Lawmakers Scrutinize Fees for 401(k) Plans
Wednesday, March 7, 2007
Workers are being overcharged tens of billions of dollars a year in unnecessary and often hidden fees imposed on popular, company-sponsored retirement savings plans known as 401(k)s, financial experts told a congressional committee yesterday.
Mutual funds and other professional investment firms often charge fees totaling 3 percent to 5 percent of the assets they manage, when 1.5 percent would be more appropriate, Matthew D. Hutcheson, an independent consultant on pension fees, told the House Education and Labor Committee.
An excess charge of just 1 percent can seriously erode retirement money, retirement planner Stephen J. Butler testified. A couple investing $10,000 a year over 30 years and earning 10 percent, for example, would have more than $1.9 million for retirement at the end of that time. But that sum would be reduced by $355,395 -- to just under $1.6 million -- if that money earned one percentage point less, or 9 percent a year.
Fees often are scattered across written materials, or sometimes not reported at all, making it difficult for employers and consumers to comparison shop, according to testimony from Hutcheson and others, including an official from the Government Accountability Office, the research arm of Congress.
The hearing comes as the new Congress, now controlled by Democrats, is applying greater scrutiny to the financial services industry, especially to how it charges and discloses fees on a variety of products, including credit cards and home loans.
The hearing was the first of two planned this year by the committee's chairman, Rep. George Miller (D-Calif.), to determine if the Labor Department is adequately overseeing the 401(k) industry and to help craft legislation requiring money managers to fully disclose what they charge and to manage 401(k) plans to maximize returns for retirees.
"We have to ask whether all these fees are necessary, and we have to examine whether they are undermining workers' retirement security," Miller said.
The mutual fund industry, which manages half of all 401(k) money, and the bank and insurance industries, which manage most of the rest, disagree with those who say their fees are too high, hard to find or hidden.
"We have looked at fees for mutual funds in 401(k)s, and those fees are falling," said Mike McNamee, spokesman for the Investment Company Institute, the lobby group for mutual fund managers. He said that fees typically are "on the order of 1 percent," including commissions. He said all fees are disclosed in each fund's prospectus -- management fees in what is called a fee table, and brokers commissions and trading costs in a separate section.
The hearing follows a GAO report last November that concluded that workers often can't understand, or in some cases can't find out, what fees they pay to have their 401(k) money managed.
The GAO said the Labor Department, which regulates company-sponsored retirement plans, has some power to make the financial industry disclose more and to do so in simpler, easy-to-understand language. But it recommended that Congress amend current law to require the industry to disclose all fees and charges and also potential conflicts of interest.
The issue has become more important as more Americans have come to rely on 401(k)s as a primary nest egg. In the mid-1980s fewer than 8 million workers participated in such plans, which totaled $100 billion. Today more than 47 million workers have more than $2 trillion invested in these plans. To encourage Americans to save more for retirement, Congress passed legislation last year to allow employers to automatically enroll workers in 401(k) plans, a change financial planners say already has accelerated workers' participation.
Acting Assistant Secretary of Labor Bradford P. Campbell said in an interview this week that he thinks the agency has all the legal authority it needs to make investment companies provide fuller and more understandable disclosures about fees.
The department, working closely with industry, last year announced a three-pronged plan he said is intended to lead to full fee disclosure by investment firms in their annual reports filed with the government, in their contracts with employers and in publications given to workers. But the first phase of the plan won't begin for several months, and the final phase might not become effective for several years.