[House Hearing, 110 Congress]
[From the U.S. Government Printing Office]

                         ARE HIDDEN 401(K) FEES


                               before the

                              COMMITTEE ON
                          EDUCATION AND LABOR

                     U.S. House of Representatives

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION




                            Serial No. 110-7


      Printed for the use of the Committee on Education and Labor

                       Available on the Internet:

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                  GEORGE MILLER, California, Chairman

Dale E. Kildee, Michigan, Vice       Howard P. ``Buck'' McKeon, 
    Chairman                             California,
Donald M. Payne, New Jersey            Ranking Minority Member
Robert E. Andrews, New Jersey        Thomas E. Petri, Wisconsin
Robert C. ``Bobby'' Scott, Virginia  Peter Hoekstra, Michigan
Lynn C. Woolsey, California          Michael N. Castle, Delaware
Ruben Hinojosa, Texas                Mark E. Souder, Indiana
Carolyn McCarthy, New York           Vernon J. Ehlers, Michigan
John F. Tierney, Massachusetts       Judy Biggert, Illinois
Dennis J. Kucinich, Ohio             Todd Russell Platts, Pennsylvania
David Wu, Oregon                     Ric Keller, Florida
Rush D. Holt, New Jersey             Joe Wilson, South Carolina
Susan A. Davis, California           John Kline, Minnesota
Danny K. Davis, Illinois             Bob Inglis, South Carolina
Raul M. Grijalva, Arizona            Cathy McMorris Rodgers, Washington
Timothy H. Bishop, New York          Kenny Marchant, Texas
Linda T. Sanchez, California         Tom Price, Georgia
John P. Sarbanes, Maryland           Luis G. Fortuno, Puerto Rico
Joe Sestak, Pennsylvania             Charles W. Boustany, Jr., 
David Loebsack, Iowa                     Louisiana
Mazie Hirono, Hawaii                 Virginia Foxx, North Carolina
Jason Altmire, Pennsylvania          John R. ``Randy'' Kuhl, Jr., New 
John A. Yarmuth, Kentucky                York
Phil Hare, Illinois                  Rob Bishop, Utah
Yvette D. Clarke, New York           David Davis, Tennessee
Joe Courtney, Connecticut            Timothy Walberg, Michigan
Carol Shea-Porter, New Hampshire

                     Mark Zuckerman, Staff Director
                   Vic Klatt, Minority Staff Director

                            C O N T E N T S


Hearing held on March 6, 2007....................................     1
Statement of Members:
    Altmire, Hon. Jason, a Representative in Congress from the 
      State of Pennsylvania, prepared statement of...............    60
    Hare, Hon. Phil, a Representative in Congress from the State 
      of Illinois, prepared statement of.........................    60
    McKeon, Hon. Howard P. ``Buck,'' Senior Republican Member, 
      Committee on Education and Labor...........................     4
        Prepared statement of....................................     5
    Miller, Hon. George, Chairman, Committee on Education and 
      Labor......................................................     1

Statement of Witnesses:
    Bovbjerg, Barbara D., Director, Health, Education, Human 
      Services Division, Government Accountability Office........     7
        Internet link to GAO-prepared testimony, ``Private 
          Pensions: Increased Reliance on 401(k) Plans Calls for 
          Better Information on Fees''...........................     9
    Butler, Stephen J., president and founder, Pension Dynamics 
      Corp.......................................................    28
        Prepared statement of....................................    30
    Chambers, Robert, Esq., partner, Helms, Mulliss & Wicker, 
      PLLC; chairman, American Benefits Council..................    22
        Prepared statement of....................................    24
    Hutcheson, Matthew, pension consultant, independent pension 
      fiduciary..................................................     9
        Prepared statement of....................................    10

                         ARE HIDDEN 401(K) FEES


                         Tuesday, March 6, 2007

                     U.S. House of Representatives

                    Committee on Education and Labor

                             Washington, DC


    The committee met, pursuant to call, at 11:02 a.m., in room 
2175, Rayburn House Office Building, Hon. George Miller 
[chairman of the committee] presiding.
    Present: Representatives Miller, Kildee, Payne, Andrews, 
Woolsey, McCarthy, Tierney, Wu, Davis of California, Sestak, 
Yarmuth, Hare, Courtney, Shea-Porter, McKeon, Petri, Ehlers, 
Kline, Marchant, Fortuno, Boustany, Davis of Tennessee, and 
    Staff present: Aaron Albright, Press Secretary; Tylease 
Alli, Hearing Clerk; Jody Calemine, Labor Policy Deputy 
Director; Sarah Dyson, Administrative Assistant, Oversight; 
Carlos Fenwick, Policy Advisor for Subcommittee on Health, 
Employment, Labor and Pensions; Michael Gaffin, Staff 
Assistant, Labor; Jeffrey Hancuff, Staff Assistant, Labor; Ryan 
Holden, Senior Investigator, Oversight; Brian Kennedy, General 
Counsel; Thomas Kiley, Communications Director; Ann-Frances 
Lambert, Administrative Assistant to Director of Education 
Policy; Danielle Lee, Press/Outreach Assistant; Joe Novotny, 
Chief Clerk; Megan O'Reilly, Labor Policy Advisor; Rachel 
Racusen, Deputy Communications Director; Michele Varnhagen, 
Labor Policy Director; Michael Zola, Chief Investigative 
Counsel, Oversight; Mark Zuckerman, Staff Director; Robert 
Borden, General Counsel; Steve Forde, Communications Director; 
Ed Gilroy, Director of Workforce Policy; Rob Gregg, Legislative 
Assistant; Jessica Gross, Deputy Press Secretary; Taylor 
Hansen, Legislative Assistant; Victor Klatt, Staff Director; 
Lindsey Mask, Director of Outreach; Jim Paretti, Workforce 
Policy Counsel; Molly McLaughlin Salmi, Deputy Director of 
Workforce Policy; and Linda Stevens, Chief Clerk/Assistant to 
the General Counsel.
    Chairman Miller [presiding]. The Committee on Education and 
Labor will come to order for the purposes of conducting a 
hearing of whether or not hidden 401(k) fees are undermining 
workers' retirement security.
    This is, again, one of a series of hearings where we are 
looking at the middle class and what we can do to strengthen 
and to cultivate the middle class.
    And I think that this is a very important hearing, because 
it does deal with the ability of millions of middle-class 
workers, whether or not they will have the ability to put 
together a plan for retirement security and for the maintenance 
of a standard of living that allows them to provide for 
themselves and their families.
    If you earn your income from a paycheck, the chances are 
that one of the things you are concerned with is trying to put 
enough money away for the golden years. If you use a 401(k) or 
a similar plan to help you save some of that money for 
retirement, then you ought to have all of the information you 
need to make a well-informed decision about what plans and 
investment options will give you the best deal.
    That is the purpose of this hearing: to examine the growing 
role of 401(k)-style plans are playing in helping people pay 
for their retirement and find out if hidden fees are eating 
into workers' retirement savings account balances without them 
even knowing it.
    During much of the 20th century, two types of retirement 
plans--Social Security and traditional employment-based pension 
plans--helped to lift older Americans out of poverty and 
allowed American workers to maintain a decent standard of 
living when their working lives were over.
    But now today, many of those traditional pensions, defined 
benefit plans, are no longer being created. New plans are being 
created or greater reliance is being placed on 401(k) plans, 
and clearly Social Security is now the sole source of 
retirement income for over half of the retirees and the primary 
source of income for two-thirds of all retirees.
    Luckily, I would say, we have fended off the attacks on the 
program from people who wanted to privatize it, turning it into 
a gamble for retirees, instead of a sure thing. So we now have 
Social Security and 401(k)s.
    The rub is that 401(k)s were never intended to be the 
primary source of retirement income, either. Today, the average 
balance among private-sector workers is just $28,000, and that 
is a pool of workers that struggle at the end of every month to 
be able to continue to invest in their retirement savings and 
in their ultimate retirement.
    This morning, we will hear testimony about services that 
are being provided and the fees are being charged. Some of 
these fees are reasonable and necessary, but today we will also 
hear about a dizzying array of terminology, revenue-sharing, 
and wrap fees, finders' fees, shelf space, surrender charges, 
soft dollars, 12(b)(1) fees.
    We have to ask whether or not all of these fees are 
necessary, and we have to examine whether they are undermining 
the workers retirement security. That is because even a 
seemingly small difference in the fees that workers pay can 
have an enormous difference in the overall size of their 401(k) 
    As we will hear later today, a 1 percentage point 
difference in fees can reduce retirement benefits by nearly 20 
percent. So you have a situation where people are struggling to 
put this money away every month, and making the sacrifices that 
go along with that, and yet we see just that 1 percentage 
    As a way of an example, if you take one person 
participating in the Thrift Savings Plan, where people who are 
making the same contribution over a 30-year period of time, and 
the other is going into an asset-based fees program, what you 
see here is that at the end of that time, the amount available 
is $175,000, if you had an asset-based fees or 3 percent, and 
$279,000, as you have in the Thrift Savings Plan.
    Three hundred basis points is not unusual, I am told, but 
as we will hear that from the experts, it creates dramatic 
difference in what people can expect to draw on and how long 
they will expect these funds to last. And so this kind of 
difference insists that we pay attention to this matter.
    Over the years, I have participated in a number of 
conferences on savings plans, on getting America to save more. 
How do we encourage savers to do this? With tax deductions, and 
tax credits, and all the rest of it, and those are all very, 
very important.
    But if, in fact, what we see is, after workers with very 
limited resources make the very difficult decision to save 
their money,, the question is, what is the stewardship of that 
    We understand the laws of the fiduciary relationship and 
the responsibilities of trust to those individuals. But the 
fact of the matter is, it does not appear that that is always 
being honored.
    The other thing here is that sometimes when people, delve 
into this subject, it is very complicated, as you will start to 
hear when the witnesses start to speak about it. Most of these 
explanations are not written in plain English. Most of these 
explanations are not presented in a matter in which 
participants can understand them.
    If you go through this information packet for these fees, I 
am sure that either your head will be on your chest, your eyes 
will be glazed over, and you simply will not be able to 
decipher the information that you need as the saver.
    Now, people will argue that this is for the plans, that the 
plans can look at this and make these determinations. The 
language is complicated; the language in many cases is 
unintelligible; the choices are unknown to the participant at 
many levels.
    And so what we have is a situation where people work very 
hard, make the decision we want them to make, to set aside 
money for their retirement, and what they find out is there is 
a lot of people who are putting their hands into that money in 
the names of fees, commissions, all of the terms that I used 
    And what happens at the end of the year, what happens at 
the end of 10 years and 20 years and 30 years is that a 
remarkable amount of the assets that could have been available 
for retirement have leaked out of that fund to the benefit of 
    We will remember through the course of this hearing and of 
future hearings, the only source for all of the fees and the 
commissions is the hard-earned retirement dollars that these 
people have set aside and that their employers have contributed 
to, in some cases. All of the fees, all of the commissions are 
derived from that source of money.
    And that is what makes, I believe, this hearing so 
critical, on what we might do, what we should consider, in 
terms of further disclosure, and further transparency, and 
certainly to make it more understandable for middle-class 
families, as they consider the choices that they have to build 
that retirement nest egg, using the 401(k) plan.
    So I look forward to hearing the witnesses.
    And at this time, I would like to recognize Mr. McKeon, the 
senior Republican on the committee, and then I will--hope 
    I don't want you to characterize the hope I have. It is 
truly mine. But at that time, then I will introduce the 
    Mr. McKeon?
    Mr. McKeon. Thank you, Mr. Chairman. And thanks for the 
    As you know, this committee is no stranger to the issue of 
retirement security. And in fact, I would say we have proven 
ourselves the House's leader on this important issue.
    In the long term, I believe the pension legislation we 
enacted last year will prove to be one of the most meaningful 
reforms of the 109th Congress. And the fact that we were able 
to do it in a bipartisan way, with 76 Democrats supporting the 
bill, and in an election year, no less, demonstrated what a 
bottom-line issue this is to workers, retirees and taxpayers.
    We should not forget that those pension reforms were set in 
motion right there in this committee room. And though we did 
not have universal agreement at the end of the process or even 
as little as a comprehensive alternative plan from the other 
side of the aisle, we did produce what has become the most 
fundamental overhaul of the private pension system in more than 
a generation.
    Indeed, the ground work for today's hearing and those that 
may follow has clearly and concretely been laid by our previous 
work. The issue before us is one that has become increasingly 
important, because defined contribution plans are clearly the 
future of our retirement security system.
    In fact, in addition to the new safeguards we put in place 
last year to bolster the traditional defined benefits system, I 
believe two of the most important aspects of our pension reform 
bill focused on 401(k) plans.
    First, we established new auto-enrollment procedures to 
increase the number of 401(k) participants. And, secondly, we 
fixed a flaw in outdated pension law that barred workers from 
receiving high-quality, independent investment advice as an 
employee benefit.
    Years from now, I believe we will look back upon these 
reforms as a starting point or a turning point, placing more 
power than even before in the hands of workers, as they make 
decisions about their retirement.
    This morning, as we look at potentially tweaking 401(k) 
rules, I will say what I said during the pension reform debate 
from the last Congress: Our first principle must be to do no 
harm. The pension bill we passed last year took years to get 
ready for the president's signature, and for good reason. We 
did not want to do anything that would force employers out of 
this voluntary system, nor did we want to take any action that 
would have discouraged retirement savings or investment, 
unintended consequences that we fought vigorously to avoid.
    This should be guiding philosophy once again this time 
around. For example, if we are considering whether to place 
additional requirements upon plan sponsors on top of those we 
already established a year ago, we must do so with great 
caution, as the financial futures of millions of workers and 
retirees depend upon it.
    At the outset of this hearing process, I also believe that 
it is vital to understand the delicate balance that exists 
within our retirement security system. For instance, workers do 
have a responsibility to make certain decisions involving their 
savings. Likewise, I believe we all must recognize that the 
topic of today's hearings, the 401(k) fees, are one of many 
factors, such as the historical performance and investment risk 
for each plan option, which plan participants do have 
responsibility to consider when investing in a 401(k) plan.
    Now, do we want to or expect workers to be completely on 
their own? Of course not. No one believes that. But at the same 
time, we must resist the urge to simply overload workers with 
information. That little prospectus that you held up a while 
ago, one of the reasons that that is so thick and cumbersome is 
regulations and laws that we have passed here.
    We must not mandate the distribution of out-of-context 
information that may lead participants to poor investment 
choices. A quick fix like that may help some of us feel good 
about ourselves, but it would do great harm to workers and 
retirees, which as I said is what we must seek to avoid.
    Mr. Chairman, I believe our time together today will serve 
to start the process of deliberately and thoughtfully examining 
whether changes to federal law are necessary to provide greater 
information to plan participants. I enter it with an open mind, 
just as I am sure you and all of our colleagues do.
    I appreciate our witnesses taking the time to be with us 
today, and I look forward to their testimony.
    Thank you.
    [The prepared statement of Mr. McKeon follows:]

Prepared Statement of Hon. Howard P. ``Buck'' McKeon, Senior Republican 
                Member, Committee on Education and Labor

