Dear 457 and 403 (b) – No One Likes You!
Oil speculation, political unrest – both domestic and foreign- and frightening natural disasters made their mark in 2011. Due to the correlation of these stories to the financial markets, many investors are unaware of a discrete issue which will quietly but directly affect their own money and financial security: new retirement plan regulations.
The problem they target has gone unnoticed for years. In 1974, Congres passed the Employee Retirement Income Security Act (ERISA) to set guidelines for plan sponsors when structuring a retirement plan. Theoretically, ERISA did its job; in practice it failed. A 2010 study covering a 20 year period by DALBAR, a financial services research firm, found that the S&P index returned 8.20%, while the average investor returned only 3.17% in retirement plans. Why such a difference? Excessive and opaque fees are part of the answer.
In April of 2012, over 70 million workers will have their eyes opened to information that was never available to them before: a clear breakdown of the fees and expenses associated with retirement plans. Mutual fund and insurance companies, who have enjoyed a private feast in the retirement game, will soon be exposed due to new Department of Labor regulations calling for full fee transparency. So, at a time in history when many find it tough to make ends meet, let alone fund retirement, the average worker will celebrate at least one win over Wall Street.
Please note: 457 and 403(b) participants are not invited to the party.
The regulations apply to private sector manufacturing workers, lawyers, doctors, construction workers and a myriad of other occupations that fall under the ERISA umbrella. So, how will these workers benefit from the upcoming transparency? The wheels are already turning at insurance and fund companies, who are racing to lower their fees due to the imminent unveiling of their previously hidden charges. Money which was once revenue for large financial and insurance companies will now head back into the pocket of the actual earner, the employee.
Now, what about the other pillars of society? Unfortunately, public school employees, teachers and government workers will not notice a difference. Until law requires fee disclosure on 403(b) and 457 retirement plans, school districts and municipalities themselves are responsible for seeking out the information they need to maximize retirement benefits. These disclosures were initially intended to take place in the private sector in 2007, but due to apparent lobbyist involvement, the implementation of regulations has been pushed back each year until 2012. If a similar fee disclosure regulation is to progress and hurtle into the public sector retirement plan market, township and school officials will need to lead the charge. The appeal initiated years ago in the private sector will need to be continued to sustain a ripple effect which would ultimately result in full fee transparency for all American workers.
In the end, retirement money is not Wall Street’s money, it’s not a fund company’s money and it’s not an insurance company’s money, it’s the retiree’s money – unless you are a 457 and 403b plan participant.
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