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Beware hidden fees and lower standards until next year
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A new regulation from the Department of Labor providing much needed fee transparency and accountability for 401k participants was to go into effect on July 16, 2011, but has been delayed until January 2012. The regulation is Section 408(b)(2), and it's all about fees, potential conflicts and fiduciary status.

By January 1, 2012, all 401k service providers, including any fiduciaries, record keepers, and brokers must provide written disclosures about their services and costs, fiduciary status and other issues.

Brokers are scrambling. The industry standard closed architecture system is going to have the light shined under the hood. Bundled services and indirect compensation have allowed hidden fees to go unnoticed for years. Brokers have traditionally received ongoing compensation from the mutual funds on its 401(k) platform without revealing the details of that relationship. Moreover, they most likely have recommended funds that paid higher fees rather than the funds best-suited for plan participants.

Not only will the pending regulations require written disclosure about what services they provide to your 401k, but also their hidden, indirect fees they receive, including gifts, awards, trips, research, finder's fees, soft-dollar payments, fees deducted from investment returns and other kinds of compensation.

Previous regulation only required providers to report direct compensation, and they did not have to say whether they were a fiduciary.

Identifying who is and who isn't a fiduciary under the new regulations increases the responsibility and legal exposure for employers.

A fiduciary keeps the plan and the participant's interests ahead of all others. Representatives of an insurance company (such as Principal, ING, John Hancock) or an investment company (Black Rock, Fidelity, American Funds, etc.) are not fiduciaries. "Plan sponsors thought they hired the expertise, but now they will get a document saying, 'We're not ERISA fiduciaries,' so they'll wonder why they need that broker around," said Jason C. Roberts, a partner at the law firm of Reish & Reicher, nationally recognized experts in employee benefits law.

Forbes Blogger Michael Chamberlain makes a great point in his article titled "5 Characteristics of a Great 401(k) Plan: "As background, the 401(k) rules from the DOL and IRS are complex. Employers are busy running their companies and have little expertise running a plan.

Employees are poorly prepared to know how much to contribute or how to invest their money. Because of these three facts, the financial services industry, insurance companies and broker dealers have made a killing at the expense of American workers."

You don't have to sit on your hands until January. Ask for full written disclosures about your 401k services and costs, and fiduciary status. Hopefully come January, you can compare it to the required itemized statement.

Andrew Brown is a Certified Financial Planner and a Fee-Only Registered Investment Adviser.