    Chairman Miller, as you know, this Committee is no stranger to the 
issue of retirement security, and in fact, I'd say we have proven 
ourselves the House's leader on this important issue. In the long-term, 
I believe the pension legislation we enacted last year will prove to be 
the most meaningful reforms of the 109th Congress. And the fact that we 
were able to do it in a bipartisan way--with 76 Democrats supporting 
the bill, and in an election year, no less--demonstrated what a bottom 
line issue this is to workers, retirees, and taxpayers.
    We should not forget that those pension reforms were set in motion 
right here, in this Committee room, and though we did not have 
universal agreement at the end of the process--or even as little as a 
comprehensive alternative plan from the other side of the aisle--we did 
produce what has become the most fundamental overhaul of the private 
pension system in more than a generation. Indeed, the groundwork for 
today's hearing and those that may follow has clearly and concretely 
been laid by our previous work.
    The issue before us is one that has become increasingly important 
because defined contribution plans are clearly the future of our 
retirement security system. In fact, in addition to the new safeguards 
we put in place last year to bolster the traditional defined benefit 
system, I believe two of the most important aspects of our pension 
reform bill focused on 401(k) plans.
    First, we established new auto-enrollment procedures to increase 
the number of 401(k) participants, and secondly, we fixed a flaw in 
outdated pension law that barred workers from receiving high-quality, 
independent investment advice as an employee benefit. Years from now, I 
believe we will look back upon these reforms as a turning point, 
placing more power than ever before into the hands of workers as they 
make decisions about their retirement.
    This morning, as we look at potentially tweaking 401(k) rules, I 
will say what I said during the pension reform debate from the last 
Congress: our first principle must be to do no harm. The pension bill 
we passed last year took years to get ready for the President's 
signature, and for good reason. We did not want to do anything that 
would force employers out of this voluntary system, nor did we want to 
take any action that would have discouraged retirement savings or 
investment--unintended consequences that we fought vigorously to avoid.
    This should be our guiding philosophy once again this time around. 
For example, if we are considering whether to place additional 
requirements upon plan sponsors--on top of those we already established 
a year ago--we must do so with great caution, as the financial futures 
of millions of workers and retirees depend upon it.
    At the outset of this hearing process, I also believe that it is 
vital to understand the delicate balance that exists within our 
retirement security system. For instance, workers do have a 
responsibility to make certain decisions involving their savings. 
Likewise, I believe we all must recognize that the topic of today's 
hearing--401(k) fees--are one of many factors, such as the historical 
performance and investment risk for each plan option, which plan 
participants do have the responsibility to consider when investing in a 
401(k) plan.
    Now, do we want to--or expect--workers to be completely on their 
own? Of course not; no one believes that. But at the same time, we must 
resist the urge to simply overload workers with information--or worse, 
to mandate the distribution of out-of-context information that may lead 
participants to make poor investment choices. A quick fix like that may 
help some of us feel good about ourselves, but it would do great harm 
to workers and retirees, which--as I said--is what we must seek to 
    Mr. Chairman, I believe our time together today will serve to start 
the process of deliberately and thoughtfully examining whether changes 
to federal law are necessary to provide greater information to plan 
participants. I enter it with an open mind, just as I am sure you and 
all of our colleagues do. I appreciate our witnesses taking the time to 
be with us today, and I look forward to their testimony.
    Chairman Miller. Thank you.
    Our panel this morning is a distinguished panel with a long 
history in this subject.
    And first witness will be Barbara D. Bovbjerg, who is the 
director of education, workforce and income security issues at 
the U.S. Government Accountability Office. At the GAO, she 
oversees evaluative studies on age and retirement income policy 
issues, including Social Security, private pension programs, 
and the operation and managements at the Social Security 
Administration, the Pension Benefit Guaranty Corporation, the 
Employee Benefits Security Administration of the Department of 
    Matthew D. Hutcheson is an independent pension fiduciary. 
He is the author of a text, ``Retirement Plan Compliance and 
Reporting,'' at Texas Tech University's International 
Foundation for Retirement Education. He is also a member of the 
Board of Standards at the American Academy of Financial 
Management. His clients include the plans of Fortune 100, 500 
and 1,000 companies, mid-and small-size companies, government 
and legal and accounting firms.
    Mr. Robert Chambers is a partner in the Employer Services 
Practice Group, of the Charlotte-based law firm of Helms, 
Mulliss & Wicker. And his practice emphasizes executive 
compensation and employee benefit law. Mr. Chambers is a member 
of the taxation, business and law, and employment law sections 
of the American Bar Association and serves on several 
committees within those sections. He is the chairman of the 
American Benefits Council, an employee-benefit lobbying firm in 
Washington, whose members either employ or administer plans for 
more than 100 Americans, and a 1971 graduate of Princeton 
    Mr. Stephen J. Butler is the founder and president of the 
Pension Dynamics Corporation retirement plan administration 
firm in Pleasant Hill, California. In April 1997, Money 
magazine published Mr. Butler's article entitled, ``Beware: 
Retirement Plan Rip-offs.'' Mr. Butler has also written two 
books on 401(k) plans, the most recent being one titled 
``401(k) Today,'' published in 1999. For the past 7 years, he 
has been a weekly columnist covering retirement-related 
financial interests and has been quoted extensively in Fortune 
and Money, the Wall Street Journal, New York Times and numerous 
other publications.
    So, Ms. Bovbjerg, we will begin with you.
    And you know the rules here, but for the other witnesses, 
the green light will be on for 5 minutes, then it will turn to 
orange, which we will ask you to start summing in, and then 
red, if you can wrap your remarks so that we will have time for 
    Thank you.


    Ms. Bovbjerg. Thank you, Mr. Chairman, Mr. McKeon, members 
of the committee.
    I am pleased to be here today to speak about 401(k) plans. 
And in these plans, participating workers are responsible for 
choosing how much of their earnings to contribute, how to 
invest these contributions, and how to manage the resultant 
accumulation in retirement.
    Today, I would like to describe trends in the use of 
401(k)s and summarize our recent report about fees associated 
with these plans. Fees are one of the aspects of 401(k)s that 
workers should know about and understand in order to ensure 
adequate income from the plan when they retire.
    First, the trends. 401(k)s are defined contribution, D.C., 
plans, meaning that benefits are based on contributions to 
accounts and investment returns that accrue. Historically, 
pension benefits were provided through defined benefit, D.B., 
plans, which provide a fixed level of monthly retirement income 
for life, based on salary, service and age of retirement.
    Since 1985, the number of D.C. plans and participants has 
risen dramatically, while the number of D.B. plans and workers 
covered by them has fallen. Today, there are about 700,000 D.C. 
plans, covering 55 million workers, and D.C. plans now hold the 
majority of pension fund assets.
    401(k) plans are an important part of this gross. Although 
they were once relatively rare, today they predominate among 
D.C.-type plans. In 1985, they were only about 7 percent of all 
D.C. plans, but now account for almost 95 percent. In 20 years, 
the number of participants in these plans has grown from 7 
million to 47 million workers, and assets held by these plans 
rose from $270 billion to about $2.5 trillion.
    401(k) plans are popular with many workers, in that they 
are portable, which D.B.'s are generally not, and they are 
easier to understand than typical D.B. plans. Yet 401(k)s also 
place responsibilities on workers that D.B. plans do not.
    The majority of 401(k) plans are participant-directed. 
Because so much rides of workers' decisions with regard to 
their 401(k) saving, it is crucial that workers have 
information to help them make wise choices.
    There are many factors that a worker should take into 
account, one being the fees associated with the plan. So let me 
turn now to issues regarding fees.
    Fees are important factors in 401(k)s because, in general, 
the higher the fee, the less savings will accumulate in the 
course of a working lifetime. Although various fees pertain to 
401(k)s, investment fees account for the largest portion of the 
total. These pay for services including selecting the plan's 
portfolio of securities and managing the fund.
    Plan record-keeping fees are the next largest. These are 
usually charged by the service provider to set up and maintain 
the plan. Whether and how participants or plan sponsors pay 
these fees varies by the type of fee and the size of the plan.
    Investment fees are usually charged at the 6 percentage of 
assets and netted from investment return, while record-keeping 
fees may be charged as a percentage of assets, or as flat fees. 
These fees are increasingly being paid by participants, rather 
than by sponsors. ERISA requires that sponsors disclose a range 
of information about plans, but only limited information about 
    Although plan sponsors may voluntarily provide information 
on fees, participants may not have a clear picture of all the 
fees they pay, because even the information that is provided 
may be offered in a piecemeal fashion, through plan 
descriptions, fund prospectuses, and fund profiles.
    Not only do participants not necessarily know what they are 
paying in fees overall, they have no simple way to compare fees 
among investment options within their plan. The Department of 
Labor has authority under ERISA to oversee 401(k) fees and fee 
arrangements among plan service providers, but it lacks 
information sufficient to provide effective oversight.
    Labor must ensure that fees are paid with plan assets, are 
reasonable, and that sponsors report information known about 
business arrangements involving service providers. But it is 
difficult for Labor to monitor fees that are netted out of 
returns and are not required to be reporter. Further, fee 
arrangements between service providers are sometimes hidden 
from the sponsor and can mask a conflict of interest that could 
affect the plan.
    Labor has initiatives under way to improve the disclosure 
of fee information to participants, as well as in required 
reporting to Labor itself, and to spell out what information 
sponsors need to obtain from service providers.
    In conclusion, 401(k) have emerged as the primary type of 
pension plans for American workers, yet requirements for 
reporting information workers should have to manage these types 
of plans has not fully caught up to the need. Fee information, 
in particular, needs to be more widely available, more 
comprehensive, and more clearly presented.
    GAO has recommended that measures be taken by both Labor 
and the Congress to help make this information more accessible 
and, in so doing, help protect workers' retirement savings.
    This concludes my statement, Mr. Chairman. I welcome any 
questions and hope that my full statement will be included in 
the record.
    [The Internet link to GAO-prepared testimony, ``Private 
Pensions: Increased Reliance on 401(k) Plans Calls for Better 
Information on Fees'' follows:]


    Chairman Miller. Thank you.
    For all the witnesses, your statement, all your written 
material will be put in the record in its entirety.
    Mr. Hutcheson?

                       PENSION FIDUCIARY

    Mr. Hutcheson. Chairman Miller, Congressman McKeon and 
members of the committee, from personal experience and research 
as an independent fiduciary, I believe the retirement income of 
America's workforce has been unnecessarily reduced due to 
confusion caused by blending fiduciary and non-fiduciary 
    Many billions more should be available for health care and 
prescription drugs, home repairs, and basic living necessities. 
Instead, these sums line the pockets of others.
    Conventional 401(k) plans now cost around 3 percent of plan 
assets per year to manage. Some are even as high as 5 percent. 
In my experience, that is 1.5 to 3.5 percent more than is 
reasonably necessary.
    To put this into perspective, just 1 percent in excess 
costs to plan participants, having $2.5 trillion in 401(k) plan 
assets, represents a wealth transfer of $25 billion to others 
each and every year. A large portion of the costs of 
conventional 401(k) plans relate to services that have little 
or nothing to do with building and protecting the retirement 
income security and, hence, are excessive.
    Take an average participant with a $30,000 account balance, 
contributing $150 per pay period. If this person earns an 
average of 8 percent over a 25-year time period, he or she will 
have accumulated over $500,000. However, add an additional 1 
percent in annual fees, and the account balance drops nearly 
$85,000. Add 1 percent more, and the account balance drops 
    This translates into approximately $540 per month in 
retirement income loss. This loss can be prevented, and it 
begins by enlightening plan sponsors about the realities of 
401(k) plan economics. When we buy bread, we know exactly how 
much it costs: One dollar buys one dollar's worth of bread. 
However, when it comes to 401(k) plans, the sticker price is 
advertised at 50 cents, yet the actual cost may be closer to 
three dollars.
    Fiduciaries simply cannot make good decisions when the 
costs of services are undisclosed. There are at least seven 
types of hidden fees or costs borne by plan participants. These 
range from brokerage fees, shared between the broker and an 
investment fund, to record-keeping subsidies between a mutual 
fund a third-party administrator.
    Contrary to fiduciary principles, some of the fees borne by 
participants are for services they do not receive. It is costly 
and unnecessary to offer a wider variety of investment 
alternatives than is absolutely necessary to construct a 
prudent, low-cost portfolio.
    The more fund choice is offered, the more mistakes 
participants make. Employees tinker with the investment within 
their accounts, incurring hidden trading costs that reduce 
their returns.
    The current 401(k) environment encourages mistakes, for no 
good or necessary reason. The brokerage and investment fund 
industries understand and count on participants making 
imprudent investment decisions. They rely on fiduciary 
ignorance to generate revenue. This is a substantial and hidden 
cost about which participants are almost universally unaware.
    An efficient, low-cost, market-tracking portfolio could 
easily and fairly be put in place for all participants. To my 
astonishment, the industry persists in the assertion that, 
without higher fees, they cannot deliver the desired services.
    This is the heart of the matter: It is the services or plan 
options that are excessive, and those services or options are 
not always necessary for protecting participants' retirement 
income. Because 401(k) participants own stocks and bonds, 
constituting $2.5 trillion, it is essential that plans be 
managed by individuals who understand and uphold the standards 
of fiduciary care and loyalty.
    In conclusion, it is incumbent upon us to be absolutely 
certain there are no unnecessary obstacles, whether intentional 
or unintentional, to the long-term success of our private 
retirement system. American workers deserve proper protections 
for the hard-earned savings they have set aside in their 401(k) 
plans, but these protections have been largely denied in the 
current state of the industry.
    I believe in implementing simple solutions. Change will 
require exposing and confronting powerful economic interests 
that support the current system. It is daunting to tackle this 
vital issue, affecting millions now and in generations to come. 
Despite the forces arrayed against change, America's workers 
deserve better than they have received to date from the 
providers of 401(k) services.
    Thank you.
    [The statement of Mr. Hutcheson follows:]

     Prepared Statement of Matthew Hutcheson, Pension Consultant, 
                     Independent Pension Fiduciary

    Very few matters of social importance are more complex than the one 
before you today. This particular issue is not only about uncovering 
obscure dollars unscrupulously extracted from the account balances of 
America's workforce, but it is also about correcting the culture that 
has permitted the problem to thrive in the first place. This written 
testimony will explain what the culture is, why it exists, how it has 
evolved over time, how it violates basic economic principles, the 
integrity of rules of fiduciary prudence, the exclusive benefit rule 
under ERISA, and other common sense practices that are critical for 
delivery of expected results from employer defined contribution 
retirement plans.
The American Worker Is Hurt by What He Can't See
    ``If we make a few rough calculations, the importance of the topic 
will be very clear. The SEC estimates in Concept Release 33-8349, that 
1% of the average mutual fund's investment return disappears each year 
due to brokerage expense, execution costs, and transaction spreads. 
Other industry sources indicate that an additional .50% slips away via 
``revenue sharing payments.'' The impact on the average American is 
    ``Consider two thirty year old workers who each invest $3,000 
annually into their 401(k) programs. American #1's 401(k) program is 
run according to stringent fiduciary principles and earns 7.5% 
annually. However, American #2's 401(k) is operated by conflicted, 
sales driven entities and only earns 6% annually after the 
aforementioned return erosion. The table below details the results.

                                                                        American #1--
                               Year                                    Fiduciary 401(k)     American #2--Hidden
                                                                         Earning 7.5%      Fee 401(k) Earning 6%
10................................................................               $45,624                $41,915
20................................................................              $139,658               $116,978
30................................................................              $333,463               $251,405
40................................................................              $732,902               $492,143
47................................................................            $1,244,260               $766,694

