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Senior Citizen Politics
Senators Kohl, Harkin Offer Legislation to Make 401k
Fees More Transparent
Aging Committee hears that these fees threaten
retirement security for seniors
 Oct. 25, 2007 - Senate Special Committee on Aging
Chairman Herb Kohl (D-WI) and Senator Tom Harkin (D-IA) will introduce
legislation this week that will require complete transparency of 401(k)
fees to both employers and participants. Kohl announced this action at a
hearing of his committee on the “devastating effect” hidden 401(k) fees
can have on the retirement savings of senior citizens and the need for
simple and clear disclosure.
The bill, Defined Contribution Fee Disclosure Act
of 2007, will enable employers to negotiate with pension fund managers
in order to get the lowest possible fees for their employees.
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Also, participants will be able to make informed
choices between investment options that charge differing fees, and will
have the opportunity to significantly increase their retirement savings.
Ultimately, this legislation will help to lower costs for everyone by
fostering competition among pension managers.
Although only established in the 1980s, 401(k)
defined benefit plans have become the main retirement savings vehicle
for most Americans, covering over 50 million people and exceeding $2.5
trillion in assets.
Under federal pension law (ERISA), there is no
requirement for plan sponsors to provide participants with information
on the fees associated with differing investment options. Because most
fees are netted from their account balances, most plan participants are
unaware of the costs of their plans.
According to a study conducted in July of this year
by AARP, only 17 percent of 401(k) enrollees knew that they were paying
any fees. Two-thirds of the respondents, or 65 percent, thought they
paid no fees for their 401(k) plan.
“I believe there is a basic right for consumers to
clearly know how much products and services are costing them,” said
Chairman Kohl. “Disclosure is especially important in the case of
401(k)s, as the slightest difference in fees can translate into a
staggering depletion in savings, greatly affecting one’s ability to
build a secure retirement.”
The U.S. Government Accountability Office (GAO)
recently estimated that a 45 year old with $20,000 in his 401(k) would
have $70,555 at age 65 if he is getting a 6.5 percent return and only
paying 50 basis points (0.5 percent) in fees.
However, increasing the fees by just 1 percentage
point would leave him with only $58,400 at retirement age. AARP used
those assumptions and realized that over 30 years, $20,000 with 0.5
percent in fees would grow to $132,287, while paying 1.5 percent in fees
would reduce that growth to $99, 679–a 25 percent reduction in the
account balance.
Even a difference of only 50 basis points, from 0.5
percent to 1.0 percent, would reduce the value of the account by
$17,417, or a little over 13 percent over the 30-year period.
At the hearing, Barbara Bovbjerg, Director for
Education, Workforce and Income Security Issues at GAO, gave committee
members an overview of the current law governing 401(k) fees, stating
that it does not adequately require disclosure of fees and expenses.
Bovbjerg also offered insight into how best to
present this information to consumers. Assistant Secretary of Labor
Bradford Campbell, head of the Employee Benefits Security
Administration, offered a preview of new disclosure regulations that the
Department of Labor intends to release.
On the second panel, Jeff Love shared the results
of AARP’s aforementioned study on 401(k) fees.
Mercer Bullard, one of the nation’s leading
advocates for fund participants and founder of Fund Democracy, offered
testimony about the lack of attention most consumers give to fees, the
need to provide consumers with clear information on quarterly
statements, and the ability of plan managers to present fee information.
Michael Kiley, of De Pere, Wisconsin, testified on
behalf of the American Society of Pension Professionals & Actuaries (ASPPA)
and the Council of Independent 401(k) Recordkeepers (CIKR). Kiley
explained how disclosure would help drive down prices and allow
consumers to choose a better product.
Lastly, Robert Chambers, chairman of the American
Benefits Council, shared with committee members the industry
perspective.
Committee webpage:
www.aging.senate.gov
Hidden: 401(k) Fees: How Disclosure Can
Increase Retirement Security
>>
Click here to view webcast.
Click on names to read testimony
Statements of Committee Members
Senator Herb Kohl (D-WI), Chairman
Senator Gordon H. Smith (R-OR), Ranking Member
Witness Testimony
Barbara Bovbjerg, Director, Education, Workforce and Income Security
Issues, US Government Accountability Office, Washington, DC
Bradford Campbell, Assistant Secretary of Labor, Employee Benefits
Security Administration, US Department of Labor, Washington, DC
Jeff Love, Director of Research, AARP, Washington, DC
Mercer Bullard, Assistant Professor, The University of Mississippi,
School of Law, University, MS
Michael Kiley, President, Plan Administrators, Inc., De Pere, WI
Robert Chambers, Chairman, American Benefits Council, Charlotte, NC
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