A key House lawmaker said Tuesday that Congress needs to consider making companies that manage 401(k) plans give clearer and more complete information on fees, which can drain thousands of dollars from a worker’s retirement savings.
“We have to ask whether all these fees are necessary and we have to examine whether they are undermining workers’ retirement security,” Rep. George Miller, D-Calif., chairman of the House Education and Labor Committee, said at a hearing by the panel.
Millions of Americans save diligently for their retirement, only to discover later that “there’s a lot of people who are putting their hands into that money,” Miller said.
Current law does not explicitly require disclosure to investors of comprehensive information on fees connected with 401(k) plans, the employer-sponsored schemes under which workers make tax-deferred contributions from their salaries.
Rep. Howard “Buck” McKeon of California, the committee’s senior Republican, warned at the hearing against congressional action that could have unintended consequences, heaping new requirements for 401(k) plan managers atop current ones and overwhelming investors with data.
Changes to current rules shouldn’t “overload workers with information,” McKeon said.
Similarly, the chairman of the American Benefits Council, which represents employers and 401(k) plan providers, said the group supports disclosure of fees, provided that the information is useful to investors, easy to understand and relevant to investment decisions.
“Congress should be careful not to address the fee issue in such a way that would impose undue costs on employers and thereby undermine the voluntary employer-sponsored system or inadvertently increase fees,” Robert G. Chambers testified.
Nearly 50 million U.S. workers have invested some $2.5 trillion in 401(k) plans, the premier vehicle for retirement savings in this country. The plans have taken on added importance because traditional employer-paid pensions, with a guaranteed monthly benefit, have declined among companies.
About 80 percent of investors in 401(k) plans do not know how much fees are eroding their account balances, according to a report issued in November by congressional investigators.
The Government Accountability Office urged Congress to consider requiring the disclosure of 401(k) fee information in a way that would allow investors to compare plan options. The report said the Labor Department should require that investors get a summary of all fees paid either from plan assets or by participants.
With the Democrats now controlling the House, prospects are strong for such legislation in the coming months.
The math is fairly simple: Consider a 45-year-old person who leaves $20,000 in a 401(k) account until retirement. If the average net return is 6.5 percent — a 7 percent investment return minus a 0.5 percent charge for fees — the account will grow to $70,500 at retirement.
If the fees are 1.5 percent, the total falls to $58,400 at retirement.
Critics say fees take an excessive bite out of workers’ retirement funds in 401(k) plans marketed by the profitable mutual fund industry.
Under current law, the fees must be fully disclosed to those at companies who decide on 401(k) plans, but not to investors themselves.
Investment fees make up the bulk of charges in 401(k) plans. Many plans, however, also charge record-keeping and other administrative or legal costs, as well as fees used to cover the advertising expenses and commissions paid to brokerage firms.
In addition, critics say, lawmakers should look at potential conflicts of interest that arise because pension consultants are not required to disclose payments they receive from companies that manage 401(k) plan assets.
“Many billions more should be available for health care and prescription drugs, home repairs and basic living necessities. Instead, these sums line the pockets of others,” Matthew Hutcheson, an independent pension expert, testified at the hearing. “A large portion of the costs of conventional 401(k) plans relate to services that have little or nothing to do with building and protecting retirement-income security, and hence are excessive.”