    ``Even though both employees contributed the same amount and took 
the same investment risk, American #2 must work an additional seven 
years to make up for the lack of fiduciary oversight in his 401(k) 
    The difference in hidden fees costs American worker #2 nearly 
$500,000 during the illustrated period of time. This issue is about 
real people, real money, and the quality of their lives later in life. 
Consider the impact on American worker #2's ability to pay for health 
care, prescription drugs, home repairs or even groceries. If actuarial 
tables hold true, today's retiree may need to be prepared to live a 
quarter century longer than his grandparents did.
A ``401(k)'' is a Qualified Retirement Plan
    Qualified retirement plan assets pursuant to Internal Revenue Code 
(``IRC'') section 401(a) are held in trust pursuant to IRC Sec. 501(a ) 
exclusively for the future benefits of participants and beneficiaries. 
There are three types of ``qualified'' plans.
     Stock bonus
     Pension, and
     Profit sharing
    A 401(k) plan, as we call it, is actually a profit sharing plan (in 
most cases) \2\ that has a feature allowing employees to take wages and 
bonuses in cash, or defer them into the profit sharing plan, and hence 
are often referred to as ``employee deferrals.'' However, those 
employee deferrals are technically ``employer'' contributions made 
pursuant to a ``cash or deferred election.'' Deposits of all employer 
contributions, including employee deferrals, plus investment earnings 
of ``401(k)'' plans are subject to the same rules of trust 
administration, governance, and fiduciary prudence which apply to stock 
bonus and traditional pension plans.
ERISA--Employee Retirement Income Security
    The purpose of a retirement plan, including 401(k) plans, is to 
provide future income for retired American workers. Those who are 
charged with the management of a qualified retirement plan must do so 
with an eye single to this purpose and none other. Such an individual 
is a ``fiduciary.''
Rules of Fiduciary Prudence
    As it relates to the issue at hand, the following fiduciary axioms 
have consistently held true:
     Fiduciary based decisions secure future retirement income.
     Non-fiduciary based decisions diminish future retirement 
     Hidden and excessive fees exist because both types of 
decisions (fiduciary based and non-fiduciary based) exist 
simultaneously within 401(k) and other similar plans, complicating and 
obscuring a fiduciary's ability to understand his duties and to 
properly discharge them.
    This written testimony will focus solely on 401(k) and similar plan 
assets held in trust, pursuant to IRC Sec. 501(a). Therefore, rules of 
Fiduciary Prudence are a fundamental component of this discussion 
because trusts are governed and managed by fiduciaries. True prudent 
practices should deliver optimal results. Poor or partial fiduciary 
practices will deliver sub-optimal or even poor results.
    Fiduciary principles and ideals are not obscure, nor are they 
difficult to learn and understand. In fact, modern rules of fiduciary 
prudence have existed for nearly two hundred years. However, in the 
United States, the primary way fiduciary responsibilities are taught to 
sponsors of retirement plans is through the financial industry. Since 
an important element of fiduciary governance is monitoring those who 
provide services to a retirement plan, strangely enough, we have 
accepted a system where those being monitored are teaching those who 
are doing the monitoring, and doing so according to their philosophies 
and standards, with a particular objective in mind.
    The current 401(k) culture essentially couples the ``fox teaching 
the rooster how to guard the hen house'' with a perceived governmental 
``get out of jail free card'' (i.e. DOL regulation 404(c)). The effect 
of adopting these two ``cultural'' elements has, over time, caused 
401(k) plans to be governed through the commingling of fiduciary and 
non-fiduciary practices and philosophies.
    Therefore, resolving the issue of hidden, obscure, and excessive 
fees is wholly dependent on bifurcating fiduciary elements and 
practices from the non-fiduciary ones within the 401(k) industry. Then, 
logic will reveal that any fees paid for non-fiduciary services and 
practices are unnecessary, and hence excessive. Furthermore, these are 
the fees that are hidden because they simply cannot be justified when 
viewed through the lens of true fiduciary prudence. In short, if 
fiduciaries eliminate non-fiduciary practices in their 401(k) plans, 
they will immediately eliminate hidden and excessive fees. To argue 
otherwise would suggest that 401(k) plans are only ``partially'' 
subject to fiduciary prudence, and hence are only a ``partially'' 
qualified plan.
    Conceptually, it is as simple as that--but in practice, it is far 
more difficult.
    The hidden fee problem in 401(k) and similar plans is actually a 
mysterious Gordian Knot consisting of trust law, tax law, public 
policy, doctrines of fiduciary prudence, financial principle, economic 
principle, and perhaps the lack of discipline to defer control and 
gratification until actual retirement. It is difficult to see the ends 
of the rope, and very few know how to unravel it. In addition, many who 
might discern how to unravel it have strong incentives not to do so.
    It is widely accepted that 401(k) and similar arrangements are the 
way most Americans will invest for retirement. Therefore, it is 
incumbent upon us all to be absolutely certain there are no unnecessary 
obstacles (whether intentional or unintentional) to its long-term 
success. As it stands today, there is an imbalance between prudent 
practices aimed at efficiently securing the retirement income of 
America's workforce, and non-fiduciary services created for business 
purposes between competing service providers in the private sector.
Obstacles to a Clear Understanding
     Conflicting Governmental messages that confuse 
qualification rules under IRC Sec. 401(a) with rules of fiduciary 
prudence and process as defined by Department of Labor regulation, case 
law, and other regulatory pronouncements.
     ``Exemptions'' given to non-fiduciary firms or individuals 
to receive compensation from trust assets without being legally held to 
a fiduciary standard of conduct. In other words, non-fiduciary 
involvement in 401(k) plans has created a non-fiduciary operating 
     ERISA has imposed a federal fiduciary duty and 
responsibility on business executives and board directors who serve as 
``ERISA Fiduciaries'' requiring them to act exclusively in the best 
interest of plan participants and beneficiaries. A growing chorus of 
benefit industry gurus believes that such executives and directors had 
a pre-existing fiduciary duty and responsibility to the owners of the 
business. Query: Has ERISA unintentionally imposed an incurable 
conflict of interest? That is, can any person faithfully serve the best 
interest of two conflicting masters? Plan participants may believe they 
are out of harm's way and protected, as fiduciary oversight is mandated 
by ERISA, but increasingly these fiduciaries appear to be like a 
sightless watchdog that doesn't bark.
     Fiduciary ignorance, fear, uncertainty, and doubt, which 
leads to non-fiduciary decisions and practices.
Identifying non-fiduciary practices, and their associated costs
    Decisions and/or functions that are clearly fiduciary in nature 
include proactively monitoring costs, selecting a proper number of 
efficient investments necessary to construct an appropriate portfolio, 
and operating the plan in exact accordance to its purpose--which is to 
deliver retirement income to its beneficiaries.
    Decisions and/or functions that are clearly imprudent include 
purchasing high cost funds when their identical match is available at 
perhaps less than half the cost, or turning a blind eye to obvious 
mishandling of trust assets by non-fiduciaries (i.e. the participants) 
and, at the same time, claiming for themselves protection from 
fiduciary liability under 404(c).
Fiduciary/Non-fiduciary/``The Gray Area'' (Subject to discernment)
    There are other decisions and/or functions that fall into a gray 
area. Such decisions or functions might be prudent, or they might not 
    The significance of this explanation is that some fees are 
obviously necessary and prudent. Some fees are hidden and imprudent and 
pay for excessive or unnecessary services. Finally, there are fees that 
could be improper in some plans, and acceptable in others, and it takes 
an experienced, discerning eye to recognize the differences.
Excessive is as excessive does
    The following examples show the interplay between various 
imprudent, hidden, and excessive fees as influenced by the 401(k) 
culture described above.
    Even at this time, a blatant non-fiduciary based feeding frenzy is 
taking place at the expense of American workers' 401(k) plans.
    ``The mutual fund industry is now the world's largest skimming 
operation--a $7 trillion (now $12 trillion) trough from which fund 
managers, brokers, and other insiders are steadily siphoning off an 
excessive slice of the nation's household, college, and retirement 
savings.'' \3\ ($12 trillion update added)
    Most experts agree that trust fiduciary laws are nominally default 
rules,\4\ and hence should be simple to adhere to and operate under. 
However, managing 401(k) plans is anything but simple. It's a jumbled 
mess because non-fiduciary investment sales people have infiltrated, 
and now control what was intended to be a purely fiduciary function.
    It would be simple to obtain optimal results. Then why isn't it 
    For example, the S&P 500 Index consistently outperformed 98% of 
mutual fund managers over the past three years, 97% over the past 10 
years ending October 2004, and 94% over the past 30 years.\5\
    Recent studies reveal (and many more continue to substantiate), 
that a passive 60% stock, 40% bond portfolio outperformed 90% of the 
nation's largest corporate pension plan portfolios, ``run by the 
world's best and brightest investment minds.'' \6\ The average return 
on actively managed equity mutual funds over the past 35 years trails 
the S&P by 87 basis points per year, and 105 basis points on broader 
indexes. ``Over long periods, this difference in return amounted to 
substantial differences in wealth.'' \7\ This is an unnecessary waste 
of participant's hard earned money. ``This is why most academic and 
many professional advisors recommend that the best investment strategy 
is to match the market's performance. You can do this by putting your 
money in a fund that holds all stocks in proportion to their market 
value. Since these index funds do no research and little trading, the 
costs of holding their portfolios are extremely small, some ranging as 
low as 0.10 percent a year.'' \8\
    Then why do literally hundreds of thousands of 401(k) plan 
fiduciaries do just the opposite? It's because they are ``guided'' to 
particular decisions by non-fiduciaries (i.e. brokers, registered 
representatives, insurance agents, etc.) in pursuit of compensation 
which very frequently is in the form of hidden and excessive fees.
Making Sense of It All
    Following are some of the usual hidden costs found in 401(k) plans.
Hidden Costs #1--Undisclosed Trading Costs
    The assets held in account for the benefit of participants and 
beneficiaries do not belong to them. These assets are owned by an 
``entity,'' which is the trust. The participants are entitled to future 
benefits from the trust. This is an important concept in trust 
governance. In other words, if the investments belonged to the 
participants right now, there would be no need for fiduciaries. 
Therefore, the fiduciaries are charged with making decisions for the 
future benefit of others, based on what they deem appropriate for the 
participants and beneficiaries, in a similar way a member of the House 
of Representatives makes decisions for their constituents. The decision 
is based upon what they judge to be in their constituents' best 
    ``The new prudent investor rule directs the trustee to invest based 
on risk and return objectives reasonably suited to the trust.'' \9\
    A major flaw in the 401(k) system, therefore, is allowing non-
fiduciaries (in this instance, plan participants themselves) to control 
trust assets by choosing without skill from a large array of investment 
choices, carefully presented in such a way as to generate additional 
brokerage (trading) commissions by encouraging ``active'' trading 
within participant accounts. In other words, emotional reactions of 
participants who lack investment expertise trigger undisciplined and 
imprudent investment decisions in the trust, when a simple 60/40 
portfolio described above is well within the reach of every single 
participant. The brokerage and mutual fund industries not only fully 
understand that participants are making imprudent investment decisions, 
but are counting on participant ignorance to generate revenue. This is 
a substantial and hidden cost that participants are almost universally 
unaware, and have no concept of how it is reducing the future 
retirement income they would otherwise receive. The average actively 
traded mutual fund experiences approximately 80% turnover per year, 
meaning that 80% of the underlying stocks and/or bonds are sold each 
year. It is estimated that for every 1% in turnover, there is 1% in 
added brokerage commission cost. Hence, the average mutual fund has an 
added cost of .8% (otherwise known as 80 ``basis points.'') This is the 
first hidden and unnecessary cost.
    It becomes easier to understand why so many 401(k) plans primarily 
offer (1) actively traded mutual funds, and (2) more funds than are 
necessary to construct a prudent, low cost portfolio. It also 
demonstrates rampant ignorance that exists in the fiduciary ranks--in 
plans large and small.
    ``TheStreet.com profiled a fund last year that had a 5 star rating, 
a 1% expense ratio, and 800 bps in brokerage expense.''\10\
    Reducing net returns through unnecessary and excessive brokerage 
expenses is a non-fiduciary and imprudent practice that runs counter to 
the principles set forth in ERISA, which is to secure the retirement of 
American workers. Consider the chaos that would result if Congress gave 
each citizen 15 laws to choose from. Individually, we might pick and 
choose those we deem appropriate for us and, in turn, adhere only to 
the particular laws we chose. The principle of fiduciary prudence is 
that fiduciaries make decisions for all individuals to whom they are 
responsible based upon what is in their best interest, whether they 
like it or not. As unpopular as this concept is, we must not equivocate 
on protecting participants and beneficiaries from their own ignorance, 
just as each of you protect your constituents from their ignorance on 
various matters.
    The current 401(k) culture has eroded the principles of true 
fiduciary governance through the begging, pleading, lobbying, or 
through other ways and means, we have drifted from ``protect and 
nurture their needs'' to ``give them what they want--in fact, let's 
give them even more than what they think they want.''
Hidden Costs #2--SEC Rule 28(e) ``Soft Dollar'' Revenue Sharing
    Hidden Cost #2 is symbiotic with Hidden Cost #1 above, and it 
violates fundamental fiduciary rules and significantly hurts 
participants. 28(e) Soft Dollars are generated by active trading within 
mutual funds and similar investment vehicles. Allowing ``Soft Dollars'' 
to go ``un-captured'' and credited back to the 401(k) trust is not a 
fiduciary practice, and the historical problems caused by soft dollars 
are self evident.
    Shortly after the creation of the IRA, but before the creation of 
the 401(k) as we know it, a change occurred within the brokerage and 
mutual fund industry. As part of the Securities Acts Amendments of May 
1975 (SAA '75), fixed commission rates on the purchase and sale of 
securities through brokerage firms were eliminated. The significance of 
the elimination of fixed commission rates would prove to be one of 
several core issues of debate regarding fees in retirement plans. This 
would ultimately allow brokerage firms to charge excess commissions, 
thereby creating ``at play'' revenue that actually belonged to the 
participants, which is commonly referred to as ``soft dollar'' revenue 
or ``SEC Rule 28(e)'' revenue. With hundreds of billions of securities 
trades each year, the revenue made available by SAA '75 would forever 
change the mutual fund and retirement plan industry. These soft 
dollars, coupled with the urgent need to compete in the 401(k) industry 
and the creation of the 12(b)-1 in 1980 created the ``perfect fee 
storm,'' which until now has existed with little or no notice by 
Federal regulators, plan sponsors, participants, or the general public.
    As a result of the Securities Acts Amendments of 1975, Section 
28(e) was added to the Securities Exchange Act of 1934. With fixed 
commission rates no longer the law, Section 28(e) created a safe harbor 
for brokerage firms who exercise no investment discretion as defined 
under Section 3(a)(35) of the 1934 Act to be able to charge a mutual 
fund a commission that was more than what it costs to actually execute, 
clear, and settle a securities transaction without violating the law or 
fiduciary duties. This excess commission could be used to purchase 
additional services from the brokerage firm in the form of presumably 
valuable investment research. In order to receive protection under the 
safe harbor, the mutual fund must act in good faith to ensure the 
excess commission was ``reasonable in relation to the value of 
brokerage and research services provided by the broker-dealer.'' Since 
a passive indexing approach requires no research and also consistently 
outperforms 90% of actively managed approaches that do require 
research, then what is the value of the research? The 10% that do 
outperform an indexing approach are temporarily fortuitous.\11\ If you 
follow the money, modern investment research exists so 28(e) 
commissions can be captured, not to provide consistent market returns 
to participants.
    Actively traded funds inherently have higher trading costs. In 
other words, every time a mutual fund manager buys and/or sells the 
underlying securities within the fund, the participants' return is 
decreased by the cost of those trades. Part of the reason for this lies 
in the fact that ``excess'' commissions are being charged for non-
fiduciary purposes.
    SEC rule 28(e) encourages turnover and the cost of trading because 
mutual fund managers receive revenue from the brokerage firms for 
clearing the Funds' securities trades. This explains why the 
intelligent approach so widely accepted by the world's most astute 
investing minds is thrown out the window in 401(k) plans. Brokerage and 
Mutual Fund companies work together to generate excess revenue at the 
expense of participants, because they believe they can indiscriminately 
do so, not because it is prudent, intelligent, or advisable.
    Prior to ERISA, mutual funds used any ``excess'' commission on a 
securities transaction to buy additional goods or services from their 
chosen brokerage firm. For example, if a trade costs 3.5 cents per 
share (trade execution, clearance and settlement), and the brokerage 
fixed commission was 5 cents per share, the excess 1.5 cents could 
either be used to purchase additional goods or services from the broker 
that directly benefited the account holder, or be credited back to 
their rightful owners, the account holders. Excess brokerage 
commissions (28(e) soft dollars) were handled the same way for IRAs and 
qualified plans.
    After ERISA, the practice of using such soft dollars in IRAs would 
remain the same, but with respect to participants and beneficiaries 
within a qualified 401(k) plan subject to rules of fiduciary prudence, 
a conflict clearly exists with ERISA sections 403(c)(1), 404(a)(1), 
406(a)(1)(D), 406(b)(1) and 406(b)(3).
     ERISA 403(c)(1) states that the assets of a plan ``shall 
never inure to the benefit of any employer and shall be held for the 
exclusive purposes of providing benefits to participants in the plan 
and their beneficiaries and defraying reasonable expenses of 
administering the plan.'' Significance: Using soft dollars for purposes 
other than for the exclusive purpose of providing benefits to 
participants and beneficiaries and paying operational costs of the plan 
itself is a fiduciary breach.
     ERISA 404(a)(1) states that a fiduciary must act prudently 
and solely in the interest of the participants and beneficiaries 
Significance: Using soft dollars to buy loyalty of brokerage firms, 
consultants or other parties-in-interest to the plan is a fiduciary 
     ERISA 406(a)(1)(D) states that a fiduciary shall not 
transfer to, or use by or for the benefit of a party-in-interest, any 
assets of an ERISA governed plan. Significance: Use of soft dollars 
could effectively be a transfer to a party-in interest, thereby 
creating a fiduciary breach.
    Due to the lack of oversight of 28(e) Soft Dollar Revenue in 
qualified retirement plans, the Securities and Exchange Commission was 
compelled to address the issue before the Congressional Subcommittee on 
Capital Markets, Insurance and Government Sponsored Enterprises, 
Committee on Financial Services. This occurred on June 18, 2003, 
shortly after H.R. 2420, the ``Mutual Funds Integrity and Fee 
Transparency Act of 2003'' was presented to the House of 
Representatives by Chairman Baker, Ranking Member Kanjorski and other 
members of the Subcommittee. According to the testimony of Paul F. 
Roye, Director, Division of Investment Management of the SEC, the 
Mutual Funds Integrity and Fee Transparency Act would:
     Provide investors with disclosures about ``estimated'' 
operating expenses incurred by shareholders, soft dollar arrangements, 
portfolio transaction costs, sales load break points, directed 
brokerage and revenue sharing arrangements.
     Provide investors with disclosure of information on how 
fund portfolio managers are compensated.
     Require fund advisers to submit annual reports to fund 
directors on directed brokerage and soft dollar arrangements, as well 
as on revenue sharing.
     Recognize fiduciary responsibility and obligations of fund 
directors to supervise these activities and assure that they are in the 
best interest of the fund and its shareholders.
     Require the SEC to conduct a study of soft dollar 
arrangements to assess conflicts of interest raised by these 
arrangements, and examine whether the statutory safe harbor in Section 
28(e) of the Securities Exchange Act of 1934 should be reconsidered or 
    While it is commendable that the SEC has decided to act on this 
issue, 17 years earlier the U.S. Department of Labor issued ERISA 
Technical Release 86-1 notifying the public of this very issue. The 
nature of ETR 86-1 was to ``reflect the views of the Pension and 
Welfare Benefits Administration (PWBA) with regard to `soft dollar' and 
directed commission arrangements pursuant to its responsibility to 
administer and enforce the provisions of Title I of the Employee 
Retirement Income Security Act of 1974 (ERISA).''
    An excerpt from ETR 86-1 states:
    ``It has come to the attention of PWBA that ERISA fiduciaries may 
be involved in several types of `soft-dollar' and directed commission 
arrangements which do not qualify for the `safe harbor' provided by 
Section 28(e) of the 1934 Act. In some instances, investment managers 
direct a portion of a plan's securities trades through specific broker-
dealers, who then apply a percentage of the brokerage commissions to 
pay for travel, hotel rooms and other goods and services for such 
investment managers which do not qualify as research with the meaning 
of Section 28(e). In other instances, plan sponsors who do not exercise 
investment discretion with respect to a plan direct the plan's 
securities trades to one or more broker-dealers in return for research, 
performance evaluation, and other administrative services or discounted 
commissions. The Commission (SEC) has indicated that the safe harbor of 
Section 28(e) is not available for directed brokerage transactions.''
    Subsequent SEC investigations have shown that illegal ``28(e)'' 
revenues have been used by ``non-fiduciary'' consultants to make 
certain services available to mutual funds.
    Among them:
     Conferences and other similar group meetings where the 
consultant invites both the ``client'' (i.e. a 401(k) plan sponsor/
trustees) and representatives of the mutual funds who want to sell 
their funds to the client of the consultant. In other words, the mutual 
fund pays the consultant a significant amount of money to be invited to 
meetings where the consultant's clients will be in attendance.
     Sales and marketing support to the mutual fund's staff.
     ``Objective looking'' performance reports that paint the 
mutual fund in the best light, and facilitate the sale of that fund to 
clients of the consultant.
     Other ``image enhancement'' or ``sales facilitation'' 
     Loyalty of consultant or brokerage firm.
    28(e) revenue practices hurt plan participants and their 
beneficiaries, and violate ERISA Sections 403(c)(1), 404(a)(1) and 
406(a)(1)(D). Illegal 28(e) soft dollars are the most difficult fee to 
Hidden Costs #3--Sub-Transfer Agent Revenue Sharing
    The following is a rather lengthy, but important illustration of 
the widespread practice of subsidized record keeping services through 
excess mutual fund management fees.
    Envision a meeting among three individuals. An employer with 75 
employees, wanting to design a brand new plan for their employees; a 
Registered Investment Representative; and a Record Keeper commonly 
referred to as a ``Third Party Administrator.'' After the meeting, the 
employer requests formal proposals from the Investment Representative 
and the Record Keeper. They leave the employer's office and agree to 
work together to design a plan that works for all parties. The 
Registered Representative and the Record Keeper collaborate and develop 
two proposals for the employer to consider.
    The first proposal recommends 6 mutual funds, 4 of which are 
actively traded mutual funds. As a portion/component of the Funds' 
Management Fees, the 4 actively traded mutual funds pay a .5% ``finders 
fee'' of each new dollar invested to the Registered Representative plus 
a .5% trail commission--referred to as a 12(b)-1 commission. (A more 
detailed discussion of 12(b)-1 commission will be forthcoming later in 
this testimony). The Record Keeper proposes a $4,000 base fee per year, 
plus $60 per participant per year, paid by the employer.
    When the employer does the math, he discovers that if each of his 
75 employees contributed $100 per semi-monthly pay period, the 
Investment Representative would earn $100 x .5% x 75 x 24 = $900 the 
first year, and every year thereafter, plus an additional .5% on the 
accumulating balance. This $900 doesn't seem like much, especially when 
compared to the record keeping fee $8,500 ($4,000 base fee plus $4,500 
(75 participants x $60)).

