Setting up and investing in a 401k is not free

But the fees you pay will soon be more transparent

Most employees enrolled in their company 401(k) plans have no idea what they are paying the investment firms that manage the accounts.

That will change on April 1, 2012, when new regulatory requirements for the securities industry take effect. When quarterly 401(k) statements begin rolling off the printing presses next July, they will for the first time include a grand total of all fees charged to the account highlighted on the front page.

"People have been investing in 401(k)s their whole life thinking it's free. They will see it's not," said Art Hazen, director of retirement plans at BPU Investment Management in Pittsburgh. "It has never been free," he said. "But when they see that number, they will wonder what they are getting for what they are paying." The fee disclosure law for 401(k)s will be a step toward more transparency, but it is only one component of the sweeping changes that will affect the securities industry as a result of the Dodd-Frank regulatory reform.

Investment firms handling company 401(k) accounts also will be expected to operate under the higher "fiduciary" standard of conduct, rather than the lower "suitability" standard that has been used for years. While firms will not be required to adopt the fiduciary standard, they will be required to disclose whether or not they are operating as a fiduciary.

Many investors do not know the difference between a suitability standard and a fiduciary standard -- and may not care.

But the difference can be a game changer, as far as the quality of investment advice and investment choices received from the plan vendor.

Under a fiduciary standard, advisers are legally bound to do what is best for a client and treat the client's money as their own.

Most employee retirement plans currently operate under the suitability standard, which allows brokers to legally push clients into "house" products that charge higher commissions when a similar product would reduce the client's costs.

"The reason brokers are so afraid of this pending change is they will be held to a higher standard," said Rick Pierchalski, CEO and founder of BPU Investment Management.

Wall Street's main lobbying group, the Securities Industry and Financial Markets Association, has been fighting to make sure that certain industry practices that are now standard do not become prohibited, such as brokers being allowed to sell mutual funds from their own fund family.

"Certain disclosures will be beneficial to 401(k) participants, but other disclosures will be costly for those individuals," said Lisa Bleier, managing director of the association in Washington, D.C.

According to the Society of Professional Asset-Managers & Record Keepers, there were 74 million 401(k) plan participants in 2010 with assets totaling more than $3 trillion.

Under the Dodd-Frank regulatory reform, Congress was required to decide if the fiduciary standard should be imposed on 401(k) plan vendors and advisers.

Now that lawmakers have decided that it would be in the best interests of retirement savers, the question becomes what sort of fiduciary duty will be required? The final rule on the definition should come out in early autumn.

"There should be only one fiduciary duty, the one that has been imposed for 100 years," said Andrew Stoltmann, a Chicago securities lawyer.

Stoltmann said association lobbyists wanted to redefine the fiduciary duty as a "universal fiduciary duty," which is a watered down, fiduciary-light standard.

The universal duty essentially says the broker must act in the best interests of the client, but that certain conditions can be waived as long as the client agrees to waive those conditions at the beginning of the relationship.

A fiduciary typically has to recommend a mutual fund that is in the client's own best interests. If he recommends a fund owned by his own company, it could be a conflict of interest.

But under a universal fiduciary duty definition, a client could waive this regulatory protection, Stoltmann said.

"This is ludicrous," he said. "Clients will typically sign anything put in front of them. A real fiduciary, such as a doctor or lawyer or a CPA, can't get a client to waive some of the fiduciary responsibility by simply getting them to sign a piece of paper."

Under a suitability standard, brokers assume no liability.

"In my field of securities arbitration and litigation, the status of the broker as fiduciary or not can be a game changer in terms of whether the client can recover money from unsuitable recommendations," Stoltmann said.

"This new law should really eliminate a lot of conflicts of interest," Hazen said. "People with 401(k)s for the first time will be able to truly understand what services they receive and the cost of the service."

(Contact

Tim Grant at tgrant@post-gazette.com. For more stories visit scrippsnews.com.)

