Prepare to maximize your personal contributions and decide on 401(k) direction.

When we scheduled this article earlier this year, my intention was to explain the new fee-disclosure rules and how they might impact you existing Section 401(k) plan. While I will comment on those regulations, there is another important development that may be of interest to you.

How Deficit Reduction Could Harm Retirement Plans

The federal tax law applicable to pension and profit-sharing plans has constantly changed. At various times over the last 30 years, when Congress has needed revenue, it has modified the tax rules to limit the amount of deductible contributions that could be made by an employer. Frequently, this has been done in two ways: by lowering the amount that can be contributed on behalf of a highly compensated employee and by lowering the amount of compensation that can be counted for retirement-plan purposes. Both of these changes harm highly compensated employees (read "business owners"), and therefore discourage small businesses from contributing to retirement plans.

At other times, Congress has worried about the rate of savings in the country and has modified the rules to encourage retirement savings. Several changes made during the George Bush administration actually made retirement plans much more attractive for highly compensated employees and owners.

There is now a strong possibility that congressional concern over the deficit and a desire for increased revenues will again lead to changes in pension law that will discourage retirement-plan savings. For example, under current law, a highly compensated employee can receive a contribution of the greater of $49,000 or 100% of pay. The bipartisan committee that was formed over the summer had recommended limiting the annual contribution for highly compensated employees to 20% of pay or $20,000. Although the recommendations of this committee were not adopted by Congress during the summer, it is widely believed that this same change will be part of the recommendations of the deficit-reducing "super committee" that is to report to Congress in the next couple of months.

If you currently have a retirement plan that allows you to make large contributions, you may want to think about maximizing your contributions this year, as the opportunity may not be available in the future.

401(k) Fee-Disclosure Rules Changing

For many years, the Dept. of Labor has been concerned about investment fees charged to Section 401(k) plan participants. As you are probably aware, different classes of shares of a mutual fund include different levels of fees, and frequently there are various forms of revenue-sharing agreements between the mutual funds and those who sell the funds, and even with plan administrators.

In an effort to protect plan participants, the Dept. of Labor proposed regulations requiring extensive disclosures concerning fees and revenue-sharing arrangements associated with all types of investments. Disclosures must be made to plan participants who have the right to choose among investments. Many Section 401(k) plans, and some other profit-sharing plans, include participant-direction provisions. The regulations were to take effect this summer. However, the effective date has been postponed twice, and the latest effective date for providing information to plan participants is now May 31, 2012.

If your plan has participant direction, you will have several more months to prepare for making the disclosures. Some of our clients have decided to remove the participant-direction provisions from their plans in order to avoid the expense of these fee disclosures. Contrary to popular belief, Section 401(k) plans do not have to give participants the right to control investments. The plan trustee can control investments.

To prepare for these coming changes, now would be a good time to discuss personal contributions and the fee-disclosure rules with your plan investment adviser or broker.