Bill seeks to shed light on 401(k)s
Consumer advocates say better disclosure of fees for 401(k) plans would lead to bigger retirement nest eggs for millions of Americans. But business groups Thursday made clear they would fight legislation that would mandate a comprehensive listing of all such expenses.
Too much disclosure, they argued, would overwhelm employees with unnecessary detail, raise expenses for plan administrators and ultimately fail to benefit retirees.
The requirements “are numerous, burdensome, complex and likely to increase participant confusion rather than enhance . . . knowledge,” said Lew Minsky, an attorney testifying to Congress on behalf of major business groups, including the U.S. Chamber of Commerce, the Profit Sharing/401(k) Council of America and the ERISA Industry Committee, which represents employers on pension issues.
The disclosure proposals “would confuse most participants and possibly hinder rather than help them make investment decisions,” Minsky added in testimony to the House Education and Labor Committee.
The target of their complaints was a bill by Rep. George Miller (D-Martinez), chairman of the education and labor panel, that would require 401(k) retirement plans to inform participating employees of every service fee charged to their accounts. These include the sales commissions and fees paid to the investment fund companies, insurance firms and benefits administrators that run employer-sponsored retirement plans.
Companies used to pay many of these expenses, but over the years they have increasingly shifted this burden to employees. Moreover, the fees are often hidden, The Times found in its 2006 “Retirement at Risk” series.
For example, some fund companies say they don’t charge a penny to administer 401(k) accounts -- but they offer participants only “retail” funds with high investment management fees, not the lower-cost institutional funds available to big groups. In other cases the fees are simply never detailed in account statements.
Advocates of more detailed disclosures say that fees can take thousands of dollars out of an investor’s returns over the years, undermining retirement security at a time when millions of families appear to be ill-prepared for the costs of old age.
Further, such expenses are reported inconsistently by different financial firms, they say, and even sophisticated workers can find it impossible to understand how they are being charged, or to compare their 401(k) program with other plans.
More effective disclosures, they argue, would pressure companies to keep the lid on costs, benefiting countless households.
The issue is further fueled by the emergence of 401(k)-style plans as the most common type of workplace retirement program, now covering some 50 million Americans.
“We want workers to have information that is presented in clear, straightforward and easily understandable terms, thereby allowing them to make sound investment decisions for themselves,” said Tom Kiley, a spokesman for Miller.
“Let’s be clear: The biggest risk here is not too much disclosure but too little,” he said, adding that the weak rules have left 8 in 10 workers unaware of the fees they pay.
“To say that adults shouldn’t be presented with the facts and then allowed to make their own decisions is, frankly, insulting,” Kiley added.
The pro-disclosure arguments have some political cachet. Rep. Richard E. Neal (D-Mass.) on Thursday introduced a bill to expand 401(k) disclosures.
“Literally, it pays to know what these expenses are,” Neal told House members. In addition, Sens. Herb Kohl (D-Wis.) and Tom Harkin (D-Iowa) are expected to introduce a bill this month.
At the same time, the stiff opposition by influential business lobbies to Miller’s highly detailed disclosure proposal suggested that the more demanding requirements face an uphill battle to pass Congress.
Miller has not yet set a date for a committee vote. “We don’t think anything will happen with the bill by the end of the year,” one industry observer said Thursday.
Proponents of more transparency cited data that measure the effect fees have on retirement savings, a factor that builds over time.
For example, the Government Accountability Office estimated that a $20,000 nest egg left in a 401(k) account for 20 years would grow to $70,555 assuming 7% interest and management fees of 0.5%. But if the fees were 1.5%, the savings would grow to only $58,400.
Senior citizen advocacy group AARP estimated that over 30 years, the $20,000 would grow to $132,287 with the lower fee -- but just $99,679 with the higher fee.
“The fee information participants currently receive about their plan is often scattered or difficult to access or nonexistent,” said David Certner, AARP’s legislative policy director. “It’s clear that better information is needed.”
Critics of the Miller plan stopped short of flatly opposing enhanced disclosures. Rather, they argued for limits and expressed concern that employers could be sued over the actions of their 401(k) service providers.
“This would likely lead some plan sponsors to drop or curtail their plans to avoid the liability created by this bill,” Minsky testified, urging Miller to undertake a “comprehensive rewrite” of his bill.
Employer groups and many 401(k) companies appeared to prefer a separate initiative underway at the Department of Labor, which is planning to amend the current U.S. disclosure rules, and they urged Miller to wait for the department’s action before moving legislatively.
The first part of the Labor Department initiative is expected within the next few weeks.
Although government officials might be moving toward some strengthening of fee disclosures to employees, a Labor Department official Thursday suggested there would be limits to new requirements for reporting.
“If we produce disclosures that are voluminous -- and ignored -- we’ve perversely increased the fees that participants pay,” Bradford P. Campbell, an assistant secretary of Labor, said during the hearing.
Disclosure is “just one piece of the puzzle,” said James A. Klein, president of the American Benefits Council, which represents employers on benefit issues, adding that employees would benefit from more literacy on financial matters.
The council, he said in a statement, is concerned that Miller’s bill “may unintentionally hurt plan participants by overburdening plan administrators and increasing the costs of plan sponsorship.”
Miller was having none of it. “Without this information, workers simply cannot shop around for the best arrangements for their retirement,” he said Thursday. “I’m sure that many workers, if they knew about [some of] these fees, would not be willing to pay them.”
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