(Distributed by Scripps Howard News Service, www.scrippsnews.com.)
Most employees enrolled in their company 401(k) plans have no idea what they are paying the investment firms that manage the accounts.

That will change on April 1, 2012, when new regulatory requirements for the securities industry take effect. When quarterly 401(k) statements begin rolling off the printing presses next July, they will for the first time include a grand total of all fees charged to the account highlighted on the front page.

"People have been investing in 401(k)s their whole life thinking it's free. They will see it's not," said Art Hazen, director of retirement plans at BPU Investment Management in Pittsburgh. "It has never been free," he said. "But when they see that number, they will wonder what they are getting for what they are paying." The fee disclosure law for 401(k)s will be a step toward more transparency, but it is only one component of the sweeping changes that will affect the securities industry as a result of the Dodd-Frank regulatory reform.

Investment firms handling company 401(k) accounts also will be expected to operate under the higher "fiduciary" standard of conduct, rather than the lower "suitability" standard that has been used for years. While firms will not be required to adopt the fiduciary standard, they will be required to disclose whether or not they are operating as a fiduciary.

Many investors do not know the difference between a suitability standard and a fiduciary standard -- and may not care.

But the difference can be a game changer, as far as the quality of investment advice and investment choices received from the plan vendor.

Under a fiduciary standard, advisers are legally bound to do what is best for a client and treat the client's money as their own.

Most employee retirement plans currently operate under the suitability standard, which allows brokers to legally push clients into "house" products that charge higher commissions when a similar product would reduce the client's costs.

"The reason brokers are so afraid of this pending change is they will be held to a higher standard," said Rick Pierchalski, CEO and founder of BPU Investment Management.

Wall Street's main lobbying group, the Securities Industry and Financial Markets Association, has been fighting to make sure that certain industry practices that are now standard do not become prohibited, such as brokers being allowed to sell mutual funds from their own fund family.

"Certain disclosures will be beneficial to 401(k) participants, but other disclosures will be costly for those individuals," said Lisa Bleier, managing director of the association in Washington, D.C.

According to the Society of Professional Asset-Managers & Record Keepers, there were 74 million 401(k) plan participants in 2010 with assets totaling more than $3 trillion.

Under the Dodd-Frank regulatory reform, Congress was required to decide if the fiduciary standard should be imposed on 401(k) plan vendors and advisers.

Now that lawmakers have decided that it would be in the best interests of retirement savers, the question becomes what sort of fiduciary duty will be required? The final rule on the definition should come out in early autumn.

"There should be only one fiduciary duty, the one that has been imposed for 100 years," said Andrew Stoltmann, a Chicago securities lawyer.

Stoltmann said association lobbyists wanted to redefine the fiduciary duty as a "universal fiduciary duty," which is a watered down, fiduciary-light standard.

The universal duty essentially says the broker must act in the best interests of the client, but that certain conditions can be waived as long as the client agrees to waive those conditions at the beginning of the relationship.

A fiduciary typically has to recommend a mutual fund that is in the client's own best interests. If he recommends a fund owned by his own company, it could be a conflict of interest.

But under a universal fiduciary duty definition, a client could waive this regulatory protection, Stoltmann said.

"This is ludicrous," he said. "Clients will typically sign anything put in front of them. A real fiduciary, such as a doctor or lawyer or a CPA, can't get a client to waive some of the fiduciary responsibility by simply getting them to sign a piece of paper."

Under a suitability standard, brokers assume no liability.

"In my field of securities arbitration and litigation, the status of the broker as fiduciary or not can be a game changer in terms of whether the client can recover money from unsuitable recommendations," Stoltmann said.

"This new law should really eliminate a lot of conflicts of interest," Hazen said. "People with 401(k)s for the first time will be able to truly understand what services they receive and the cost of the service."

(Contact Tim Grant at tgrant@post-gazette.com. For more stories visit scrippsnews.com.)

(Distributed by

Scripps Howard News Service, www.scrippsnews.com.)
 

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