                                              SUMMARY OF PROPOSAL A
                             Cost item                                    Investment           Record keeping
Finders Fees......................................................         $900 per year                    N/A
Ongoing Commissions...............................................      $900 and growing                    N/A
Base Fees.........................................................                   N/A                 $4,000
Per Head Charges..................................................                   N/A                 $4,500

    The employer looks at the record keeping fees, squirms a little, 
and quietly questions whether the record keeper's services are really 
worth $8,500 per year. Then he requests Proposal B. Having experienced 
that reaction before, the Investment Representative and the Record 
Keeper are prepared to present something more palatable.
    The second proposal consists of 12 mutual funds, 9 of which are 
actively traded. To the employer's delight, proposal B seems much 
better. The Investment Representative's compensation remains the same, 
but the Record Keeping fee is cut by 70%! The base fee is reduced to 
$800 per year, and the per-head charge is reduced to $25.

                                              SUMMARY OF PROPOSAL B
                             Cost item                                    Investment           Record keeping
Finders Fees......................................................         $900 per year                    N/A
Ongoing Commissions...............................................      $900 and growing                    N/A
Base Fees.........................................................                   N/A                   $800
Per Head Charges..................................................                   N/A                 $1,875

    This proposal seemed like the best of both worlds. Twice as many 
mutual fund options for one-third the cost! The employer thinks 
participants will love it, and of course he loves it, too. It doesn't 
occur to the employer that he should question the economics, or whether 
there are fiduciary implications to going with one proposal vs. 
another. It seems like a no-brainer, so the decision is made to go with 
Proposal B.
    Fast forward 10 years and the employer now has 150 employees, and 
$4 million dollars in the plan. As far as the employer is concerned, 
the economics are still the same as the first day the plan was adopted. 
However, there was an element the employer didn't understand. Remember 
the reaction to the $8,500 fee for record keeping fees? The employer 
wasn't certain if that was a fair fee for services rendered. Maybe it 
was fair, and if that was the case, the employer might have reduced or 
cut-back on various optional ``elements'' of the plan to arrive at a 
fee that seemed appropriate, all services considered.
    The $2,675 in fees associated with Proposal B seemed about right. 
With the growth of the company and the plan, the fact that plan costs 
also increased went without saying. Looking back at the original 
``deal'', the employer computes the fees and costs as he thinks it 
stands today. All things remain the same except for 150 participants 
instead of 75, and there are $4 million dollars in assets.

                                   SUMMARY OF COSTS 10 YEARS LATER--PROPOSAL B
                                         [The ``believed-to-be'' costs]
                             Cost item                                    Investment           Record keeping
Finders Fees......................................................       $1,800 per year                    N/A
Ongoing Commissions...............................................       $20,000 growing                    N/A
Base Fees.........................................................                   N/A                   $800
Per Head Charges..................................................                   N/A                 $3,750

    Paying the record keeper for such an extensive array of services 
rendered might even be perceived as being a little low. The employer 
intuitively knows the record keeper is worth more than $4,550, but is 
uncertain ``how much more.'' If the record keeper needed more money, 
they would certainly ask for it, and if they don't request more they 
must be satisfied. The employer also notices the Investment 
Representative is now being paid over $20,000--and given all of the 
enrollment and investment education meetings--along with all of the 
reports, trustee meetings, and general education given to the 
fiduciaries, it might seem ``about right.''
    Luckily for the employer and the participants, the employers' niece 
happened to be a student of fiduciary prudence and retirement plan 
economics and something seemed ``fishy'' to her.
    After looking into the economics of ``Proposal B'' today, the 
employer's niece reluctantly brought the bad news. Something has gone 
terribly wrong, and the employer is stunned beyond words. Here's how 
the true economics look:

                                                 TRUE ECONOMICS
                             Cost item                                    Investment           Record keeping
Finders Fees......................................................       $1,800 per year                    N/A
Ongoing Commissions...............................................       $20,000 growing                    N/A
Base Fees.........................................................                   N/A                   $800
Per Head Charges..................................................                   N/A                $30,150

    How could the record keeper be making more money than the 
Investment Representative? Ten thousand dollars more * * * and growing!
    Remember the ``collaboration'' the Investment Representative and 
Record Keeper originally entered into? Proposal B involved the payment 
of Sub-Transfer Agent fees (Revenue Sharing from the Mutual Funds). The 
increase in funds was not an added benefit to the employer or employees 
as initially believed. Rather, it was a carefully calculated design 
element to capture a particular type of revenue sharing based upon two 
things: (1) The number of funds offered multiplied by (2) the number of 
participants with assets in those funds.
    Assume in this case 8 of the 9 actively traded mutual funds are 
being utilized by participants. Also assume that the mutual funds each 
pay $22 per participant per year. The true economics are therefore 150 
participants x $22 Sub-Transfer Agent Revenue Sharing x 8 Funds = 
$26,400. When the existing ``per head'' fee paid by the employer 
($3,750) and the base fee ($800) are added to the Revenue Sharing 
number, the new total is $26,400 + $3,750 + $800 = $30,950.
    The employer is angry for four reasons. First, he feels deceived 
because he didn't understand the true economics of the plan. Second, he 
feels his ability was impeded to prudently judge whether the services 
rendered were worth what the Record Keeper received in actual 
compensation. Third, he understands now that the ``extra'' funds had 
nothing to do with helping participants build a better portfolio. It 
had everything to do with multiplying the potential revenue sharing--
and that has not helped the participants at all. Fourth, the 
realization that the employer has allowed assets to be improperly spent 
on services with skewed economics might place him squarely in the cross 
hairs of an effective litigator.
    Such is the nature of hundreds of thousands of 401(k) and similar 
retirement plans across the United States even as you read this.
What is a Sub-Transfer Agent? (and Sub Transfer Agent Revenue Sharing?)
    A transfer agent is usually a bank or trust company (or the mutual 
fund itself) that executes, clears and settles a security buy or sell 
order, and maintains shareholder records (i.e. accounts for ``title'' 
of the ownership of the shares). When certain functions of the transfer 
agent are sub-contracted to a third party, that third party becomes a 
``sub-transfer agent.'' Within the context of this paper, a sub-
transfer agent would be one of the following entities:
    1. A third party administrator.
    2. A bank or trust company performing recordkeeping services.
    3. Some other entity tracking the number of shares held for the 
benefit of a specific participant within an individual account plan.
    Payment to these parties for this sub-contracted service has come 
to be known as ``Sub-Transfer Agent fees.'' Sub-Transfer agent fees 
exist solely to support the participant directed account culture in 
actively managed mutual funds.
    Sub-transfer agent fees are generally paid as a flat dollar, per-
participant, per fund. For example, many funds will pay a third party 
administrator $10 per participant, per fund. Other funds will pay a 
percentage of assets--such as 5 to 10 basis points. However, some funds 
pay up to $22 per participant, per fund or 35 basis points. The 
problems with sub- transfer agent fees is not how much is being paid to 
the service provider. Rather, the problem is being unaware who is 
receiving the payments, and whether or not the payments fairly 
represent the value of the service being rendered. The Department of 
Labor has made it very clear that a plan sponsor must understand the 
value and associated compensation of each individual servicing company, 
thereby making the cost of the parts more important than the cost of 
the whole.
    An estimated 100 million shareholder accounts, or approximately 40 
percent of all mutual funds, are in sub accounts at financial or record 
keeping intermediaries at this writing. Approximately $2 billion 
dollars per year is paid to third parties for sub-accounting services. 
There are potential costly and ERISA-violating problems inherent in 
omnibus accounts with underlying participant directed sub-accounts 
which are beyond the scope of this testimony.
Hidden Costs #4--Non-Fiduciary Compensation (12(b)-1 commissions)
    There are two types of 12(b)-1 fees:
    1. Sales commission 12(b)-1--paid to a registered representative 
for selling mutual funds for an individual or within a plan.
    2. Servicing 12(b)-1--paid to a person or entity who services an 
account after the sale.
    SEC Rule 12(b)-1 was enacted in 1980. It is partially responsible 
for the proliferation of mutual funds in individual account plans. 
Again, referring to the mutual fund relationship with the distribution 
medium (sales force) of the brokerage firm, it creates a conflict of 
interest between the brokerage firm and the mutual fund, thereby 
rendering each unable to devote their loyalties to the plan 
participants. It permits mutual funds to increase their internal fund 
expense ratio by up to 1% in aggregate.
    The combination of these two commissions may not exceed 1%. For 
example, the sales 12(b)-1 could be 50 basis points (.5%) and the 
service 12(b)-1 could also be 50 basis points.
    It is common to refer to both sales and servicing revenue as 
``12(b)-1'' fees, not differentiating between the two. More than half 
of all mutual funds have a 12(b)-1 feature. These commissions are 
disclosed in the prospectus, but very few plan sponsors understand 
their significance to the plan, the participants, and the trustees.
    The 12(b)-1 commissions are a concern because non-fiduciary sales 
people carefully place products with high 12(b)-1 commissions within 
401(k) plans without the full understanding of the plan sponsor or 
trustees. Conversely, a Fiduciary Investment Advisor would be obligated 
to disclose fees in writing, invoice the plan sponsor or plan for those 
stated fees, and credit any 12(b)-1 fees back to the trust. This clear 
difference in behavior and reporting shows the crisis that exists in 
the industry. Plan sponsors don't know there is a difference; mutual 
funds are simply mutual funds to them.
    Another seldom considered 12(b)-1 issue is that of unfair subsidy 
disparity. Fee subsidy disparity is often referred to by the fiduciary 
community as the ``Hidden Tax'' paid by participants with larger than 
average account balances because 12(b)-1 commissions pay for non-
fiduciary services.
    Let's compare two hypothetical plans, Plan ``A'' and Plan ``B.'' 
Let's say each has $50 million in assets, both have identical mutual 
funds and service providers, each paying 3% (1.50% in trading costs, 
and 1.50% in fund management fees). Further, assume that 40% of the 
fund management fee pays for revenue sharing arrangements (brokers, 
record keepers, insurance agents, and others), and 60% is kept by the 
fund manager. Let's also say that Plan ``A'' has 500 employees and Plan 
``B'' has 2,500 employees.
    Are costs consistent for all employees as a percentage of their 
account balances? Yes, of course. But what are the real economics? Take 
a look at the following example of a comparison between two 
hypothetical plans:

                    Fee/Cost element                                Plan A                      Plan B
Gross fund fees and commissions.........................  $1,500,000  ($50,000,000 x  $1,500,000  ($50,000,000 x
                                                                                3%)                         3%)
Revenue sharing.........................................   $300,000  (1.50% x 40% x    $300,000  (1.50% x 40% x
                                                                       $50,000,000)                $50,000,000)
Revenue Sharing borne by each participant...............             $300,000  500             $300,000  2500
                                                           participants = $600  per    participants = $120  per
                                                                        participant                 participant

