401k Contribution Limits

Eve Kaplan, CFP(R) Practitioner, (Guest contributor)

The hard-earned dollars you defer each month into your 401(k) are about to get the money equivalent of a face lift in 2012. Why? Fees that affect your net 401(k) plan balance could drop on account of regulatory changes in 2012. These changes force providers to disclose all their fees to your employer and to you for the first time ever.

Knowing what you pay for something gives you the ability to lobby your plan administrator at prove he/she has selected a 401(k) plan that’s delivers good value for money. Plan administrators also can see if their current 401(k) plan is up to snuff.

Here’s how the changes will play out in your 401(k) account next year:

1. Dept of Labor Regulation 408(b)2 goes into effect April 1, 2012. This regulation requires plan providers (e.g. John Hancock, ING, Hewitt – whoever is listed at the top of your 401(k) statement) to disclose ALL their fees to your employer. (You might be thinking – “doesn’t my employer already know what I’m paying each month for my 401(k) plan”? The answer often is: Not often!)
2. Your employer also needs to demonstrate it has a process in place to evaluate your 401(k) plan and show it selected a plan with “reasonable and appropriate fees.” Your employer also should confirm if any plan advisors are fiduciaries on your plan or not. (Having an advisor that’s a fiduciary is a good thing for participants and employers because you receive a higher standard of care. Having a 3(38) fiduciary is the platinum standard in the 401(k) industry).
3. By autumn 2012 you’ll be able to see how much you personally pay for your plan in dollars and cents. Regulation 404(a)5 goes into effect on May 31, 2012, requiring full disclosure of plan fees to participants. By Q3 2012, you will see fees fully disclosed on your Q3 401(k) statement – e.g. $280 for the advisor, $430 for the underlying expense ratio of your investments, etc.

It’s clear the majority of Americans don’t have enough saved in their 401(k) plans to help cover retirement.  Greater fee disclosure and more pressure on employers to pick cost-effective plans should drive overall 401(k) plan costs down, promote transparency and possibly improve quality.

To understand the impact of fees on plan balances, compare Jerry and Lenore. Jerry’s 401(k) at ABC Company has annual plan fees totaling 1.4%. He has $100,000 in his 401(k), will defer $23,000 each year ($17,000 plus $6,000 company match) and will retire in 15 years. He projects his assets will grow by 5% per year, net of fees. Jerry should have $704,200 in pre-tax dollars when he retires in 15 years.

Lenore, by comparison, works at XYZ Company. Her annual plan fees are 2.4% per year (1% per year more than Jerry’s plan). She also has $100,000 in her 401(k), defers $23,000 each year and will retire in 15 years. Since she’s paying 1% more in fees per year than Jerry, her assets are projected to grow by only 4% per year (net of fees). When Lenore retires, she expects to have $640,636.

All things being equal, Jerry should earn $63,564 more in pre-tax dollars than Lenore because his 401(k) plan costs less. Perhaps Jerry will use this to retire 6 months earlier, or take a nice cruise to celebrate his retirement.

We haven’t even addressed a further +1-2% potential rate of return each year in 401(k) plans that have an effective fiduciary advisor present steering participants toward low cost, automatically rebalancing solutions. Automatically rebalanced investments help keep Jerry on track so his 401(k) plan doesn’t drift away from the model portfolio his advisor counseled him to retain. If Jerry has this advice advantage, the additional $64,564 advantage over Lenore could morph into $134,367 more than Lenore by the time he retires (a 6% annual return vs. Lenore’s 4%).

Everyone wins when both you and your employer are clear about 401(k) costs and quality. 2012 is a great time for plan administrators to make sure they are giving their employees a 401(k) plan that’s high in quality – not high in fees.

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