New rules for 401(k) options and fee disclosures go into effect this month, bringing more transparency to disclosures regarding fees.
“The new laws mean that employees will have more information regarding the costs of their 401(k) and that is a positive thing,” said Kam Amirzafari, a certified financial planner with MacLean Wealth Management at 138 Nassau Street.
The Employee Retirement Income Security Act of 1974 (ERISA), which set minimum standards for pension and health plans, stated only that “fees must be reasonable,” explains Amirzafari. It gave little definition or guidance as to what the word “reasonable” meant and also did not require disclosure of those fees to participants.
The disclosures are the result of new regulations set by the Labor Department. Beginning this month, investment companies that administer 401(k)s are providing new disclosures to employers that sponsor the plans. Employers must then share their own disclosures with employees, detailing plan costs that participants bear.
“Many employees right now think that their 401(k) is free. That is not true,” he says. “There are fees involved. And some plans have poor investment choices and very high fees.”
In fact, a survey published earlier this year by the AARP showed that 71 percent of people polled believed that they did not pay fees on their 401(k)s while six percent were unsure. There are literally thousands of different retirement account plans available, each with different fee structures and rates of return for investors.
The Department of Labor estimates there are 483,000 individual retirement account plans covering 72 million participants. These accounts hold approximately $3 trillion in assets.
There are two main types of fees taken from 401(k) accounts: investment management fees and administrative costs. Under the new rules, companies administering 401(k)s must provide employers who sponsor the plans with details of all fees associated with running the accounts.
Amirzafari has been working in the industry since shortly after high school. “I began working for my godfather, Jerry MacLean (the owner of MacLean Wealth Management) when I was just 18,” he says.
His interest was sparked by its proximity to his parents’ place of employment, Firestone Library at Princeton University. “I was easily able to visit both places as I was growing up, so I also have a great interest in books.”
Amirzafari received his bachelor’s degree in business and environmental economics from Rutgers University in 1994 and a master’s in financial services from American College in 2009. Along with his CFP certification, he has also received an Accredited Estate Planner (AEP) designation from the National Association of Estate Planners and Councils and a Chartered Advisor in Philanthropyr (CAPT) designation, and is certified in Long Term Care planning.
He has taught courses at Prudential’s New Agent School, the Center for Financial Planning Excellence, and the Capstone Retirement Planning School. He is a member of the Mercer County Estate Planning Council, the Financial Planning Associations, and the Gift Planning Council of New Jersey. He is also active in the Spirit of Princeton community service organization and is a former paratrooper in the 82nd Airborne Division.
Full disclosure of 401(k) will occur in stages; 401(k) service providers were able to wait until July 1 to disclose costs to employers. Individual employees will begin to see these costs when they receive their third quarter statements in early October.
The change will, at the very least, generate “a lot of conversation between employers and their fund managers and employees and their HR department or employer,” says Amirzafari. It may also generate “shock, sometimes reasonable, sometimes unreasonable.”
The end result will be good for many employees, who currently are unaware of just how much they may be losing to fees.
Fee disclosure is a very important component of retirement. For smaller plans it can be hard to find the information. The new rules will “allow participants, the people who are actually paying the fees, to make affirmative decisions about their retirement plans,” says Amirzafari. It will also allow fund managers to make better comparisons of different products.
In many smaller businesses, the fund manager for 401(k) money is the owner of the business or another executive who is not necessarily knowledgeable about investing, says Amirzafari.
“Unfortunately, many times the fund manager makes the initial decision on which funds the company will use and then never looks at it again,” he says. “A fund that was doing well several years ago may have changed and now is not doing well at all, but the company’s manager really is not aware of it.”
Amirzafari expects the new rules will mean that the 401(k) managers at many companies will be reaching out to their brokers to learn more about the products they are currently using and to consider making changes in the plans they are currently offering to their employees.
Employers and employees should begin reviewing their plans as soon as they receive the new information, says Amirzafari.
For employees of larger companies, where a variety of options are offered, it is important to look at all of the options and choose the best ones for you. “Fees are only a part of the overall decision,” he adds. The type of fund, the risk factors, and how close you are to retirement should all be a part of the decision.
In addition, everyone should ask themselves what type of investor they are, and what type of risks they are willing to take.
Amirzafari breaks down investors into three categories: turtles, deer, and foxes. “The turtle is the investor who knows where he wants to go, sets his sights on it, and slowly and steadily heads for that point in a straight line. He doesn’t let anything distract him,” he explains.
The deer, on the other hand, startles easily and moves quickly from one investment to another depending on shifts in the market, news events, or talk around the lunchroom table. The fox is the savvy investor who is always paying attention, looking for information, and staying as informed as possible.
“There are advantages and disadvantages for each type of investor. The important thing is to be aware of which personality you are and to be aware of it. Stay educated about your investments and don’t make decisions too quickly.”
MacLean Agency, 138 Nassau Street, Princeton 08542; 609-683-9300; fax, 609-683-9232. Jerry R. MacLean, agent.www.macleanagency.com.