The House Education & Labor Committee last week proposed new rules for 401(k) disclosure that will give investors greater transparency into the fees they are paying, but some 401(k) advocates say the new rules are too aggressive and unnecessary.
House Resolution 1984, also called the 401(k) Fair Disclosure for Retirement Security Act of 2009, aims to make it easier for employees to pick the best retirement options in their 401(k). Currently, the law does not require all fees to be disclosed, and it can be difficult for workers to find fee information that is already available.
"Workers should be entitled to clear and complete information about their retirement security," said committee Chairman Rep. George Miller (D-Calif.). "Especially during these troubling economic times, workers need to be able to account for every penny taken from their hard-earned savings."
Miller's bill, co-sponsored by fellow Democrat Rob Andrews of New Jersey, seeks to raise awareness by requiring the disclosure of all 401(k) fees, including administrative, investment management and transaction fees.
A study by the Government Accountability Office found that even seemingly small differences in fees can make a huge difference over the life of an investment. Even a 1% fee increase can reduce retirement benefits by 20% over several decades. There is a widespread lack of understanding about fees, with 80% of plan participants acknowledging they were not aware of how much they were paying in fees, according to a 2007 survey by the AARP.
"It's sad that the law does not presently require that investors and workers be given the right to know what they are being charged," Andrews said. "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."
According to the Investment Company Institute, investors had $2.7 trillion in 401(k) accounts as of Sept. 30, down about $2 trillion since stock markets began their decline in October 2007.
Back during the heyday of pension funds, most workers had their retirement plans managed by a professional who took care of the whole company's investment portfolio on behalf of all the workers. When companies began dropping pension plans in favor of the more cost-effective 401(k)s, the responsibility for those investment choices was placed squarely on the shoulders of workers, most of whom had no financial background.
While the popularity of 401(k) plans has soared in recent years, workers' interest in understanding them has not. Most individual workers don't have the financial knowledge, skills or motivation to properly manage their own retirement accounts.
Every quarter since the stock market began its long, slow slide more than a year ago, 401(k) investors have gasped at the constantly dropping balances in their 401(k) statements, yet they largely avoid making changes to their portfolios' asset allocation. Many investors don't even open their 401(k) statements any more, taking the "ostrich" approach to investing by figuratively burying their heads in the sand.
While some may argue that defined contribution plans give too much control to apathetic investors, 401(k) advocates say it's investor education and participation that needs to be addressed, not the structure of the plans themselves.
"We should do a better job of educating the retiring worker so that they're not three weeks away from retirement or a year away from retirement and 100% invested in emerging market equities," said ICI Chairman John Murphy in an interview with MME earlier this year. "Just because the value of the securities goes down doesn't necessarily mean the vehicle's broken or there's something wrong with it. [401(k) plans are still] a powerful tool for people to save."
Rep. Howard "Buck" McKeon (R-Calif.) said legislators shouldn't blame 401(k) fees for the drop in retirement assets.
"To blame 401(k) fees for the substantial losses that people are seeing is to ignore the real culprit: a stock market that has been plummeting in the face of the recession," McKeon recently said. "The downturn in the stock market should not be used as an excuse to enact controversial policies."
Specifically, the bill aims to ensure that workers can access basic information on risk, return, fees and investment objectives. It will require firms to disclose all fees, broken down into administrative, investment management and transaction fees, as well as require the quarterly disclosure of the total amount of fees paid. The bill will require service providers to disclose financial relationships in order to avoid conflicts of interest, and it will give the Department of Labor the authority to enforce violators.
The committee approved a similar bill in April 2008.
More controversially, the bill also requires plan administrators to offer at least one low-cost index fund in every 401(k) plan. This index fund requirement has become a political issue, with Republicans like McKeon calling it "tantamount to a government seal of approval on a particular investment option."
Several industry groups have also taken issue with the index fund requirement, calling it an unprecedented mandate.
"We are concerned that the index fund requirement as a condition for 404(c) fiduciary protection is effectively a mandate, which is unprecedented under ERISA," said Larry Goldbrum, general counsel of The SPARK Institute. "We are also concerned about the subjective nature of the requirement because reasonable investment experts are likely to disagree on what funds satisfy the requirement. And we have all been painfully reminded that past performance is no guarantee of future results."
SPARK supports and encourages fee transparency, but Goldbrum said the bill's requirement for fee disclosure and expenses in a "one-size-fits-all" approach is inappropriate.
"Not all fees fit neatly into the categories, and no single form or methodology can adequately address the diversity of products and service structures without favoring one segment of the industry over others," he said. "Categorizing fees by the way they are charged-which may have nothing to do with what they are for-may not increase participants' understanding. Any statutory framework must be flexible and adaptable to the broad array of investment products, and must accommodate the ever-changing nature of the retirement plan and investment industries."
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