As the popularity of 401(k) retirement accounts grows, so does scrutiny of the costs associated with them.
The latest effort to make the savings vehicles more transparent is being led by Rep. George Miller, D-California, who introduced legislation on Thursday, July 26, that would require plans to reveal more information about fees and conflicts of interest.
Meanwhile, the Department of Labor is in the midst of considering regulations governing disclosure among plan sponsors, service providers, participants and the government.
The 401(k) plan is the most popular retirement option offered by employers, covering 52 million active workers. Companies are replacing traditional pensions, which are based on annual salary and length of service, with defined-contribution mechanisms like the 401(k). In 2006, there were $3.3 trillion of assets in such plans.
The number of participants and the amount of money are likely to increase substantially after the passage of major pension reform law last year. That measure enables companies to automatically enroll employees in 401(k) programs.
Such activity has helped focus congressional and administration attention on fees.
“We’re going to see enhanced disclosure both to plan sponsors and to participants,” says Jan Jacobson, retirement policy legal counsel at the American Benefits Council, an organization representing large companies.
But the question is whether the change will be influenced more by the executive branch or by Capitol Hill.
Miller has been pushing the fee issue ever since he took over as chairman of the House Education and Labor Committee in January, when Democrats gained control of the chamber, arguing that opaque charges hurt workers.
He cites a recent report by the Government Accountability Office that shows that a 1 percent difference in fees could result in a 20 percent difference in returns.
“Hidden fees are eating into the retirement savings of millions of American workers without them knowing it,” he said in a statement.
His bill would require that plan administrators list individually every service fee charged to an account and to clearly identify historical returns and fees assessed on each investment option. It also requires that service providers disclose all fees and conflicts of interest to plan sponsors. And it would mandate that 401(k) plans include at least one lower-cost, balanced index fund in its investment array.
Business advocates, who want the Department of Labor’s regulatory process to play out over the next year before turning to legislation, fear Miller’s bill.
They say it would flood participants with too much information, increase costs for company sponsors and encourage people to sign up for the lowest-fee investment while ignoring factors like risk, diversification and historical return.
For instance, trying to parse individual charges for individual services, as the Miller bill stipulates, would be ineffective and create administrative burdens, Jacobson says.
“Providing these reams of information may be less useful than providing the bottom-line fee figure that [participants] can compare between investments,” she says. “It’s all a matter of cost and complexity and making the disclosure useful to the participant.”
Her colleague, Lynn Dudley, vice president of the benefits council, asserts the quality of information is more important than the quantity. “More [disclosure] is not necessarily better,” she says.
It’s in their interest to limit 401(k) fees. “Employers see the 401(k) plan as a key recruitment and retention device,” Delaplane says. That means that they drive a hard bargain from investment companies.
“If they are even slightly out of line from a pricing standpoint, you won’t get business,” he says.
But Miller worries that 401(k) providers are giving participants the business in the form of hidden fees that crack retirement nest eggs.
“A lot of middle Americans struggle every month to make [their retirement] contribution,” he said at a hearing earlier this year. Inscrutable fees and conflicts of interest amount to a situation in which “you have a lot of people dipping into other people’s money.”
“This is an opportunity to improve everyone’s retirement security,” she says.