    In this example, the participants of Plan ``A'' are subsidizing the 
overhead of Plan ``B.''
Hidden Costs #5--Variable Annuity Wrap Fees
    A Variable Annuity is an investment contract between a plan and an 
insurance company where (normally) a series of ongoing deposits are 
made to accumulate resources sufficient to pay a future benefit. 
Variable Annuities can be sold by insurance agents who have little or 
no formal investment or fiduciary training. Variable Annuities are 
separate vehicles that invest in mutual funds--they are not mutual 
funds in and of themselves.
    Variable annuities offer a variety of investment options that are 
typically mutual funds investing in stocks, bonds and cash. Gains on 
variable annuities are tax deferred whether held in a qualified trust 
or not, and there are costs associated with this ``built-in'' tax 
deferral. The fee associated with obtaining this tax-deferred benefit 
is an insurance component. Therefore, one must ask whether or not 
putting a variable annuity in an ERISA-governed vehicle is necessary, 
or even wise. In other words, you could buy a lower cost mutual fund 
using the inherent benefits of a 401(k) and still get the deferral of 
tax. Paying the insurance company for the tax deferral may not be 
prudent. Variable annuities generally have higher expenses than 
comparable mutual funds, and these fees are assessed in such a way that 
each component service is ``wrapped up'' into one aggregate fee. 
Accordingly, this aggregate fee is called a ``wrap'' fee. The wrap fee 
hides individual component fees and services, which are:
     Investment Management: Management fees of the mutual fund 
that is contained within the variable annuity. (Note that trading costs 
are in addition to the investment management component, and are 
extremely difficult to discover in variable annuity contracts.)
     Surrender Charges: If withdrawals are made from a variable 
annuity within a certain period of time after units are purchased 
within the annuity, the insurance company will assess a surrender 
charge. The charge is used to reimburse the insurance company for the 
commission payments they paid to a broker or insurance agent upfront. 
The surrender charge usually starts out higher, and decreases over the 
length of the surrender period.
     Mortality and Expense risk charge: This charge is equal to 
a percentage of the account value, typically 1.25% per year over the 
investment management fees--but could be more or less depending on who 
is purchasing the annuity.
     Administrative Fees: The insurer may deduct charges to 
cover record-keeping and other administrative expenses. It is common to 
see fees of $25 or $30 per year, or a percentage of each participant's 
account value, typically in the range of an additional .15% per year.
     Fees and Charges for Other Features: Stepped up death 
benefit, a guaranteed minimum income benefit, long-term care insurance 
etc. These fees are stated in the annuity contract, and are actuarially 
computed based on age, health, etc., and hence differ from participant 
to participant.
     Bonus Credits: Some insurance companies offer bonus 
credits, which is a credit back to the account of percentage of each 
purchase--e.g. 3% of each deposit. These types of accounts often have 
higher expenses, and the expenses can be larger than the credit. Bonus 
credits are generally ``purchased'' with higher surrender charges, 
longer surrender periods, higher mortality and expense risk charges.
Hidden Costs #6--Administrative ``Pass Throughs''
    An unfortunate and yet almost universally common in 401(k) plans is 
an expense borne by all participants for unnecessary services demanded 
by a vocal minority. A fiduciary is obligated to protect and treat all 
participants equally. It is a violation of ERISA's exclusive benefit 
rule that millions of participants unknowingly pay for the 
undisciplined urges of others to immediately wrest benefit from their 
retirement plans. Three examples are:
     Easy loans taken against a participant's vested balance
     Open brokerage options
     Investment ``advice'' services
    While some may argue that these plan features are available to all 
participants equally, we must not confuse matters of coverage and non-
discrimination in benefits rights and features (pursuant to IRC 
Sec. 401(a)(4)) with fiduciary prudence. Plan assets should not be used 
to pay for services that all Participants do not collectively receive 
or benefit from plan assets. In hundreds of thousands of companies 
across the U.S. there are assertive individuals, who are the vocal 
minority, that want various bells and whistles in their 401(k), and the 
unsuspecting end up having to pay for it. This subtle violation of the 
exclusive benefit rule is rampant and costly. Plans with optional 
benefits that increase the overall cost of plan operation should be 
paid for by the individual users or by the plan sponsor, not by the 
plan. These amounts vary from plan-to-plan, but they can be 
substantial, especially if the fees are ``translated'' into an asset 
based charge that goes un-examined year after year.
Hidden Costs #7--Non-Fiduciary Mish-Mash
    To wrap up this discussion, it's important to highlight a few 
remaining hidden costs. The following is not an all-inclusive list, 
because there are dozens of variations to each of these items, and even 
a few other costs that are highly complex and difficult to explain. 
These are beyond the scope of this hearing, but might be examined as 
part of a subsequent hearing. Some of the remaining fees and costs 
employers of all sizes are struggling to grasp are:
     Share class variances based upon plan size. (i.e. high 
load share classes in large plans. Common share classes include A, B, 
C, R, etc.) \12\
     Shadow Index Funds. These are basically funds that closely 
track passive indexes, but have ``actively managed'' prices. In other 
words, they are overly priced index funds, some overpriced by 200% to 
     Suspected Inter-Fund pricing discrimination. (Evidence 
that this practice is now coming to light, but this is so new that 
independent fiduciaries are still trying to grasp the full nature and 
extent of this particular issue.) \13\ This is where a mutual fund cuts 
``deals'' with preferred investors, and increases fees to non-preferred 
clients so that the total fee balances out to what is disclosed in the 
prospectus. For example, a prospectus of a two hundred million dollar 
fund might state that the fund management fee is 1% of assets. The fund 
manager then ``discriminates'' against clients 2--6 by cutting a deal 
with preferred Client 1 that reduces their fee by half.

                                                  Assets          fee
Client 1...................................      $100,000,000       .50%
Client 2...................................        20,000,000      1.10%
Client 3...................................        20,000,000      1.10%
Client 4...................................        20,000,000      1.10%
Client 5...................................        20,000,000      1.10%
Client 6...................................        20,000,000      1.10%
      Total................................      $200,000,000      1.00%

    Clients 2 through 6 are paying for the backroom ``deal'' between 
the fund manager and client 1, and will experience lower returns at the 
same time, a clear example of investment return and cost 
discrimination. Also, other suspected violations of fiduciary prudence 
are coming to light where the ``deal'' isn't with a preferred client, 
but with the Investment Representative. This has even more serious 
implications when proven to be true.
    Expert fiduciaries are still trying to get their arms around this 
issue. It's such a startling revelation that independent fiduciaries 
don't want to believe it, and hence are trying to find other reasonable 
explanations for their findings, hoping it simply isn't so. However, 
the economics of 401(k) plans are so defiant, entrenched, and arrogant, 
that it might very well be happening more often than one would like to 
think. Like Andrew Fastow, the former CFO of the complex ENRON 
``special purpose entities,'' maybe the industry thought no one would 
ever figure it out.
    There is more that can and should be shared with legislators about 
other activities in the final markets that adversely affect 
participants and beneficiaries. I hope this testimony provides 
sufficient background to assist in grasping the issues at hand and 
comprehending the necessity of diligently considering possible 
Possible Solutions
     Require full disclosure of all financial service provider 
costs and expenses. Create stiff monetary sanctions for any person, 
entity, or institution to withhold information from named fiduciaries 
for any qualified plan. This would require full transparency of all 
service provider activities and costs. It would enable fiduciaries to 
better understand the basis for their decisions regarding plan 
operations and investments. With improved understanding, the retirement 
income security of millions of Americans would be enhanced.
     Require fiduciaries to itemize any and all fees and 
expenses extracted from plan assets at any level, including trading 
commissions, spreads, management fees, soft dollar arrangements, 
finders fees, transfer agent fees, and other expenses, and to disclose 
those directly to participants on the Summary Annual Report. This will 
demonstrate to participants that fiduciaries are aware of the costs the 
plan is bearing, and that they are taking responsibility for those 
     Hold all individuals or companies who are paid from plan 
assets to a fiduciary standard. This includes brokers, insurance 
agents, record keepers, actuaries, and others. Those individuals or 
professionals unwilling to assume fiduciary responsibility could 
negotiate payments directly from plan sponsors.
     Require all mutual funds held in a qualified trust (within 
the meaning of Internal Revenue Code section 501(a)) to be ``revenue 
sharing free'' which would include barring 28(e) soft dollars, 12(b)-1 
marketing or servicing commissions, and sub transfer agent fees. This 
would force the industry to price services based upon what 
knowledgeable fiduciaries determine to be reasonable and appropriate 
and are willing to bear.
     Eliminate Department of Labor Regulation 404(c). Plan 
sponsors and service providers have hidden behind this regulatory 
allowance as a perceived shield from fiduciary liability while ignoring 
the plight of workers who desperately need guidance and oversight for 
their investments. Rule 404(c) is non-fiduciary at its core, and it 
encourages other decisions that are not in the interests of securing 
the retirement incomes of American workers.
    Thank you for the invitation to testify before this committee. It 
is my earnest belief that the workers of America deserve proper 
protections for the hard earned savings they have set aside in their 
401(k) plans--protections which they are denied in the current state of 
the industry. I also believe that the problems with the industry can be 
solved rather simply, though it will require confronting powerful 
economic interests that support the current system. But America's 
workers deserve better than they have received to date from the 
providers of financial services. Finally, thank you for beginning the 
daunting task of tackling this very important and relevant social issue 
that will affect millions in the coming decade. I look forward to 
elaborating on this written testimony in more detail during the 
question and answer period.
    \1\ Randy Cloud, founder of CNMLLC. Accredited Investment Fiduciary 
Auditor and a member of the Revere Coalition, a non-profit fiduciary 
advocacy group of independent investment fiduciaries.
    \2\ Stock bonus plans may also have a 401(k) feature.
    \3\ Statement by Senate Governmental Affairs Subcommittee on 
Financial Management, The Budget, and International Security. November 
3, 2003, Senator Peter G. Fitzgerald (R- IL)
    \4\ http://papers.ssrn.com/abstract--id=868761
    \5\ http://www.ifa.com/Book/Book--pdf/overview.pdf--``Step 5''
    \6\ Dimensional Fund Advisors, Basic 60/40 Balanced Strategy vs. 
Company Plans 1987-2003. FutureMetrics, 2004.
    \7\ http://finance.yahoo.com/expert/article/futureinvest/6953--
``The Truth About Money Management''
    \8\ Ibid--``The Birth of Indexing''
    \9\ http://papers.ssrn.com/abstract--id=868761 page 2
    \10\ ``Fee Forensics, The impact of brokerage expense and trade 
execution in mutual fund portfolios.'' 2005 Annual Conference of the 
Center for Fiduciary Studies. Santa Fe, New Mexico.
    \11\ http://www.efficientfrontier.com/ef/997/tough.htm
    \12\ http://www.nasd.com/InvestorInformation/InvestorAlerts/
    \13\ The following is a startling quote from an actual Independent 
Fiduciary fee review: ``We find it noteworthy that the funds in the 
Plan are paying out more than half of the revenue they receive for 
`investment management'. In fact, one fund (fund name deleted) is 
paying out 150% of the revenue that it discloses by prospectus. Several 
other funds (mostly name deleted / name deleted funds) pay out more 
than 70% of their receipts. Obviously, this indicates that they may be 
making up their lost revenues in some other manner. We spot checked the 
SAIs of a couple of the Plan's funds and found hidden expenses in 
excess of .50% for transaction expenses. Some portion of this money 
goes back to the manager in one form or another (research services, 
commission rebates, etc.). We estimate that the true investment and 
recordkeeping cost of the plan is significantly greater than the .94% 
that is revealed by the basic plan expense ratios.''
    Chairman Miller. Mr. Chambers?


    Mr. Chambers. Good morning, Chairman Miller, Ranking Member 
McKeon, members of the committee. My name is Robert Chambers, 
and I am a partner in the Charlotte, North Carolina-based, law 
firm of Helms, Mulliss & Wicker. As was noted earlier, I am 
also the chairman of board of the American Benefits Council, on 
whose behalf I am testifying today.
    The council very much appreciates the opportunity to 
present testimony with respect to 401(k) plan fees. Our goal, 
like yours, is that the 401(k) system remains fair and 
equitable, that it functions in a transparent manner, and that 
it provide meaningful benefits at a fair price.
    Our members have been successful in obtaining fee 
information and using it to sponsor less expensive and more 
efficient 401(k) programs, and yet, at the same time, we think 
that there is room for improvement through more universal 
disclosure of both fee and other information to both 
fiduciaries and to plan participants.
    There are three pieces to the fee disclosure puzzle that we 
will be discussing today: one, disclosure by service providers 
to employers and other fiduciaries; two, disclosure by those 
fiduciaries to participants; and, three, disclosure by the 
fiduciaries to the government.
    Now, this comports with the GAO's recommendations in its 
2006 report, as has previously been mentioned, and with the 
three-part project that the Department of Labor is currently 
pursuing. Admittedly, we have some concerns with some of the 
details in the department's proposals, but we absolutely agree 
with their general approach.
    Now, I would like to take the rest of my time to raise five 
points that we think, at the council, bear consideration this 
    First, the 401(k) plan system in the United States is 
voluntary. It depends on the willingness of employers to offer 
plans and the willingness of employees to use them. Whatever 
fee disclosure reform efforts evolve, they must not undermine 
these basic building blocks.
    If a new regiment is overly complicated, overly costly, 
some employers will drop their plans. Others will comply and 
pass the costs onto participants, either in the form of plan 
expenses, or perhaps reduced employer contributions.
    Further, and perhaps most important, many employees will be 
confused by the overemphasis on fees. Compared to equally 
valuable investment consideration, such as diversification, 
actual investment performance, and risk factors, and they will 
either make unbalanced investment decisions or, even worse, a 
decision not to participate at all.
    Investment education is based on balance, and neither 
Congress, the Department of Labor, nor plan fiduciaries should 
counteract that concept through a disproportionate focus on 
plan fees.
    Second, every new feature that is added to a 401(k) plan 
adds new costs. There are mandatory bells and whistles, such as 
the benefit statement rules that are new, and permissive bells 
and whistles, such as automatic enrollment. But they are all 
bells and whistles; they have all been adopted by Congress; and 
they all cost money to administer.
    Additional fee disclosure will also result in additional 
cost. Therefore, we must carefully measure the value of what 
may be gained against the cost of the annual disclosure. Let's 
make sure that our efforts to reduce costs do not, in the end, 
actually reduce savings.
    Third, in our system of commerce, it is the quality and 
features of a product or service that permit one manufacturer 
or service provider to charge more than a competitor. Some cars 
cost more than others, as do computers, and, unfortunately, my 
    Similarly, 401(k) plan fees should not be evaluated 
independently from the product or service that is provided. 
Every participant would be willing to pay higher fees if the 
total net return on the investment were increased. Enhanced 
disclosure will enable participants to determine whether the 
quality of the product or the quality of the provider warrants 
it cost. The two are inextricably tied to one another.
    Fourth, we acknowledge that fee levels differ among differ 
plans, just like cable TV service. Some people want only basic 
service; some employers want to provide only a basic 401(k) 
plan. But other folks want hundreds of channels, providing, 
they expect, an even wider spectrum of entertainment. And many 
employers want to provide a similarly broad span of retirement 
plan features for their participants.
    More bells and whistles, more costs. Enhanced disclosure 
will help participants to make decisions among the choices 
    It is also true that many smaller employers pay higher 
401(k) plan fees. This is usually attributable to fewer lives 
over which to amortize fixed costs. We believe that increased 
disclosure will exert downward pressure on fee levels in the 
    Fifth, and finally, some maintain that revenue-sharing is 
wrong and should be prohibited. People with this view, we 
think, misunderstand how the 401(k) system works. They also 
probably think that Toyota manufactures cars. It does not. It 
assembles cars.
    No one expects Toyota to manufacture all of the glass, all 
of the seats, all of the computer components for its vehicles. 
They subcontract. And revenue-sharing in the 401(k) context is 
simply a way of paying for subcontracting.
    One service provider delegates a function to another, who 
is able to perform the function more efficiently and at less 
cost. Revenue-sharing reduces the overall cost of the plan for 
both employers and employees.
    So, in conclusion, we are very supportive of enhanced 
disclosure of plan fees, but fee disclosure must be addressed 
in a way that does not overemphasize fees relative to other 
factors in the investment decisionmaking process, nor should it 
undermine confidence in the retirement system, or create new 
costs that, in turn, could decrease retirement benefits.
    I would be happy to answer any questions that you may have.
    [The statement of Mr. Chambers follows:]

Prepared Statement of Robert Chambers, Esq., Partner, Helms, Mulliss & 
           Wicker, PLLC; Chairman, American Benefits Council

