight. What Should be Next?

You know fees are a big factor in investment success. The less you pay, the more money that stays in your accounts working for you. Pretty basic. But somehow, thirty years into the grand experiment of the 401(k), understanding all the fees your plan charges has been anything but clear. The expense ratio charged by a fund offered in a plan isn't so much the issue, as are all the other underlying fees charged to the plan, many of them bundled up and embedded in a way that makes it very hard to know what the plan really costs participants

That's about to change. The Department of Labor is readying some new regulations that will require better disclosure of those fees. The upshot is that if your plan takes its responsibility to act in your best interests seriously (whisper "401(k) and fidicuiary" if you're ever in the proximity of anyone on the Board of Directors) it will no longer be able to make an excuse that it wasn't aware how much the plan is forking over in fees. It's sort of like giving your plan one of those high-beam flashlights the cops like to use. Makes it a whole lot easier to see what's going on.

Putnam Investments announced this week that it is already stepping up to the 401(k) fee disclosure plate. In early June Putnam will launch a new online 401(k) fee disclosure tool that will allow employers to clearly-and more easily-ferret out the total fees its plan is on the hook for. I'm not sure it's possible to have a moral high-ground in the 401(k) business, but Putnam sure is trying to carve one out. The following statement from Edmund F. Murphy, head of Putnam's 401(k) business was practically Elizabeth Warren-esque in its consumer friendliness.

At Putnam, we think that retirement plan sponsors and participants have a right to clear, unambiguous information about the fees and expenses of their defined-contribution retirement plans -- period. Providing this information is a fundamental obligation that we welcome and embrace.

What 401(k) Plans Need to Tackle Next

It's obviously good news if we turn up the heat on fee disclosure. To the extent some plans, or plan advisors, are called out for running an excessively pricey operation, the idea is that they will be pressured to make some changes. It's hard to defend that you're fulfilling your fiduciary responsibility to operate the 401(k) in the best interests of the participants if you're doing business with fee hogs.

But I hope this isn't a One-and-Done case. There's a lot more wrong with 401(k)s that needs fixing. Here's what I hope Washington and the 401(k) industry tackles this year.

• Automatic Escalation of 401(k) Contribution Rates. The default contribution rate employers set when automatically enrolling employees in a 401(k) plan is way too low. Typically it's just 3 percent or 4 percent of pre-tax salary; that's less than one-third of what you really need to be socking away. Now that we've got the data showing that auto-enrollment is a success, the important next step is to nudge Americans to increase what they contribute to their 401(k)s. You do that by adding anautomatic escalation feature to a plan, that slowly raise an employee's deferral rate by 1 percentage point or so a year. Not enough plans have this feature.

• Show How Much Income Your 401(k) Will Safely Generate in Retirement. The lump sum balance on your 401(k) statement needs to be massaged into a more meaningful and helpful number: How much monthly (or annual) income could that lump sum safely generate for you in retirement without you running a high risk of eating up all the money way too fast? I mean come on, that's what keeps you up at night, right? Will I have enough to live on in retirement. As I reported recently, there's already a bipartisan Senate bill floating around that would help Americans understand what their 401(k) is really worth in terms of retirement security. But it's not exactly a front-burner topic in D.C. right now. Stay tuned.

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