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401k plans must show admin costs next year

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NEW YORK (6/22/11)-For the first time next year, 401(k) plan participants will be able to see what they’re paying for their investments (The New York Times June 11). The Labor Department, which oversees 401(k) plans, is forcing investment companies to itemize all of the various expenses employers pay and to make the underlying fund costs separate from administrative costs. Workers should get account statements that make their mutual fund fees clearer, and should be able to better understand whether they are revenue sharing with their providers. Workplace retirement plans often include administrative fees and may also be revenue sharing with the investment company that manages the plans. Many mutual fund companies refund some of the expenses to the service provider running the plan to pay for its administrative costs. Here’s how revenue sharing works. When 401(k) plans started in the 1980s, employers (plan sponsors) generally paid the administrative costs. Over time, employees started asking for investments they could follow in the press. In addition, employers wanted to keep administrative costs under control. The solution was to put 401(k) money into mutual funds. Investment companies decided revenue sharing, rather than charging an administrative fee, was a better solution for all involved. Charging a flat 20 basis points to each plan participant for administrative fees each year sounds equitable until one considers that high-balance participants pay significantly more without necessarily getting more administrative service. Think of it this way: A 20-basis point draw on a $10,000 401(k) balance is $20, while the same draw on a $100,000 balance is $200. Don’t assume that every plan provider has been both charging administrative fees and revenue sharing, but do know that this Robin-Hood-like practice is more common than you may think. And previously, it has been the rare employer that breaks down and discloses all the costs you pay in your 401(k) plan. For related information, read “401(k) Loans Poach Nest Eggs” in the Home & Family Finance Resource Center.