    My name is Robert G. Chambers and I am a partner in the Charlotte, 
North Carolina law firm of Helms Mulliss & Wicker. I have advised 
clients with respect to 401(k) plan issues since 401(k) was added to 
the Internal Revenue Code in 1978. In that regard, my clients have 
included both major employers that sponsor 401(k) plans as well as 
national financial institutions that provide services to 401(k) plans.
    I am also chair of the board of the American Benefits Council 
(``Council'') on whose behalf I am testifying today. The Council's 
members are primarily major U.S. employers that provide employee 
benefits to active and retired workers and that do business in most if 
not all states. The Council's membership also includes organizations 
that provide services to employers of all sizes regarding their 
employee benefit programs. Collectively, the Council's members either 
directly sponsor or provide services to retirement and health benefit 
plans covering more than 100 million Americans.
    The Council very much appreciates the opportunity to present 
testimony with respect to 401(k) plan fees. With the decline of the 
defined benefit plan system, 401(k) plans have become the primary 
retirement plan for millions of Americans. Accordingly, it is more 
important than ever for all of us to take appropriate steps to ensure 
that 401(k) plans provide those Americans with retirement security. In 
that regard, our goal is an effective and fair 401(k) system that 
functions in a transparent manner and provides meaningful benefits at a 
fair price in terms of fees.
We Support Enhanced Disclosure And Reporting Requirements
    With respect to 401(k) plan fees, we believe that this Committee 
would be pleased by what our member companies are doing. Our members--
both plan sponsors and service providers--report to us that plan 
fiduciaries are taking extensive steps to ensure that fee levels are 
fair and reasonable for their participants. Plan fiduciaries are asking 
hard questions regarding the various plan services and fees, and the 
fiduciaries are obtaining answers that give them the tools to negotiate 
effectively for lower fees and to provide meaningful information to 
participants. In the case of small plans with less bargaining power, 
plan fiduciaries are using additional fee information to shop more 
effectively for service providers.
    Are there exceptions to this rosy picture? Of course there are. No 
system functions perfectly. So we need to strive to make the system 
even better. How can we achieve those improvements? The answer is 
conceptually simple: through even more universal disclosure of 
meaningful information. We need to ensure that all plan fiduciaries and 
service providers follow the practices we are hearing about from our 
members. Those practices include disclosure to plan fiduciaries of 
direct and indirect fees that service providers receive from the plan 
or from unrelated third parties. Those practices also include clear, 
meaningful disclosure to participants.
    In this regard, we commend the Department of Labor and the 
Government Accountability Office (``GAO''). The Department of Labor has 
been working on a three-part project to enhance transparency that is 
conceptually the same as the enhanced regime we are recommending. This 
three-part approach is very similar to the recommendations made by GAO. 
One part would require the type of disclosure by service providers to 
plan fiduciaries that I refer to above. A second part would require 
clear, meaningful disclosure to participants. And a third part would 
require plans to report fee information to the Department. We have 
concerns regarding certain specific points with respect to the 
Department's proposals, but conceptually we are in agreement with the 
general approach. We look forward to a constructive dialogue with the 
Department as its proposals move forward.
    As described in its letter to GAO regarding plan fees, the 
Department of Labor has already taken a number of steps to improve 
awareness and understanding with respect to plan fees. The Department 
makes available on its website important materials designed to help 
participants and plan fiduciaries understand plan fees. These materials 
include ``A Look at 401(k) Plan Fees for Employees'', which is designed 
to assist participants in selecting investment options. For employers 
and other plan fiduciaries, the Department makes available 
``Understanding Retirement Plan Fees and Expenses'', ``Tips for 
Selecting and Monitoring Service Providers for Your Employee Benefit 
Plan'', and ``Selecting and Monitoring Pension Consultants--Tips for 
Plan Fiduciaries''. In addition, the Department makes available a model 
form--called the ``401(k) Plan Fee Disclosure Form''--that is designed 
to facilitate the disclosure of plan fees by service providers to plan 
fiduciaries and the comparison of these fees. Finally, the Department 
has been conducting educational programs across the country that are 
designed to educate plan fiduciaries about their duties.
    In short, we believe that the Department of Labor and GAO are 
making, and have been making, important contributions to improving the 
401(k) plan system. In this regard, we are also proud of our own 
efforts to improve fee disclosure, which include working in a 
constructive manner with the Department to help it improve disclosure 
and transparency. For example, recently, a group of associations 
submitted to the Department of Labor an extensive list of fee and 
expense data elements that plan sponsors can use to discuss fees 
effectively with their service providers. (The associations were the 
American Benefits Council, the Investment Company Institute, the 
American Council of Life Insurers, the American Bankers Association, 
and the Securities Industry Association (now the Securities Industry 
and Financial Markets Association).) We view disclosure enhancement as 
a critical part of our mission to strengthen the 401(k) plan system and 
we are committed to continuing to offer our help to this Committee, 
other Committees, and the agencies.
Addressing Concerns And Questions
    So far, I have been talking about positive things that can be done 
to improve the 401(k) plan system. Now I would like to touch on 
concerns that I know are shared by this Committee and answer some 
questions that have been raised.
We Must Not Undermine The Voluntary System
    The success of the 401(k) plan system is dependent on many things, 
including very notably the willingness of employers to offer these 
plans and the willingness of employees to participate in the plans. It 
is critical that any reform efforts not inadvertently undermine these 
key building blocks of our system. Clear, meaningful disclosure is 
needed; overly complicated and burdensome disclosures would only push 
employers and service providers away from the 401(k) plan system. In 
particular, burdensome rules would be yet another powerful disincentive 
for small employers to maintain plans. Overly complicated disclosure 
would also confuse rather than inform participants; participants need 
clear meaningful information that is relevant to their decision-making.
    In addition, employee confidence is critical to their participation 
in the system. If the huge number of employees participating in well-
run efficient 401(k) plans hear only about the 401(k) plan problems and 
do not hear about the strengths of the system, their confidence will be 
eroded, their participation will decline, and their retirement security 
will be undermined.
We Must Not Inadvertently Increase Fees In The Effort To Reduce Them
    Every new requirement imposed on the 401(k) plan system has a cost. 
And generally it is participants who bear that cost. So it would be 
unfortunate and counterproductive if a plethora of new complicated 
rules are added in an effort to reduce costs, but the expense of 
administering those new rules actually ends up adding to those costs. 
The Department of Labor has explicitly raised this exact concern. In 
its letter to GAO regarding the GAO plan fee report, the Department 
noted that its own fee disclosure project must be designed ``without 
imposing undue compliance costs, given that any such costs are likely 
to be charged against the individual accounts of participants and 
affect their retirement savings.''
    In this regard, it is important to recognize a key point noted in 
the GAO report. In the course of numerous plan fee investigations 
conducted by the Department of Labor in the late 1990's, no ERISA 
violations were found with respect to 401(k) plan fees. Moreover, the 
Department of Labor receives enforcement referrals from various 
entities, such as federal and state agencies. The GAO report notes that 
``only one of the referrals that the [Department of Labor] has closed 
over the past 5 years was directly related to fees'' (emphasis added). 
In the context of these facts, imposing burdensome new rules and costs 
to be borne by participants would be even less justified.
Fees Can Only Be Evaluated In The Context Of The Services They Pay For
    Another critical point to bear in mind is that we must not examine 
fee amounts out of context. Any specific fee can only be effectively 
evaluated in the context of the quality of the service or product that 
is being paid for. For example, some actively managed investment 
options may logically have higher than average expenses, but it is the 
net performance of the option that is critical to retirement plan 
sponsors and participants, not the fee component in isolation. We must 
avoid studying fees in a vacuum. Fees are very important, but they are 
only one component of performance; with respect to investments, other 
key components include minimization of risk, diversification, relative 
peer group performance, quality of the investment organization, and, of 
course, investment return. Our objective should be excellent 
performance and service at a fair price.
    Another example of this point is that increased fees generally 
reflect increased services. In the past several decades, there has been 
enormous progress in the development of services and products available 
to defined contribution plans (``DC plans'') such as 401(k) plans. For 
example, many years ago, plan assets generally were valued once per 
quarter--or even once per year--so that employees' accounts were 
generally not valued at the current market value. Participants 
generally were not permitted to invest their assets in accordance with 
their own objectives; the plan fiduciary generally invested all plan 
assets together. Today, 401(k) plans generally value plan investments 
on a daily basis, and permit participants to make investment exchanges 
frequently (often on a daily basis) to achieve their own objectives. 
Other new services include, for example, internet access and voice 
response systems, on-line distribution and loan modeling, on-line 
calculators for comparing deferral options, and investment advice and/
or education services.
    In addition, the legal environment for DC plans used to be simpler, 
with far fewer legal requirements and design options. New legal 
requirements or options can require significant systems enhancements. 
For example, system modifications were needed to address catch-up 
contributions, automatic rollovers of distributions between $1,000 and 
$5,000, Roth 401(k) options, redemption fees and required holding 
periods with respect to plan investment options, employer stock 
diversification requirements, default investment notices, automatic 
enrollment, and new benefit statement rules. Today, 401(k) plans have 
become the dominant retirement vehicle for millions of American 
workers. With this change has come the need to help participants 
adequately plan for their retirement. Service providers have responded 
by developing investment advice offerings, retirement planning and 
education, programs to increase employee participation in plans, and 
plan distribution options that address a participant's risk of 
outliving his or her retirement savings.
    Naturally, the new services and products and the needed systems 
modifications have a cost. In this regard, we also want to emphasize 
that the disclosure rules need to be flexible enough to take into 
account the ever evolving 401(k) plan service market. For example, the 
rules need to be consistent with the current trend toward reducing the 
size of the plan investment menu as well as the trend toward offering a 
brokerage account option.
    On a related point, we see enhanced plan fee disclosure as another 
important step with respect to participant education. And we look 
forward to working with this Committee on further participant education 
Why Do Fee Levels Differ So Much Among Different Plans?
    Different workforces need different services. Accordingly, the 
401(k) plan market has attracted a number of different service 
providers that have developed numerous service options for plans, often 
with different fee structures and different services available for 
separate fees. This structure avoids forcing plans to pay for services 
that they do not want or use, and increases the options available to 
plan sponsors wishing to find providers and services that meet their 
and their employees' unique needs.
    Concerns have been raised about the higher level of fees for 
smaller plans. Many plan fees vary only slightly (if at all) based on 
the number of participants in the plan. Accordingly, on a per-
participant basis, plan costs can be much higher for small plans than 
for large plans. On a similar point, many costs do not vary with the 
size of a participant's account, so plans with small accounts will 
often pay much higher fees--on a percentage of assets basis--than plans 
with large accounts. These effects are most often a function of the 
nature of the services rendered: for example, plans must meet the same 
regulatory requirements without regard to whether a plan has 100 
participants or 100,000 participants, and without regard to whether the 
average account size is $5,000 or $50,000.
Who Pays DC Plan Fees?
    By law, the employer must pay certain fees, such as the cost of 
designing a plan. But there are a wide range of fees that are permitted 
to be paid by the plan and its participants, such as fees for 
investments (which generally constitute the vast majority of a plan's 
total fees), recordkeeping, trustee services, participant 
communications, investment advice or education, plan loans, compliance 
testing, and plan audits. Many employers voluntarily pay for certain 
expenses that could be charged to the plan and its participants, such 
as recordkeeping, administrative, auditing, and certain legal expenses. 
On the other hand, investment expenses, such as expenses of a 
particular mutual fund or other investment option, are generally borne 
by the participant whose account is invested in the fund.
Why Does One Service Provider Sometimes Receive Fees From Another 
        Service Provider? Is This ``Revenue Sharing''? Is This A 
        Problem Area?
    Some maintain that ``revenue sharing'' is wrong and should be 
prohibited. That view reflects a misunderstanding of how the 401(k) 
plan system works. Let me explain.
    It is not uncommon, for example, for mutual funds or other 
investment options to pay other plan service providers for services 
needed by the funds. For example, assume that participants of a plan 
invest some of their assets in Mutual Fund A. If these were retail 
investors in Mutual Fund A, Fund A would need to: maintain separate 
accounts for each investor; provide a means for investors to interact 
with Fund A (e.g., internet access, voice response systems, telephone 
service representatives); make certain that investors receive 
statements, investment confirmations, and any statutory notices; and 
prepare the appropriate tax reporting for any distributions. When a 
participant invests in Fund A through a retirement plan, the plan's 
recordkeeper generally assumes these responsibilities and bears the 
cost of performing them. It is not uncommon for Fund A to pay the 
plan's recordkeeper for performing the services that the fund would 
otherwise have to perform in the retail environment.
    Such ``inter-service provider'' fees arise because different 
service providers cooperate in providing a total service package to a 
plan. ``Revenue sharing'' is the term often used to described these 
types of inter-service provider fees. In fact, fund companies typically 
designate a portion of their overall expense ratio as ``shareholder 
servicing fees'', and it is this expense stream that is typically used 
to pay other providers.
    There is nothing inherently problematic regarding inter-service 
provider fees and the current-law prohibited transaction rules preclude 
inter-service provider arrangements that would create conflicts of 
interest. For example, assume that a plan pays Mutual Fund A $100 for 
investment services and the plan pays unrelated Service Provider B $50 
for recordkeeping services. Assume further that Mutual Fund A pays 
Service Provider B $10 to provide shareholder services so that A 
receives $90 net and B receives a total of $60. Assume further that B 
discloses the receipt of the extra $10 to the plan fiduciary so that 
the plan fiduciary can evaluate the fee and the relationship between 
Mutual Fund A and Service Provider B. If $100 is a fair price for 
investment services, why does it matter whether A performs shareholder 
servicing itself or subcontracts with Service Provider B to perform 
those services? In other words, if Mutual Fund A performed the services 
itself, the cost to the plan would be the same $150, but A would keep 
the full $100, instead of paying $10 of its $100 fee to B. And if $50 
is a fair price for recordkeeping services provided to the plan, why 
does it matter if B receives an additional $10 for services rendered to 
A? This example illustrates how an efficient subcontracting 
relationship works among service providers.
    We are not suggesting that disclosure of the inter-service provider 
fees is not important. On the contrary, as discussed previously, we are 
very supportive of such disclosure. But the existence of these 
arrangements is not indicative of an inherent problem or a sign that 
401(k) participants are paying excessive fees. If fully disclosed, 
these subcontracting arrangements can, on the contrary, be quite 
efficient and the current-law prohibited transaction rules are already 
in place to preclude conflicts of interest.
Are Plan Fees Too High?
    Competition among investment options and service providers is 
intense, which exerts downward pressure on fee levels. For example, as 
noted above, investment expenses are generally the largest plan 
expense. These expenses are reviewed in the context of reviewing the 
performance of investment options. Plans routinely review such 
performance: a 2006 survey by the Profit Sharing/401(k) Council of 
America indicates that 62% of plans review plan investments at least 
quarterly and substantially all plans conduct such a review at least 
    In fact, plan investment fees are much lower than fees outside the 
context of plans. For example, a 2006 study by the Investment Company 
Institute found that in 2005 the average asset-weighted expense ratio 
for 401(k) plans investing in stock mutual funds was .76%, compared to 
a .91% average for all stock mutual funds.
    We are very supportive of enhanced disclosure of plan fees. But fee 
disclosure must be addressed in a way that does not undermine 
participant confidence in the retirement system and does not create new 
costs that have the counterproductive effect of increasing fees borne 
by participants. We are committed to working with the government to 
make improvements in the fee disclosure area, including reporting to 
the Department of Labor. We believe that the best approach to the fee 
issue is through simple, clear disclosures that enable plan sponsors 
and participants to understand and compare fees in the context of the 
services and benefits being offered under the plan.
    Chairman Miller. Thank you.
    Mr. Butler?

                         DYNAMICS CORP.

