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Practice Management > Compensation and Fees

House argues for improved 401(k) fee disclosure

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House Democrats held a hearing Wednesday to discuss legislation introduced this week that aims to improve 401(k) fee disclosure.

The Health, Employment, Labor, and Pensions Subcommittee of the House Education and Labor Committee introduced the 401(k) Fair Disclosure for Retirement Security Act of 2009 Tuesday. The bill is sponsored by Rep. George Miller, D-Calif., chairman of the Education and Labor Committee, and Rob Andrews, D-N.J., chairman of the Health, Employment, Labor, and Pensions Subcommittee. Similar legislation was introduced in April 2008.

Provisions of the bill include:

  • Ensure that workers receive basic investment information, including information on risk, return, complete fees, and investment objectives before signing-up for a plan;
  • Require that all fees – in one number – that are charged against a workers account to be included in the account holder’s quarterly statement;
  • Require service firms to tell employers the fees workers’ are charged on all investment options into four categories: administrative fees, investment management fees, transaction fees, and other fees;
  • Require plan administrators to offer at least one low-cost index fund to plan participants in order to receive protection against liability for participants’ investment losses;
  • Require service providers to disclose financial relationships so companies that sponsor 401(k) plans can make sure there are no conflicts of interest; and
  • Give the U.S. Department of Labor the authority to enforce new disclosure rules and fine service providers who violate them.

“During a time where American workers have already lost $2 trillion in assets due to last year’s market downturn, it is vital that employees have full access to clear information regarding their hard-earned retirement savings and financial security,” said Rep. Rob Andrews (D-NJ), chairman of the Health, Employment, Labor, and Pensions Subcommittee in a statement.

Kristi Mitchem, head of Barclays Global Investors US Defined Contribution business, said in a prepared testimony for Wednesday’s hearing that an improved disclosure regime allows for a clear comparison between plans, and that information allowing for such is often difficult to obtain given differing compensation methods for investments alternatives and the fact that investment fees are often bundled with administrative costs.

“The challenges faced by plan fiduciaries in making decisions among service providers for the same services is compounded by the inability to make comparisons,” Mitchem said. “Clear, comparable and fully disclosed information about compensation will allow the plan sponsor to more easily and adequately meet its fiduciary responsibility under ERISA (Employee Retirement Income Security Act of 1974) to determine that the fees and expenses are reasonable.” (Parenthesis inserted).

Mitchem also said participants need information that is easy to understand and that will facilitate a comparison across the full range of designated investment alternatives, including automated asset allocation funds. Funds also should be organized around risk level, not by asset class.

Both Mitchem and Alison Borland, retirement strategy leader for Hewitt Associates, said while full fee disclosure is important, it must also be concise but not too technical so as to encourage plan participants without overwhelming them.

“While Hewitt believes that comprehensive fee information should be readily accessible when requested, mandatory disclosures should be concise and provide information that is truly meaningful for the vast majority of participants,” Borland said in her written testimony. “Fee disclosures to participants must be understandable without overloading the average participant with so much technical detail that the information is likely to be ignored or discarded. The worst-case scenario is that the disclosure actually discourages savings.”