Ways and Means Hears Testimony on Appropriateness of Plan Fees

In a statement Committee Chairman Charles B. Rangel (D-New York) said, “As we move away from a system where the responsibility for retirement savings is shared by the employer and employee, Congress – and this Committee in particular – owe it to our workers to ensure their ability to maintain a high quality standard of living once they stop working.”

Some studies have indicated that some providers who service 401(k) plans are charging as much as 1% (100 basis points) in fees and expenses over the prevailing average rates, the statement said. These excessive expenses and fees directly reduce the value of the workers’ total retirement savings.

“It is critically important for people to consider the cost to administer a 401(k) plan, and who pays the cost,” said Representative Jim McDermott (D-Washington), Chairman of the Income Security and Family Support Subcommittee, in the statement. “Let me reiterate, a shift in our economy to personal plans dramatically emphasizes the need to make every invested dollar count – and grow.”

Testimony

According to the statement, Assistant Secretary of Labor Bradford P. Campbell said in written testimony, “Excessive fess can undermine retirement security by reducing the accumulation of assets. It is therefore critical that plan participants directing the investment of their contributions, and plans fiduciaries charged with the responsibility of prudently selecting service providers and paying only reasonable fess and expenses, have the information they need to make appropriate decisions.’

Many participants are not even aware they pay any plan fees and those who are aware may not know how much they are paying, according to testimony submitted by Barbara D. Bovbjerg of the Government Accountability Office (GAO). A report from the GAOsaid, “Participants need fee information to make informed decisions about their investments—primarily, whether to contribute to the plan and how to allocate their contributions among the investment options the plan sponsor has selected.’

In addition, the GAO report pointed out information on expenses associated with the investment options offered to participants and the providers hired to perform plan services would help plan sponsors meet their fiduciary duty to determine if expenses are reasonable for the services provided. In addition, sponsors need to understand the implication of certain business arrangements between service providers, such as revenue sharing, the report said.

In testimony submitted on behalf of TIAA-CREF, Bertram L. Scott, Executive Vice President, TIAA-CREF, told the committee, “One of the most important variables considered by plan sponsors is the cost and expense of providing a 403(b) retirement plan.” Scott said TIAA-CREF discloses all of the expenses associated with investing in its registered investment products in its annual prospectuses for the CREF Variable Annuities and TIAA-CREF Mutual Funds. Expenses are broken out into the categories of Investment Advisory Expenses, Administrative Expenses, Distribution Expenses (12b-1), Mortality and Expense Risk Charges and Acquired Fund Fees and Expenses, the testimony indicated.

In addition, Scott said in the same document, TIAA-CREF provides individual investors with the impact of expenses on a hypothetical investment of $10,000 over different time periods for each investment option, and all of the funds’ performance and prices are posted on TIAA-CREF’s Web site.

Paul Schott Stevens, President and CEO of the Investment Company Institute (ICI), said in a statement to the committee, “In the Institute’s view, the 401(k) system could be further strengthened with appropriate disclosure reform.”

According to Stevens’ testimony there are two gaps in the current 401(k) disclosure rules:

The Department of Labor’s rules for participant disclosure cover only those plans relying on an ERISA safe harbor (section 404(c)); no rule requires that participants in other self-directed plans receive investment-related information.

There is no specific requirement on service providers to disclose to an employer information on services and fees that allows the employer to determine the arrangement is reasonable and provides reasonable compensation.

The ICI testimonysuggested:

• Participants in all self-directed plans need simple, straightforward disclosure focusing on key information, including information on fees and expenses.
• Disclosure should apply to all investment products regardless of type in a way that allows comparability.
• Employers should receive clear information about plan services and fees, including total costs, that allows them to fulfill their fiduciary duties.

In a separate hearing on October 24, the Chairman of the Senate Special Committee on Aging, Senator Herb Kohl (D-Wisconsin), said consumers have a basic right “to clearly know how much products and services are costing them.’ Kohl and Senator Tom Harkin (D-Iowa) are expected to introduce the Defined Contribution Fee Disclosure Act of 2007, which would require full transparency of 401(k) fees to both employers and participants (See Kohl to Unveil Senate Version of 401(k) Fee Disclosure Legislation).