IN late July, the United States Department of Labor announced a proposal that will require every 401(k) plan to show participants the performance and annual costs of the funds offered in their plan.
As millions of 401(k) participants know, that basic information is often hard to find or nonexistent.
The new regulation will require a simple table showing the 1, 5 and 10-year annualized performance of funds in a plan and will also show the comparative performance of a benchmark index. In addition to being able to compare performance, you'll also get a table showing the annual expense ratio for the funds.
Participants in 401(k) will finally have easy access to data that will tell them if the funds are any good.
The proposal is open for comment through September 8, then is scheduled to kick into action on January 1, 2009. It will still be up to you to study the info and figure out your lowest-cost option.
US Congressional legislation that would have mandated that your plan automatically provide one low-cost index fund in its lineup of investment options failed to gather momentum on the Hill. The proposed law merely called for an index fund to be added to each plan's lineup among all the other existing options.
For now we'll just have to settle for the Labor Department rules. It's a nice development, but not everything it could have been.
That's true of so many forms of financial disclosure. Consumers have poor access to the information they need. I'm not advocating more disclosure - what's needed is better disclosure.
For instance, banks do a great job of disclosing that they're FDIC insured. I wish they'd do a better job of flagging accounts that exceed the protections of that insurance.
In July, the Federal Deposit Insurance Corp shut down IndyMac bank after deeming it insolvent. As is FDIC policy, all individual bank deposits under US$100,000 at this FDIC-insured bank will be made whole - that is, they're guaranteed to get all their money back.
Joint accounts are eligible for an additional US$200,000 and an IRA account gets another US$250,000 in FDIC coverage if the IRA is invested in bank deposits such as CDs. There are also ways to sock away more money at a bank that's fully insured by setting up accounts with designated beneficiaries in Payment on Death accounts.
But IndyMac depositors with accounts that exceed the insurance limits have been paid just 50 US cents on the dollar for the money above the FDIC insurance limits.
I'd love to see a system where the minute you deposit money that exceeds insurance coverage, you receive a notice that informs you that not all your money is insured. The point is to clearly inform them of their risk. Something along the lines of:
"Your recent deposit of US$150,000 is not fully insured by the FDIC. In the very unlikely event that this bank runs into financial trouble, only US$100,000 of your money would be eligible for full payment through the FDIC program. The remaining US$50,000 may be subject to less than full coverage."
It's the sort of disclosure that helps risk-averse investors stay out of trouble. The the most disturbing part of the IndyMac story is that the people who are going to lose money are the most risk-averse.
As encouraging as the Labor Department's 401(k) disclosure rule is for retirement savers, we all know that lousy disclosure is rampant throughout the financial services industry, and it costs consumers a ton of money.
I'm not pushing for lower fees (though that would be nice), just a level playing field where the fees and risks are disclosed. If the Labor Department can push the 401(k) industry to do just that, maybe there's hope elsewhere.