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Tackling High Investment Plan Fees
By
Michael A. Piekarz
Staff Writer
The
U.S. Senate Special Committee on Aging recently announced a bill
to protect retirees from exorbitant management fees that can reduce
401(k) retirement accounts by as much as 25 percent.
Many Americans who rely on employer-sponsored 401(k) retirement plans often find
their nest egg is far less than they had planned for. Plan administration fees,
investment fees and individual service fees act in unison to reduce funds accumulated
over a lifetime of labor.
Fees associated with managing plan investments are the largest component of 401(k)
plan fees. They are assessed as a percentage of assets invested and are paid
for by consumers in the form of an indirect charge against retirement accounts
that are deducted from investment returns.
Often, investment management fees are not specifically identified on statements
of investments. Because they are not immediately apparent, they come as a shock
to retirees who find that they have less money than they originally thought.
In order to allow investors to make a fully-informed decision about which plan
is best for them, Senator Tom Harkin (D-Iowa) and Senator Herb Kohl (D-Wis.),
chairman of the U.S. Senate Special Committee on Aging, introduced legislation
to ensure that consumers can access information on the cost of 401(k) plans’ management
fees.
The Harkin/Kohl Defined Contribution Fee Disclosure Act would require 401(k)
plan providers to disclose all fees so that workers saving for retirement can
make a fully-informed decision about which plan is best for them.
“It is absurd that millions of Americans rely on 401(k) plans for their
retirement security and yet they aren’t told what fees they are paying
to maintain these accounts,” said Senator Harkin.
“This bill will shed light on the 401(k) selection process and give Americans
more control over their retirement future. In an economy with more and more defined
benefit plans being slashed or frozen everyday, it is vital that employees have
access to all the information they need to maximize their retirement savings.”
The protection provided by the pending legislation can significantly increase
some retirees’ standard of living by boosting retirement savings by thousands
of dollars. AARP found that if a 35-year-old invested $20,000 in a 401(k) plan
over 30 years, earning a 6.5 percent return and paying 0.5 percent in fees, that
individual would have $132,287. But if their fees increased to 1.5 percent, only
$99,679 would be left for their retirement – a 25 percent reduction in
the account balance.
“I believe there is a basic right for consumers to clearly know how much
products and services are costing them,” said Senator Kohl.
“Disclosure is especially important in the case of 401(k)s, as the slightest
difference in fees can translate into a staggering depletion in savings, greatly
affecting one’s ability to build a secure retirement.”
Under present law it is difficult for 401(k) participants to access information
on what fees they are being charged and how these fees will affect their final
account balance. The proposed legislation helps employees obtain this information
in an easily understandable format.
The proposed law will increase the information given to employers who sponsor
401(k) plans. Employers determine what 401(k) plans their employees can choose
from. By providing employers with a comprehensive list of all of the fees they
are paying the information would then be passed on to plan participants.
The Senate bill will also give future retirees information about the overall
levels of fees at the time they choose investment options as well as on their
quarterly statements. Other critical information for plan selection such as historical
returns, the level of risk and basic investment guidance will also be required.
The Harkin/Kohl legislation also provides for transparency by requiring the disclosure
of relationships between all parties with financial interest in the plan. The
GAO found that “Labor and plan sponsors also may not have information on
arrangements among service providers that could steer plan sponsors toward offering
investment options that benefit service providers but may not be in the best
interest of participants.”
Increasing disclosure of these business arrangements is key to consumer protection.
Similar legislation was introduced in the U.S. House by Representatives by George
Miller (D-CA) earlier in 2007.
“After a lifetime of hard work, retirees ought to have financial security
that allows them to focus on family and friends without sacrificing their standard
of living,” Congressman Miller stated.
“Helping workers to make better-informed decisions about their retirement
options is a critical step towards increasing retirement security for America’s
workers.”
Further action on both bills is pending.
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Metropolitan News Company, Inc.