    Mr. Butler. Chairman Miller, Congressman McKeon and members 
of the committee, my name is Steve Butler. I am the founder and 
president of the Pension Administration Firm in Pleasant Hill, 
    My company is one of the largest independent administration 
firms in Northern California, and we have operated well over a 
thousand retirement plans over the past 30 years.
    I have written two books on the subject. The first was 
``The Decisionmaker's Guide to 401(k) Plans.'' The second was 
entitled ``401(k) Today.'' Both books identified hidden costs 
and offered a formula for making an effective comparison 
between the total costs of different vendors and vendor 
    This led to some national publicity focused on what we 
called the Butler Index. This is an index of total costs, 
employee and employer, on a same plan, which was then the 
subject of a New York Times article. The article compared about 
a dozen major vendors in the 401(k) industry, and the results 
were shocking. Money magazine then wrote a feature article 
based on the Butler Index.
    A persistent lack of disclosure leads many plan 
decisionmakers to purchase 401(k) plans that careful analysis 
of costs would show to be a poor value for participants.
    A number of academic and industry studies show that just an 
extra 1 percent of assets charged to a plan will reduce 
retirement account balances by roughly 20 percent over a 30-
year period. This means that someone retiring will have 80 
percent of what they otherwise would have had, if fees had been 
reasonable and competitive.
    The need for full disclosure of 401(k) fees should be as 
obvious as the reasons for any consumer protection laws. 
Throughout the history of these plans, a subset of the 
financial services industry has advertised free 401(k) bundle 
services to sponsoring employers, while the actual costs were 
billed to plan participants. And if costs were disclosed at 
all, a breakdown of these costs has not been offered to those 
    In many cases, they were not disclosed to or fully 
understood by the company decisionmakers. To date, the 
Department of Labor has still not required bundled 401(k) 
vendors to fully disclose all the real fees associated with 
these plans.
    Today, American workers have what I estimate to be $3 
trillion in 401(k) plans. To pay for the record-keeping and 
money management services, they are paying somewhere between 1 
percent and 2 percent, $30 billion to $60 billion a year. And, 
of course, that will only increase.
    Charges for these basic functions can differ by as much as 
600 percent for essentially the same range of services from 
different providers. This says that, while some plan 
participants are receiving good value, others are being grossly 
    By comparison in the automobile industry, there is the 
manufacturer suggested retail price, commonly known as the 
sticker price, a legal requirement that the price be emblazoned 
on the window of every car sold in this country, with the 
component costs of each option listed separately.
    There is nothing that should stand in the way of an 
equivalent, simple, and elegant solution to a problem that is 
otherwise costing American retirement savers as much as 20 
percent of their ultimate retirement nest egg.
    The approach of the Butler Index was to identify and 
breakdown all costs of either a bundled plan or combination of 
vendors. It was not rocket science. Anyone smart enough to 
operate a 401(k) plan today is smart enough to be able to go 
one step further, to identify and disclose the fees it is 
charging and what those fees are for.
    Anyone asking for an exemption from these disclosure 
requirements because they say it can't be done is insulting our 
intelligence. Are they really trying to say that they have no 
way of determining the extent to which they are making a profit 
on a 401(k) plan client?
    Any 401(k) is better than no 401(k), even if it an 
expensive one. However, company owners and managers owe it to 
themselves and their employees to make informed decisions about 
the plans they purchase on behalf of their fellow employees. In 
fact, the failure of corporate plan sponsors to have adequate 
disclosure of 401(k) fees and a breakdown of what those fees 
are for has been the subject of recent class-action lawsuits 
brought by participants, alleging that the plan sponsors 
breached their fiduciary duties under ERISA.
    Full disclosure of 401(k) plan fees to corporate plan 
sponsors and participants will allow for cost comparisons. Give 
the number of players in the 401(k) marketplace, this will 
create competition, ultimately leading to reduced costs, to the 
benefit of participants.
    In the absence of full disclosure, we see the equivalent of 
the fog of war. The battle for extremely valuable retirement 
plan money is so intense that the industry cannot resist any 
steps that enhance the perceived value of their product. The 
simplest of these enhancements has been to bury the total cost 
and fees charged to participants and then fail to disclose 
    As I see it, this is the problem that needs to be addressed 
with disclosure legislation and/or appropriately crafted 
Department of Labor regulations.
    Thank you.
    [The statement of Mr. Butler follows:]

    Prepared Statement of Stephen J. Butler, President and Founder,
                         Pension Dynamics Corp.

A Brief History
    The 401(k) phenomenon is an accident in legislative history that 
has changed the face of America's retirement system. Voluntary pre-tax 
contributions from employees have generated substantial financial 
resources that provide a comfortable retirement for many. Considering 
the average American employee, early projections indicated that these 
plans would generate roughly five times the asset value at retirement 
than would have been received from the continuation of what was then a 
combination of qualified profit sharing, money purchase and defined 
benefit plans. Current statistics for the average employee who has been 
a participant for at least twenty years (and who is in their early 
60's) support this original projection. The $3 trillion now accumulated 
in 401(k) plans offers a testimonial to their success.
    The fact that pension laws have evolved to provide what amount to 
``portable'' pension plans is critical in a country where the average 
employee changes jobs every seven years. The Bureau of Labor Statistics 
recently determined that the average employee born between 1957 and 
1964 has had 10.5 different jobs between ages 18 and 40. Twenty-one 
percent of this group have had 15 jobs. Only fifteen percent have had 
fewer than four jobs. Those with college degrees had no better 
statistics regarding job stability than those without degrees.
    To the extent that the traditional retirement plan system (that 
which preceded the 401(k) era) failed to meet expectations, its failure 
was largely attributable to the practical reality of employee turnover. 
Traditional pension benefits were designed to create a form of ``golden 
handcuffs'' with vesting schedules that rewarded only those employees 
who remained with a company long enough to become vested in their 
retirement benefits. In the early '70's, this could have required as 
much as ten years of service. A direct quote from President Reagan at 
the time was that he wanted to create ``portable pension programs.'' 
Over 70% of working Americans work for companies having less than 100 
employees. A large percentage of these employees work for companies 
with less than 25 employees. In the past, small, relatively unstable 
companies rarely offered traditional retirement plans when employer 
contributions were the only source of funds. Today, many offer some 
variation of a 401(k) plan or the small-company equivalent in the form 
of SIMPLE 401(k)'s.
    The complicated laws requiring 401(k) plans to pass non-
discrimination tests has compelled company owners and highly-
compensated managers to spend time and money promoting plans to all 
rank and file employees. Without substantial contribution percentages 
from these non-highly compensated people, the managers were limited to 
contribution amounts below the legal maximums. This has prompted 
management to do everything in their power to promote the plans. 
Matching contributions, company discretionary contributions, employee 
meetings, individual financial advice and careful selection of 
investments are all a part of this promotional effort leading to the 
success of these plans.
Cost to Participants in General
    The costs to 401(k) participants struggling to save for retirement 
is a detriment that has marred what would otherwise have been the 
unqualified success of the 401(k) phenomenon. Excessive fees, just over 
the past twenty years, have reduced participant account balances by an 
average of 15%. On a projected basis, excessive fees charged to 
participants will have reduced retirement ``nest-eggs'' by 20% 
according to a wide variety of organizations conducting research on the 
Understanding the Fundamentals of 401(k) Costs
    Fees taken from plan assets to pay for administration and/or money 
management are paid with funds that could otherwise be earning and 
compounding on a tax-deferred basis. The ``Magic of Compound Interest'' 
works against employees to dramatically magnify the loss of these 
missing dollars. The business term for this condition is ``opportunity 
cost''--the calculated cost in dollars of a lost opportunity.
    The best illustration of the cost of excessive fees is to project a 
flow of 401(k) contributions over time at percentage returns that 
reflect the difference of 1% (a typical amount of an ``excessive 
fee.'') Choosing $10,000 as an employee contribution amount is 
reasonable considering that we are looking well into the future. The 
median income today is $71,000 and the average contribution amount is 
6-7%. In many cases, both members of a married couple are contributing, 
so $10,000 per year is not unreasonable. The returns for the American 
stock market have averaged 10% per year over a long historical period.

                                                                   Account value   Account value   Account value
                    Percentage annual return                         10 years        20 years        30 years
10%.............................................................         171,178         641,491       1,925,836
9%..............................................................         162,568         566,549       1,570,441
Cost of 1% fee..................................................           8,610          74,942         355,395

    For the 20-year period through the 1980's and 1990's, the stock 
market averaged a 16% rate of return. Looking at what might be higher 
underlying rates of return going forward, the opportunity cost of the 
missing 1% is much higher. By 2000, many employees in expensive plans 
who had been participating for twenty years effectively paid the 
following amounts in opportunity costs as a result of high fees during 
that 20-year period.

                                                                   Account value   Account value   Account value
                    Percentage annual return                         10 years        20 years        30 years
15%.............................................................         232,057       1,279,641       6,008,782
14%.............................................................         215,656       1,079,734       4,541,874
Cost of 1% fee..................................................          16,401         199,907       1,466,908

