By Catherine Gordon, Toolkit Staff Writer
For many workers, participating in a 401(k) account is the biggest piece of a retirement savings plan. Because of their popularity and importance, these savings vehicles are highly regulated by lawmakers and the government. And one aspect of the plans is receiving renewed attention from Congress because of its effect on the value of your 401(k) plan--the service fees.
Investment and recordkeeping fees are the primary fees associated with 401(k) plans and are disclosed to plan participants through summary plan descriptions, account statements and summary annual reports. However, there are numerous other fees, such as trading costs, SEC Rule 28(e) excess commissions, sub-transfer agent revenue sharing, non-fiduciary 12b-1 commissions, variable annuity wrap fees, administrative pass-through fees. . .you get the idea. Moreover, these types of fees often are not disclosed to 401(k) plan participants.
What kind of impact can these unknown fees have on your 401(k) account balance? Well, consider the example presented by the Government Accountability Office (GAO) at a Congressional hearing on 401(k) plan fees and you will understand why Congress is considering action to force the unveiling of these fee structures.
In the GAO's example, a 45-year old employee who changes jobs with a $20,000 balance in his or her 401(k) will realize $70,500 at retirement 20 years later, assuming an average annual net return of 6.5 percent (7 percent investment return minus 0.5 percent fee charge). If the fees increase to 1.5 percent annually, the average annual net return will be reduced to 5.5 percent, decreasing the participant's account at retirement by nearly 17 percent to $58,400. Obviously, a small change in the fee percentage may impact the balance in a 401(k) account in a big way.
At the Congressional hearing, representatives for the financial services industry argued that their service fees are not excessive. The GAO didn't directly contradict this statement, but stressed that the limited information that plan sponsors are required to disclose prevents the Department of Labor (DOL) from exercising effective oversight over 401(k) plan fees and business arrangements involving service providers. In addition to expense ratios and other fee information, the DOL and plan sponsor may not have information on revenue sharing and other arrangements among service providers that may involve conflicts of interest.
And when fee information is provided, the GAO reported that the information is released in a piecemeal fashion or by a method that makes a comparison of fees between investment options difficult. The GAO was particularly critical of the fact that most employers are not required to provide expense ratios to 401(k) plan participants, because in the GAO's opinion expense ratios are the best method to compare fees among investment choices.
Another Congressional hearing on this issue is scheduled, but in the meantime the DOL has announced that it intends to issue proposed regulations governing fee disclosure. In addition, to further the goal of 401(k) plan participants making informed decisions, the GAO has recommended that the Employee Retirement Income Security Act (ERISA) be amended to require the disclosure of fee information in a way that offers a simpler comparison among investment options and the disclosure of any compensation that the plan providers receive from other providers. The GAO has also suggested that the DOL require plan sponsors to report a summary of all fees paid out of plan assets or by participants.
A financial services industry representative agreed there should be disclosure of information such as the fees that service providers receive from the plan or unrelated third parties. However, the financial services industry takes the position that if disclosure rules are too burdensome, employers, and small employers in particular, as well as service providers, will not participate in 401(k) retirement plans; if disclosure information is too complicated it will just confuse plan participants; and that ultimately the expense of complying with new disclosure requirements will be borne by the 401(k) plan participants.
Only time will tell how far, if anywhere, this reform will go. In the meantime, if you are an employer or employee with a 401(k) plan, it behooves you to gather what information you can about the fees you're incurring. Only then can you make an educated decision about your retirement plan choice.
- Related items:
- New Pension Law Expands Investment Advice Options
- Congress Passes Comprehensive Pension Reform Bill
- Introducing the New Roth 401(k) Retirement Plan
- Estate Tax/Minimum Wage Bill Falls in Senate; Pension Legislation Approved
Added to the News September 11, 2007.
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