Lawmaker Hints at 401(k) Legislation

After an initial hearing on 401(k) fees, the chairman of a House committee says he is inclined to offer legislation that would require plan sponsors to provide greater disclosure about charges related to the retirement products.

Rep. George Miller, D-California, chairman of the House Education and Labor Committee, convened the hearing Tuesday, March 6, to explore what he says are hidden fees that erode the retirement savings of middle-class Americans.

“There’s general agreement, both with the industry and certainly on this committee, that there are some serious problems with transparency, with possibly conflicted relationships, and with understandable language [in prospectuses] for plan participants,” Miller told reporters after the hearing.

He says that he doesn’t have a timetable for a bill, but asserted that something should be done.

“Inaction is probably not an option for the committee,” he says. Miller plans to schedule more 401(k) hearings during the next few weeks.

Following the March 6 meeting, the Department of Labor tried to demonstrate that it is moving on the 401(k) fee issue. In a statement, it said that it is planning to publish this spring a proposed regulation to require service providers to disclose their compensation, fees and other financial arrangements.

The department also said it will soon publish a request for information seeking public comments on how to improve fee disclosure. Last year, it expanded the public disclosure of fee and expense information on Form 5500 annual reports.

The DOL’s efforts notwithstanding, Miller is convinced that middle-income families are suffering retirement income losses thanks to fees they don’t see or understand.

Miller commissioned a study released by the Government Accountability Office in November stating that opaque fee structures hurt participants. The agency said that a 1 percentage point difference in annual costs for a $20,000 401(k) account over 20 years can result in a 17 percent difference in accumulated savings.

Such losses could be devastating to a retirement nest egg, Miller contends.

“A lot of middle Americans struggle every month to make this contribution,” he says.

Inscrutable fees and conflicts of interest with service providers amount to a situation in which “you have a lot of people dipping into other people’s money,” Miller says.

An industry expert cautions that Congress must be careful in defining what kind of information to provide and how much—considering there are dozens of different kinds of fees.

“It is important to make sure that the cost of doing this does not overwhelm the benefit that comes from it,” says Robert Chambers, a partner at Helms Mulliss Wicker in Charlotte, North Carolina, and chairman of the American Benefits Council.

Chambers favors greater fee disclosure but said it should be done in a way that doesn’t create burdens for plan sponsors or scare investors. He said that fees should be related to the quality of the investment product.

“The reasonableness of a fee is based on what you get for it,” he said.

But another expert argues that hidden fees make it difficult for CFOs to assure workers that they are not being hurt by excessive costs.

“The industry must not impede the fiduciary,” says Matthew Hutcheson, plan architect at G Fiduciary in Tualatin, Oregon. “If we held everyone to a fiduciary standard, this might self-correct.”

Misleading and obscure information is the rule, not the exception, when it comes to 401(k) costs, according to Hutcheson.

“It’s pervasive,” he says.

One example of an effort to increase fees, according to Hutcheson, occurs when a record keeper is paid based on the number of funds in which money is invested. Instead of spreading assets among four or five funds, the money may be put in eight or more.

In its report, the GAO suggested two legislative remedies. The agency said Congress should consider amending the retirement savings law to require that all plan sponsors disclose fee information in a way that facilities consumer comparisons of investment options. The GAO also recommended that Congress should consider amending the retirement law so 401(k) service providers disclose to plan sponsors compensation they receive from other service providers.

When it comes to legislation, however, the senior Republican on the House committee urged a measured pace.

“We must resist the urge to simply overload workers with information—or worse, to mandate the distribution of out-of-context information that may lead participants to make poor investment choices,” says Rep. Howard “Buck” McKeon, R-California.

Overall, the hearing was less of a grilling of the 401(k) industry than a lively discussion.

“There was a general sense of people wanting to understand the issue and come to a good conclusion,” says Ann Combs, a principal at Vanguard and former assistant secretary of labor for the Employee Benefits Security Administration.

—Mark Schoeff Jr.