Federal regulators should boost their oversight of 401(k) retirement plans and adopt reforms to ensure full disclosure of hidden costs that can cut deeply into the savings accrued by millions of American workers, a government report recommended Thursday.
With companies rapidly abandoning traditional pensions, 401(k) plans have become a cornerstone of retirement security for an estimated 47 million people. Yet regulation and oversight haven't kept pace with the growing importance of these plans, the report by the Government Accountability Office concluded.
The Labor Department is responsible for ensuring that 401(k) fees are reasonable but "lacks the information it needs to provide effective oversight" and is "unable to identify fees that may be questionable," the report said.
The GAO stopped short of a direct attack on the Labor Department, focusing instead on changes it could make so that employees would have a clearer picture of 401(k) fees and could comparison shop for low-cost options.
But others said the report was an indictment of the agency, which they claimed had done little to shield workers despite concluding in a 1997 study that employees were potentially being charged excessive fees.
"The problems the report describes have been open secrets for at least the last decade," said David Brown, chief of New York Atty. Gen. Eliot Spitzer's investment-protection bureau. The Labor Department "is primarily responsible for policing these matters, and its continuing failure to act is disappointing, to say the least."
Rep. George Miller (D-Martinez), who requested the study, called on the House Education and Workforce Committee to conduct hearings next year on the issues it raised.
"They're way behind the curve in protecting the retirement security of working families," Miller said of the Labor Department.
Acting Assistant Labor Secretary Bradford Campbell said in a statement that his agency planned to propose rules next spring that would "vastly improve" the disclosure of fees. The department also plans to require better disclosure of business relationships among the companies that administer and invest 401(k) funds to shed light on potential conflicts of interest.
"The Labor Department is committed to ensuring that 401(k) fees are reasonable and disclosed to workers," Campbell said.
Many Americans are unaware of how much they are paying in overhead costs and investment fees for their 401(k) plans, which hold an estimated $2 trillion in assets nationwide. The GAO report cited one outside study showing that more than 80% of participants didn't know how much they were paying in fees.
Outdated disclosure rules make it hard for workers to know how much they are paying, the GAO said. Employers and the firms often hired to administer the plans aren't required to give investors concise and easily understandable information.
Instead, the GAO said, workers get piecemeal data and must gather and wade through numerous documents to decipher the complete picture.
Fees can make a big difference in how much workers accumulate. In an example cited in the report, a worker who invests $20,000 in a 401(k) plan can expect to see it swell to $70,500 after 20 years, presuming annual investment returns of 6.5% and annual fees of 0.5%.
But the same worker would have accumulated only $58,400 -- 17% less -- if he or she paid 1.5% in annual fees. Fees of that amount are not uncommon, experts on benefits say, especially at smaller companies.
"It's not unusual to find an extra 1% in fees and commissions loaded into a 401(k) plan, and over time that can reduce a participant's retirement savings by 20% to 30%," said Bud Green, a principal at Fortress Wealth Management Inc., a 401(k) consulting firm in Santa Monica.
Fees include the investment charges assessed by mutual funds, the overhead costs charged by outside administrators and commissions taken by brokers who manage plans.
Administrative costs and broker commissions are often invisible, and mutual fund charges may not be disclosed in a way that allows employees to easily make cost comparisons, the GAO report found.
Employers once paid most administrative charges but have steadily shifted them to workers.
The 38-page GAO report echoes key findings of a Los Angeles Times investigation last spring, which said workers' nest eggs were being quietly eroded by obscure and often hidden deductions and that employers rarely question these expenses because they simply pass on the costs to their employees.
The study by the GAO, which is the investigative arm of Congress, showed that the Labor Department only loosely tracked 401(k) fees and rarely investigated whether employees were being overcharged. The department receives few complaints about fees -- it got only 10 last year -- probably because employees don't understand the issue well enough to complain, the report said.
It recommended a variety of reforms, including calling on Congress to require better fee disclosure from employers and to force 401(k) providers to divulge potential conflicts of interest in their business dealings that could affect the availability or pricing of 401(k) plans.
It said the Labor Department should also require employers that sponsor 401(k) plans to report a summary of all fees that are paid out of plan assets or paid directly by participants.
Ted Siedle, president of Benchmark Financial Services, a Florida company that investigates retirement plan abuses, said reforms were long overdue.
The Labor Department "has certainly been advised time and again over the years that these problems existed," Siedle said. "But they have consistently failed to take any initiative in correcting the most fundamental problems."
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Highlights of the GAO report on 401(k) oversight:
* Fees paid by participants in 401(k) plans can significantly decrease retirement savings.
* Plan participants pay most fees but because of poor disclosure may be unaware of how much. Participants aren't given enough information to compare the cost of investment options.
* Business dealings among companies that administer and invest 401(k) holdings create potential conflicts of interest that may raise costs for participants.
* The Labor Department has authority to ensure that fees are reasonable, but it doesn't collect enough information to make this determination.
* The Labor Department needs to mandate better disclosure of fees to help reduce costs and eliminate potential conflicts of interest.
Source: Times staff