401(k) Fee and Advice Legislation Moves Forward

The vote for legislation requiring 401(k) fee disclosure was split along party lines

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A House subcommittee voted today to move forward to with two 401(k) bills. The 401(k) Fair Disclosure for Retirement Security Act would require fee disclosure for all 401(k) investment options. The Conflicted Investment Advice Prohibition Act would impose safeguards on investment advice with the goal of ensuring that retirement plans don’t have conflicts of interest. Both measures were passed by the subcommittee on health, employment, pensions, and labor by a 13 to 8 vote today. The legislation will now be considered by the full House Education and Labor Committee.

The 401(k) fee bill would require that all fees charged to a worker’s account be listed as a single number in dollars on the account holder’s quarterly statement, not as a percentage of the account balance. Financial service firms would have to further break down fees for employers into 4 categories: administrative fees, investment management fees, transaction fees, and other fees. Employees could get this information upon request. 401(k) plan sponsors would also be required to offer at least one low-cost index fund in order to receive protection against liability for participant’s investment losses. “Americans should be entitled to clear and complete information on the fees taken from their hard-earned retirement savings,” says George Miller, a California Democrat and chairman of the education and labor committee. He cosponsored both bills with subcommittee chairman Robert Andrews, a New Jersey Democrat.

Senators Tom Harkin, an Iowa Democrat, and Herb Kohl, a Wisconsin Democrat, introduced similar 401(k) fee legislation in the Senate. “Employees should be told everything about what they pay in fees in a clear manner and an easily accessible format,” the senators wrote today in a joint statement. “Many people don’t realize that a small administrative difference, such as a single additional percentage point in pension plan fees over the 30 years that they are investing, can cut their final retirement account balance by as much as 25 percent.”

The investment advice bill would only allow financial advisers to offer advice to 401(k) participants when they don’t manage the funds individuals are invested in and if compensation does not vary based on the investment options selected. Relationships between the investment adviser and money managers, brokers, service providers to the plan, and other potential conflicts of interest would be required to be disclosed. “Working Americans deserve and require conflict-free advice so that they can make informed and responsible decisions about their financial future,” says Andrews. Investment advice could also be provided via a computer model.

The vote for the legislation was split along party lines, with Democrats in favor of both bills. Opponents of the legislation say they disagree with the increased regulation of investors. No date has been set for the full committee vote.