Many industry insiders predicted that a Democratic-controlled Congress would turn its attention to 401(k) fees, and, sure enough, the first hearings on the topic took place last week. More than likely, however, the fund industry will fight legislation mandating better disclosure because if that should pressure it to lower 401(k) fees, it would put billions of dollars in annual revenue at stake.
Rep. George Miller (D-Calif.), chairman of the House of Representatives Education and Labor Committee, maintained that because fees in 401(k) plans are hidden from investors, they can be unfairly high. Expert witnesses concurred, saying 401(k) fees are typically between 3% and 5%, when they should be no more than 1.5%. "That is 1.5% to 3.5% more than is reasonably necessary," said Matthew Hutcheson, an independent pension fiduciary.
All 401(k)s charge fund management fees, pension experts said, but many also unfairly include recordkeeping, audit, legal, trustee and consulting fees. "Fees charged to participants may be stated in the investment materials," noted Stephen Butler, president of Pension Dynamics, "but they remain effectively hidden because participants never receive a bill."
Even one percentage point can reduce the gains in a 401(k) plan by as much as 20%, Miller argued. "Even a seemingly small difference in the fees that workers pay can make an enormous difference in the overall size of their 401(k) account balance," said Miller, who plans to introduce legislation to mandate better disclosure. "Today, because of weak [ERISA] disclosure rules, most workers don't even know how much they are paying in fees."
If the experts are right that 401(k) plans overcharge, that represents billions of dollars a year to the fund industry. With $2 trillion in 401(k) plans, a fee reduction of 1.5% would reduce fund company revenues by $3 billion a year, while a 3.5% reduction would lower it $7 billion a year.
The government, however, isn't likely to ease up on the issue of 401(k) fees. In November, the Government Accountability Office recommended 401(k) fee disclosure legislation, calling on the Department of Labor to handle it. The DOL is currently working on several ways to improve fees and hopes to publish a final regulation in the next several months.
It will be interesting not only to see how investors but the fund industry react.
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