US Labor Dept's 401k Exams Aim To Provide More Transparency

Dusten Carlson

Over the course of the past year, regulators from the U.S. Department of Labor have quietly increased examinations of firms that offer 401k retirement plans, including brokerage firms, registered investment advisers and third-party administrators, according to firm attorneys. So what is the Labor Dept looking for? They want to know how these companies get paid, and want to see if any conflicts of interest come out of that investigation.

A spokesman for the Labor Department said that the examinations are part of a larger effort to study employee benefits as a whole - not limited to 401ks, but also an inspection into health and welfare plans, according to Reuters. Attorneys interviewed by Reuters said that at least three 401k retirement plan provider clients are being investigated by the Labor Department. They opine that the Labor Department's focus on the providers themselves will ramp up when the agency's fee disclosure rules take effect on August 30th.

"There are going to be a lot of complaints from employees who didn't know what they were paying," said Sheldon Smith, a member of the board of directors of the American Society of Pension Professionals and Actuaries. "For advisers, it's going to be a new world."

Whatever you may think about the exams, they have already led to at least one action over conflicted compensation. Morgan Keegan agreed to pay $634,000 to 10 retirement plans after the Labor Department exam found that they were taking kickbacks for selling hedge funds of funds last week.

The Labor Department exams also seem to be aimed at better transparency. Though the information they yield is public, and available to anyone willing to dig through fact sheets and prospectuses on the Internet, the investigations make the information more available to those who may not know what they are looking for.

"What's important about this is it's the first time many plan participants will be able to see things in a simple comparative format to make informed decisions with the investments in their retirement plan," said Sandra Pappa of Buck Consultants.

The 401k retirement plan has all but replaced the pension plan for retirement, with 72 million workers in total embracing the system. Most of them don't know that they pay fees for the management of their retirement plans. The examinations are part of a new transparency policy put forth back in October 2010 by the Labor Department's Employee Benefits Security Administration. The summer's advent regulations will require companies to give workers quarterly statements that detail plan fees and expenses deducted from the accounts, allowing employees to exercise comparative shopping for their own retirement.

"We believe this regulation will be very useful for individuals to make informed decisions with investments in their plan," said Ms. Pappa, whose firm will provide new statements for employers with 401ks that aren't managed by large fund companies.

The goal of the Labor Department examination seems simply to be more transparency, lower fees, and better hands-on management of your 401k plan.