Wouldn’t it be nice if 401(k) statements looked sort of like nutrition labels on packaged food? The calories, fat, and protein content are neatly spelled out for you in a tidy little box. The information doesn’t necessarily make you eat any healthier, just as I’m sure 401(k) fee disclosure wouldn’t make everyone choose smarter investments. But the data is easily comprehensible for people who want to monitor their diet and get a pretty good idea of what they are eating.
Representative George Miller, a California democrat, and Representative Rob Andrews, a New Jersey democrat, introduced a 401(k) fee disclosure bill yesterday. If passed in its current form, a worker’s quarterly statement would be required to list total contributions, earnings, closing account balance, net return, and all fees subtracted from the account. The total fees taken out of the account would be disclosed as one number in dollars, not as a percentage of the account balance as they typically are now. “Especially during these troubling economic times, workers need to be able to account for every penny taken from their hard-earned savings,” said Miller, chairman of the house education and labor committee.
401(k) service providers would be required to provide information to employers about the fees charged to workers broken down into four categories: administrative fees, investment management fees, transaction fees, and other fees. “Armed with disclosure of fee components, the plan fiduciary can consider alternate providers, evaluate lower-cost fund options, and/or negotiate lower fees with the current provider,” said Alison Borland, a retirement strategy leader for Hewitt Associates in her congressional testimony today. “Lower fees directly benefit plan participants by increasing their account balances and compounding this savings throughout their working years.” Workers could get the detailed fee information by asking their employer.
Service providers would also have to disclose any financial relationships or potential conflicts of interest to plan sponsors. The 401(k) Fair Disclosure for Retirement Security Act of 2009 would give the U.S. Department of Labor the authority to fine service providers who violate the rules.
Plan administrators would be required to offer workers at least one low-cost index fund as an investment option in order to receive protection against liability for participant’s investment losses. “The 401(k) Fee Disclosure Act takes the long overdue step of prohibiting pension plans from limiting investment options to actively managed portfolios and thereby forcing participants to pay higher fees and assume active management risk,” said Mercer Bullard, founder of the investor rights group Fund Democracy and an assistant professor of law at the University of Mississippi. “It is widely accepted that actively managed funds cannot, as a group, outperform the marketplace after taking fees into account.”
Critics of the proposed legislation warned that it could lead to an increase in fee-related litigation. “Over the past few years, we have seen significant growth in litigation involving defined contribution plans, much of which is directly related to plan fees,” said Robert Chambers, a partner with law firm McGuireWoods and past chair of the American Benefits Council board of directors. “The increased risk of litigation becomes factored into the cost of benefit plans through lower employer contributions and higher fees, resulting in reduced account balances.”
Opponents also raised concerns that unbundling fees, or listing each fee individually, could lead to higher administrative costs. “Service providers should not be required to calculate the actual dollar amount of fees and expenses, particularly those that are embedded in the expense ratios of plan investment options,” said Larry Goldbrum, general counsel for the Spark Institute, an industry association that represents retirement plan service providers. “Providing expense ratio or rate information, instead of dollar estimates, will provide enough information.”
Tell us, what do you think of the 401(k) fee disclosure bill?