Lawmakers Considering New 401(k) Rules
Investment plan fees can sap thousands of dollars from a worker's retirement savings. Some lawmakers are considering making companies that manage 401(k) plans give clearer and more complete information on those costs.
"We have to ask whether all these fees are necessary and we have to examine whether they are undermining workers' retirement security," says Rep. George Miller, D-Calif., chairman of the House Education and Labor Committee.
A committee hearing was scheduled for Tuesday to examine the issue.
Current law does not explicitly require disclosure to investors of comprehensive information on fees connected with 401(k) plans. Workers make tax-deferred contributions from their salaries to those employer-sponsored plans.
Nearly 50 million U.S. workers have invested some $2.5 trillion in 401(k) plans, the premier vehicle for retirement savings in this country.
The plans have taken on added importance because traditional employer-paid pensions, with a guaranteed monthly benefit, have declined among companies.
About 80% of investors in 401(k) plans do not know how much fees are eroding their account balances, according to a report in November by congressional investigators.
The Government Accountability Office urged Congress to consider requiring the disclosure of 401(k) fee information in a way that would allow investors to compare plan options. The report said the Labor Department should require that investors get a summary of all fees paid either from plan assets or by participants.
With the Democrats now controlling the House, prospects are strong for such legislation in the coming months.
Consider a 45-year-old person who leaves $20,000 in a 401(k) account until retirement. If the average net return is 6.5% -- a 7% investment return minus a 0.5% charge for fees -- the account will grow to $70,500 at retirement.
If the fees are 1.5%, the total falls to $58,400 at retirement.
Critics say fees take an excessive bite out of workers' retirement funds in 401(k) plans marketed by the profitable mutual fund industry.
Under current law, the fees must be fully disclosed to those at companies who decide on 401(k) plans, but not to investors themselves.
Investment fees make up the bulk of charges in 401(k) plans. Many plans, however, also charge record-keeping and other administrative or legal costs, as well as fees used to cover the advertising expenses and commissions paid to brokerage firms.
In addition, critics say, lawmakers look at potential conflicts of interest that arise because pension consultants are not required to disclose payments they receive from companies that manage 401(k) plan assets.
"A large portion of the costs of conventional 401(k) plans relate to services that have little or nothing to do with building and protecting retirement-income security, and hence are excessive," Matthew Hutcheson, an independent pension expert, said in testimony prepared for Tuesday's hearing.
The American Benefits Council, which represents employers and 401(k) plan providers, says it supports disclosure of fees, provided that the information is useful to investors, easy to understand and relevant to investment decisions.
"Congress should be careful not to address the fee issue in such a way that would impose undue costs on employers and thereby undermine the voluntary employer-sponsored system or inadvertently increase fees," the chairman of the group's board of directors said in his prepared testimony.