401ks,  Return on Investment

401(k) Changes

Change. Do you find it scary? A lot of people do. In the financial industry, big businesses have been fighting change. They haven’t been successful. Change has come. The Department of Labor instituted a new rule for 401(k)s starting in November 2011. Personally, I think it’s necessary.

The new rule for 401(k) plans states all fees must be spelled out for participants. This means third party administrators, those who prepare the reports, will break down each fee and disperse the information among participants. Why is this huge? Seventy percent of 401(k) participants don’t think they pay anything for their 401(k). They believe the plan is paid for by their employer. I think employees and employers are in for a rude awakening when the fees are fully disclosed.

There are a small number of fund companies which dominate 401(k) funds. These are the funds about which most people know. It doesn’t mean they are the best performing funds or the least expensive.

One of the biggest changes deals with advisors who are non-fiduciaries. That is what most financial consultants are. If you are dealing with an advisor they currently don’t have to disclose any conflicts of interest. But, this is about to change. They are now being asked to do two things:

Flat Payment – Advisors are now being asked to accept a flat amount no matter which 401(k) plan they recommend. In the past, an advisor received more depending on the fund they recommended. This gave them an incentive to recommend a fund based on their own earnings rather than what was in the best interest of their client.

Third Party Computer – Advisors are also being asked to use a third party computer model to look at the performance of the funds. This raises a really interesting question because for a long time it was held that past performances were not a guarantee for future performance. This still remains true. There is no guarantee, but we are beginning to realize past performances may be a useful factor to take into account.

Change may be scary, but I think it’s entirely necessary. Don’t you?


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