    After twenty years, this illustrates the actual cost for what might 
have been a single employee contributing $10,000 a year (or two people 
contributing $5,000 each) in the twenty years ending in 2000. Multiply 
these single-participant detrimental effects times the $3 trillion now 
in 401(k) plans and we can understand why the fee issue is critical.
    Stop and recall for a moment the ``Rule of 72'' which states that 
money earning 7.2% doubles every ten years, and money earning 10% 
doubles every 7.2 years. Today's $3 trillion can be reasonably expected 
to double twice to $12 trillion in the next 14 years, thanks to 
reasonable investment returns and annual contributions. Excessive, 
undisclosed fees scheduled to cost participants as much as $2 trillion 
dollars is the problem we are here to try to correct.
Where the Abuse Begins
    The greatest abuses are seen in the small-company environment where 
the average company owner is not a mutual fund or retirement plan 
expert. Large companies, by comparison, have reasonably sophisticated 
decision-makers. Xerox, for example, operated its own mutual funds and 
charged participants just 3/100ths of one percent per year. 
Participants in many small-company plans can be paying as much as 3 
full percentage points--exactly 100 times more for the same level of 
    Technically, all fees charged to participants are disclosed today 
to plan sponsor decision-makers, but not all fees are disclosed to 
participants. In the insurance industry, for example, the practice of 
non-disclosure was justified by the rationale that ``fees didn't 
matter--net investment results were all that participants needed to 
see.'' This was an actual quote from the marketing Vice President of a 
major insurance company when interviewed by MONEY magazine in 1998.
    Fees charged to participants may be stated in the investment 
materials, but they remain effectively hidden on an ongoing basis 
because participants never receive a bill and never see a separate line 
item outlining what their costs, in dollars, have been.
    According to FORBES magazine, the mutual fund industry is the 
world's most profitable as it earns a consistent 30% pre-tax profit. 
Investors are not fee sensitive because they are focused on returns. 
Generally this means ``chasing last year's best performing mutual 
    In today's seamless electronic financial services arena, the hard-
dollar cost of administering a mutual fund with at least $50,000 is 6/
100ths of one percent per year--approximately $30. Virtually all 401(k) 
plans are administered in pooled accounts where the investor is the 
plan itself--not the individual employee. As a result, virtually all 
401(k) accounts, on a fund-by-fund basis, meet this $50,000 benchmark, 
meaning that the profit on the account is anything beyond the 6/100ths 
being charged. If the average mutual fund charge in a 401(k) investment 
is 1 full percentage point per year, the profit on those accounts might 
be as high as 94%.
    In all discussions regarding fees, we have to take as a given that 
no single mutual fund or fund family can show that that they have 
consistently earned a higher rate of return (to justify higher fees) 
for any sustained length of time. The money management industry is a 
``zero sum game'' in which all players revert to the norm at some 
point. Moreover, even when we can review past performance, there is no 
way to know prospectively whose performance might compensate for an 
excessive fee going forward. Over longer periods of time, a difference 
in performance among funds of the same type can be largely attributed 
to the difference in their costs to investors.
How 401(k) Plans are Structured
    Most 401(k) money is maintained today in a ``daily-valued'' 
electronic environment managed by the mutual fund or insurance 
companies themselves or the transfer agent industry that services the 
mutual fund industry. Plan participants can dial up their account 
information on an 800 voice-response number, but by far the most 
popular access is through the Internet. The raw cost of providing this 
seamless, electronic recordkeeping function is approximately $50 per 
year per participant. This is referred to as the ``recordkeeping fee.'' 
It is the cost of maintaining the accounting of the participant's 
    Apart from the money management, there is the cost of complying 
with the layers of retirement plan regulations dictated by ERISA. This 
work is concentrated immediately after the end of every year when the 
discrimination testing must be completed. Later in the year, the 
government reporting form (Form 5500) for the plan must be completed 
and submitted. It is essentially a balance sheet and income statement 
for the plan. The cost of this compliance testing and administration is 
typically about $35-$60 per participant with a base company fee of 
$1,000- $1,500.
An Illustration of Fees in a Typical Plan
    We can use an example a plan with 50 participants and $3,000,000 in 
assets. This is typical of an engineering or professional firm that has 
had a plan for twenty years.
    The record keeping and compliance cost for these 50 employees 
should be roughly $130 per employee. If the true cost of money 
management is only 6/100ths of a percent, the money management cost for 
$3,000,000 would be $1,800. The total cost of the plan would be $7,800. 
By comparison, a typical vendor in the industry today would be charging 
an average of $36,500 for this plan. Some have scheduled fees that 
would amount to as much as $60,000 or 2% of assets.
    While a plan sponsor (the company) might be happy to pay for the 
administration cost, it will never pay total fees of this magnitude. 
Asset-based money management fees will always be charged to 
participants where they will be largely ignored. After all, no 
participant ever receives a bill or writes a check for these costs. 
They are automatically deducted from what would have been earnings--or 
from principal in years when earnings may be negative.
Techniques that Obscure the Magnitude of Fees
    Having established that hidden excessive costs are a guaranteed 
detriment to optimizing savings results over time, it is generally easy 
to identify them when we know where to look. Some of the more difficult 
hidden costs, however, are those that are buried in the process and 
that will never show up in any stated cost to participants.
Non-disclosure at Participant Level in ``Bundled Plans''
    In the 401(k) marketplace, participants are told the annual expense 
ratios of the mutual funds offered by the plan, but administrative fees 
charged to their accounts are typically disclosed only in an annuity 
contract signed by the plan sponsor. This percentage amount is referred 
to as the ``wrap fee'' and it is typically one or two percent in a 
small company environment. The insurance industry is not legislated by 
federal laws, so the normal disclosure requirements demanded of the 
fund industry do not apply to insurance companies legislated only by 
state governments. In the mutual fund industry, the cost of 
administration, if presented as being ``free,'' is usually imbedded in 
the expense ratios of the funds. Comparable funds, if not priced to 
support administration, could generally be found that would be less 
expensive for participants.
    These plans that combine investment products with administration 
all provided by one company are referred to as ``bundled'' plans, and 
the providers of such plans are suggesting that ``bundled'' plans be 
exempt from any disclosure requirement to come out of these hearings. 
With what I estimate to be 70% of all 401(k) plans provided in this 
``bundled'' format, making them exempt would emasculate any new 
disclosure requirements.
Mutual Fund Industry--Proprietary Fund Requirement
    In the mutual fund industry, the fees to participants are disclosed 
because they are the normal annual expense ratios of the funds. They 
are spelled out in the prospectus of each fund and today are 
universally summarized in the employee promotional literature. The 
mutual fund industry does not add a wrap fee. Instead, a company such 
as Fidelity will insist that at least half of the funds selected for 
the plan include their own proprietary funds. Remembering that the 
profit from a 401(k) account can be as much as 94% to the fund family, 
the insistence that at least half of the funds come from the fund 
family's proprietary list ensures that the plan will be profitable. A 
refinement of this technique is to require that the so-called ``core 
funds'' will be proprietary. These are the large-company or balanced 
funds that traditionally attract as much as 70% of the money in the 
plan. So, while the fund requirement based on the number of funds may 
only be half of the offerings, the percentage of employee money in 
those funds can easily be 70% or more.
    The balance of the funds offered in the plan may come from other 
fund companies as part of an effort to create a ``veneer of 
objectivity'' for marketing reasons. These other fund families will 
typically be limited to just those funds that charge enough to pay the 
primary fund family 25/100ths of one percent and possibly some 
additional funds to buy ``shelf space'' on the ``platform'' offered by 
the primary fund family selling and administering the plan.
    What does this practice cost the participant? No single fund family 
offers superior funds across the entire spectrum of the industry. 
Common sense would tell us that selecting from a vast universe of 
choices will generate better fund selection than a limited universe 
from just a single fund family. Here, we are selecting funds for the 
convenience and pricing demands of the vendor--not with the sole 
purpose of improving the outcome for the participant. Knowing that this 
is the case explains why major mutual fund companies in the 401(k) 
industry refuse to be construed as fiduciaries of the plan. Selling 
their own funds would be a prohibited transaction and would violate the 
requirement that fiduciaries make decisions based upon the ``sole 
interests of participants.''
    In the sample plan above, (50 employees and $3,000,000) most 
vendors today would offer to do the administration and record keeping 
at no cost to the plan sponsor. A quick review of the arithmetic would 
explain why. Those administrative costs would have been about $7,000 
and the plan is charging participants $30,000.
Barring the Exit--Back-end Charges for Plan Sponsors who Want to Leave
    The most egregious examples of excessive fees today are found in 
plans that are using share classes or annuity products that pay 
commissions up front and then have high ongoing fees to participants to 
offset, over time, the commission that was paid up-front. If a plan 
sponsor chooses to leave one of these plans there will be a 
``contingent deferred sales charge'' otherwise known as a ``back-end 
load.'' Eventually, the load grades down and disappears after five to 
seven years, but in the meantime, the plan sponsor can not leave 
without subjecting participants to an exit charge that can be as high 
as 5% of their assets. Moreover, the law specifically bars a plan 
sponsor from paying that cost as a company expense, because plan 
contributions can only be made as a percent of compensation--never as a 
percent of assets. These are the plans that can be charging 
participants as much as 3% per year. Once introduced, they are locked 
in by exit charges for at least five years.
    The insurance industry and the subset of the mutual fund industry 
selling through the NASD brokerage industry are selling these 401(k) 
packages with back-end loads. The pure no-load sub-set of the fund 
industry does not offer this format. The back-end-load phenomenon 
occurs only in an environment where a mutual fund sales person or 
insurance agent requires a sales commission that has to be charged to 
the plan.
Funds as a ``Feeding Trough'' for the Brokerage Industry
    As yet another example of a hidden fee, FORBES magazine published 
an article entitled, `` What's the Matter With Brokers' Funds?'' The 
fact that these funds generate relatively poor performance is well-
established, and the reasons have to do with two facts. The article 
stated that ``* * * the whole psyche of a brokerage firm is built 
around selling, not buying * * * Analysts at wire houses get ahead by 
helping underwriters, not by being skeptical.'' This is essentially 
saying that the brokerage-sponsored funds are used as a resource for 
investing in the kind of companies that the firm was underwriting. High 
turnover of assets in the funds also generated trading fees for the 
brokerage firm. I was once told by a Prudential-Bache retirement plan 
representative offering a ``free'' plan to a plan sponsor that ``once 
we have the assets, we don't have to worry about making money.'' The 
FORBES article went on to say, ``Another problem is that broker-
sponsored funds tend to have steep expense ratios.''
How an Expensive Plan Can Be Marketed
    Thanks to the benefit of hindsight, a classic marketing ploy 
involves a presentation of funds from a new vendor candidate that have 
substantially out-performed the incumbent selection of the existing 
vendor. The current vendor, of course, is saddled with a selection of 
funds that were chosen three years previously in most cases. There are 
the problems of logistics and inertia that stand in the way of making 
changes in plans unless performance has fallen off a cliff. Of course, 
in this environment, a new set of fund choices will always look 
substantially better. The average plan sponsor rarely thinks to ask for 
examples of what the proposed new vendor's investment selections might 
be for a plan that they have operated for three years. There would 
typically be no improvement shown by this comparison.
    This is symptomatic of how the consultants and marketing personnel 
in the industry can appear to be offering improvement when, in fact, 
they are simply rearranging the deck chairs and adding to the level of 
hidden fees in many cases. Representations of superior performance are 
a major tool used to take the focus away from participant fees.
Misinformed Decision-making on the part of Plan Sponsors
    Section 404(c) is a U.S. Department of Labor regulation 
establishing requirements for plan sponsors that reduces their 
liability for making poor decisions with regard to the plan. Employees 
must be able to change investments and receive statements at least 
quarterly. They must be offered three basic fund types including a 
money market or guaranteed fixed income option. Finally, the plan must 
have a written investment policy statement, and employees should be 
provided with investment education (the latter being undefined and 
    Ironically, Section 404( c ) proved to be a solution looking for a 
problem which then created a far more serious disadvantage for the 
employee participant. Since 1980 or the earliest days of the 401(k) 
phenomenon, virtually all plans offered quarterly statements and 
investment changes and a selection of different investment types. 
Remember that senior executives were major beneficiaries of these plans 
and they were inclined to want investment quality and flexibility. 
Virtually all plans operated under what was essentially an investment 
policy statement because decision-makers wanted decent investment 
choices for themselves.
    The financial services community seized on Section 404( c ) as the 
reason for hiring them to monitor the plan and therefore reduce 
liability. In fact, there was no practical liability for reasons having 
to do with 404( c ). At industry conferences, lawyers were quick to 
point out that there were no lawsuits anywhere in the country brought 
by employees or groups of employees offered a selection of name-brand 
mutual funds and a rudimentary investment education and plan 
promotional effort.
    The law of unintended consequences quickly created a ``create the 
need'' opportunity for the financial services community. An army of 
qualified and experienced ``advisors'' fanned out across the 401(k) 
Plan Sponsor community and talked about the potential liability of not 
using professional help and advice with regard to operating the plan. 
What this universe of advisors did not point out was that a.) there was 
no practical legal problem stemming from the way plans were typically 
being operated, and b.) the cost of this advisory service was going to 
be, at a minimum, one half percent to one full percentage point charged 
to plan participants--a cost that guaranteed a loss of up to 20% of 
retirement assets for each participant.
    Meanwhile, there have been some lawsuits successfully filed against 
plan sponsors. The first that I am aware of was against First Union 
Bank settled for $25 million in behalf of the bank's employees. The 
bank was operating a collection of mutual funds, (Evergreen Funds which 
they owned at the time) and these funds were charging bank employees 
substantially more than 401(k) investments the bank was selling to its 
bank customers.
    In the same vein, the recent class action suits against Fortune 500 
companies such as Caterpillar, Boeing, Kraft and International Paper 
are all centered on fees--not a lack of reporting, investment choice or 
investment education.
Avoiding Compliance Responsibility
    While the financial services industry has seized upon Section 404 ( 
c ) and the scare tactics it can foster, they have deliberately avoided 
responsibility for most of the other IRS and Labor Department 
Regulations that they should be upholding when representing themselves 
as providing 401(k) administrative services. A typical service contract 
will have hold harmless language such as ``the design and ongoing 
operation of your retirement plan needs to be reviewed by your tax and 
legal advisors.'' The ``bundled provider'' contract of one of the 
nation's largest mutual fund companies says the company will perform 
the 401(k) test and coverage test, but all other tests are the 
responsibility of the plan sponsor. In effect, the financial services 
industry is saying that they will do the work, but they are not 
offering a guarantee that it will be done correctly or completely. A 
plan failing an audit can cost the plan sponsor a substantial amount of 
money in legal fees and corrective measures. In an indirect way, this 
misrepresentation could be construed to be a hidden fee. The average 
plan sponsor assumes that the major financial institution handling 
their plan has taken responsibility for its compliance with all 
government regulations. In my experience, however, the immediate 
response when compliance problems arise is the voice on the phone 
saying, ``read your contract.''
The Search for a Solution
    To identify a solution, a process would involve working back from a 
perfect, if admittedly impractical, model.
    Ideally, the best 401(k) plan would be one that charged nothing to 
the plan. All fees, even those associated with managing the mutual 
fund, would be charged to the company and paid with tax-deductible 
corporate dollars. A typical employee would be better off electing to 
have his or her taxable salary reduced slightly to help defray all or a 
portion of these costs. This would be far better than having the same 
costs deducted from plan assets that could be compounding on a tax-
deferred basis.
    Here's an actual example of that positive arithmetic. Over 800 
dentists use a money management firm to manage retirement assets at 
their respective practices. The firm charges 1% of assets and routinely 
levies this charge against plan assets. In one actual case, I pointed 
out to a dentist that the firm was free to bill his practice for what, 
in this case was $15,000 per year on $1.5 million of assets. The net 
cost to the dentist billed directly, considering his 50% marginal state 
and federal tax bracket was $7,500. Instead, the dentist was paying 
that year's $15,000 with money in his plan that in 7.2 years (at a 10% 
annual return) would have doubled to $30,000. In 14.4 years, it would 
have doubled again to $60,000--in 22 years, $120,000 etc. Obviously, 
the dentist asked to be billed directly and then started wondering if 
1% might be little high for mediocre investment management that failed 
to beat basic benchmarks. The financial services industry will always 
opt to bill the plan directly because they do not want fees to become 
an issue. The arrangement outlined above had persisted for over twenty 
years. The billing format had a projected cost for the dentist and his 
employees of well over one million dollars of opportunity cost--a cost 
that was reduced to a fraction of that amount in future years with the 
stroke of a pen.
    Xerox charged just 3/100ths of one percent to its employees. 
Vanguard, on large amounts of money, can charge as little as 6/100ths 
of a percent and still make a profit. DFA is yet another mutual fund 
company renowned for its Vanguard-equivalent low fees. These 
organizations offer mute testimony to the fact that it doesn't have to 
cost what most of the industry charges to invest pools of money. An 
oligopolistic situation exists thanks to buyers who are unaware of the 
impact of fees. With few exceptions, nobody in the financial services 
industry wants to see this condition change.
The Solution
    A simple but impractical solution would be to bar any organization 
that manages money from actually selling and administering 401(k) 
plans. The industry selling plans would be barred from receiving any 
revenue-sharing from the money management (mutual fund) industry. This 
would end the hidden fee elements seen in the brokerage industry and 
mutual fund industry where the sale of 401(k) plans is an engine for 
selling proprietary funds and generating trading commissions. There are 
3,500 third party administrators across the country today who are 
independent of major financial institutions and that perform 
recordkeeping services and compliance work for retirement plans. Some 
of these companies, such as Hewitt Associates and Milliman and Roberts, 
are substantial and equipped to handle the nation's largest plans. 
Without this separation between product producers and 401(k) 
administration and sales, it is difficult to see how some of the more 
subtle examples of hidden costs can be avoided. Considering the 
foothold that mutual fund companies have in the industry, however, it 
is difficult to envision this as a practical solution. The horse is out 
of the barn.
    The next option would be to have a national standard fee disclosure 
form required of any 401(k) presentation and require that it be renewed 
to reflect any change in investment mix. This standard would require 
that the cost in dollars and compound earnings over ten and twenty year 
time periods would be based upon the average fee charged to 
participants, assuming an even mix of investments across the entire 
spectrum of fund offerings. This would be stated on the front page of 
the 401(k) presentation and as part of the Summary Plan Description. In 
other words, a 401(k) vendor would have to show what the average 
opportunity cost would amount to over ten and twenty years based upon 
the average fee charged to a $10,000 per year contribution. It would be 
reasonable to assume a 10% rate of return as the starting point or 
gross return on investments assuming no fee. Fees would then be 
subtracted from this percentage amount, and the compound results would 
be illustrated. Using an average contribution of $10,000 per year would 
be simple (and inspirational.)
    This comparison would illustrate the dramatic difference in costs 
over time between different vendors. It would offer a reality check for 
the average decision-maker who might otherwise have chosen a hidden-
cost but expensive plan for his or her company. It is critical to 
require that the comparison use an example in dollars as I have 
suggested. To just require a stated percentage cost is too abstract. 
Even investment professionals have a hard time grasping the magnitude 
of opportunity cost presented by just a fraction of a percent in excess 
The Outcome and Benefit to Those Saving for Retirement
    Saving fees increases retirement benefits, in the aggregate, by as 
much as 15%-20%. How can this not be important enough to enact 
disclosure standards demanded of every company in the industry? 
Decision-makers may still purchase expensive plans for their employees, 
but not without hearing from the ``self-styled mutual fund experts'' 
that manage to find a voice in every company. An army of retirement 
savers have now deposited $3 trillion in their 401(k) plans. They are 
rapidly becoming a nation of reasonably sophisticated investors. For 
the most part, they know how to diversify investments, and they have 
lived through the volatility of stock market performance. This is a 
clear case where the glass is half full. The financial services 
industry can be commended for getting us this far. Going forward, 
however, we can improve results by insisting on an educational tool 
(comprehensive cost disclosure) that the industry acting on its own is 
inclined to avoid.
    Chairman Miller. Thank you very much to all of you for your 
    Mrs. Bovbjerg, toward the end of your testimony, you said 
that one of the problems was that many of the fees are hidden 
from sponsors and might mask conflicts of interest. Could you 
    Ms. Bovbjerg. What we are talking about there is when a 
sponsor may contract with a pension consultant or a service 
provider, who then has, unknown to the sponsor, a business 
relationship with, say, a fund manager, and then recommends to 
the sponsor, ``You should use this, you should go with this 
fund manager.''
    Chairman Miller. And that may be without regard to 
performance or cost?
    Ms. Bovbjerg. It may not be in the best interest of the 
    Chairman Miller. You also said that the Department of Labor 
did not have resources to adequately--fill in the--to do what? 
I didn't catch the last part of your testimony there.
    Ms. Bovbjerg. Well, the Department of Labor doesn't get the 
information that they would need to enforce fee 
responsibilities. They don't get a total fee reported to them 
in the Form 5500, the primary way that they get information 
from plan sponsors. We think that they should make that more 
clear, that they need all of the fees in one place.
    Chairman Miller. You think that should be corrected?
    Ms. Bovbjerg. We have recommended that to them, and they 
are pursuing several initiatives in the area.
    Chairman Miller. What is the status of that, do you know, 
since this report?
    Ms. Bovbjerg. Of our recommendation?
    Chairman Miller. Yes.
    Ms. Bovbjerg. They are considering it.
    Chairman Miller. Yes?
    Ms. Bovbjerg. They haven't done anything yet, but they are 
considering it.
    Chairman Miller. Okay, thank you.
    The example that you just pointed out, a few months, there 
was a story in one of the business journals talking about this 
arrangement, where money was between sponsor and a fund. And it 
was one of the worst-performing funds and had been one of the 
worst-performing funds for multiple years, like among the 
worst, and yet they kept paying out money to get, you know, 
recommendations of deposits of funds in that fund.
    So is that what you are talking about, that kind of 
conflict of interest? I am not necessarily saying of that 
magnitude, because this was----
    Ms. Bovbjerg. Well, we are talking about some of the things 
that came up in the SEC report a couple of years ago. They 
looked at 24 pension consultants and found that about half of 
them had undisclosed relationships with other types of service 
    Now, that is not to say that there was necessarily a 
conflict or that it harmed the pension fund, but it was not 
disclosed, and they felt that was problematic.
    Chairman Miller. Mr. Hutcheson, in your testimony, you 
suggest that that is not that unusual.
    Mr. Hutcheson. No, sir, that is very common. That is a very 
common practice. In some cases, the term ``directed 
brokerage,'' which is now a banned practice with mutual funds, 
an explanation of that is where a fund manager would speak with 
a brokerage firm and say, ``I will bring all of the trades of 
the underlying securities of our mutual fund to you if you will 
then recommend my fund to your sales force.''
    And what would happen is, is the sales force would get a 
recommendation for a particular fund, and they would go out and 
sell it to plan sponsors.
    Chairman Miller. That is a now banned practice, you are 
    Mr. Hutcheson. In mutual funds, it is.
    Chairman Miller. In mutual funds.
    Mr. Hutcheson. There are some other types of investment 
pools, where it is not a banned practice, but the egregious 
problems happened in mutual funds, and now that is a banned 
    Chairman Miller. Thank you.
    Mr. Chambers, you suggested that people think that Toyota 
builds cars, but they assemble them. But at the end of the day, 
they are buying a car which can be--is rated over time. People 
say that this is what it costs to drive this car for this year, 
this is the maintenance, this is the miles per gallon, and all 
the rest of it.
    They can find out information and make a decision between 
that Toyota and the Chevrolet Impala, if they want. They can 
make that decision. My concern is here is that people are being 
asked to make decisions or decisions are made for them, and the 
assumption is that that is better or that is different.
    Because what we see is that, you know, day in and day out, 
it is very hard for fund managers to beat the S&P index, right?
    Mr. Chambers. If you would elaborate on a particular fund--
    Chairman Miller [continuing]. Mr. Hutcheson's testimony, I 
think it was--it is obviously used many times by index funds. 
But, for example, the S&P 500 index consistently outperformed 
98 percent of the fund managers over 3 years, 97 percent over 
10 years, and 94 percent over the past 30 years.
    Recent studies reveal--and many more continue to 
substantiate--that the passive 60 percent stock, 40 percent 
bond portfolio outperformed 90 percent of the largest corporate 
pension plan portfolios, ``run by the world's best and 
brightest investment minds.''
    Mr. Chambers. And the source for that, sir?
    Chairman Miller. It is in Mr. Hutcheson's testimony, but we 
see this remark all of the time at the end of the year or the 
quarter, where they match and compare actively managed funds 
against index funds and other such funds. And it is very hard 
for those managers to beat those index over any period of time.
    Mr. Chambers. Well, I think, in given periods, you are 
absolutely right.
    Chairman Miller. Well, 10 years.
    Mr. Chambers. But I also think--and if I may, I also 
    Chairman Miller. Thirty years is a pretty good given 
period, since that is the time most people work.
    Mr. Chambers. Possibly. It depends upon which fund it is, 
of course. I can tell you, for example, that the funds----
    Chairman Miller. Well, it beats 94 percent of the active 
funds, so you can pick the other 6 percent of the funds, and I 
hope I could find them.
    Mr. Chambers. Well, I can tell you, sir, that, for example, 
in our retirement plan, at our law firm, we get this 
information every quarter. And over 5 years, which is a 
measurement--our law firm has not been in existence for 30 
years, so we don't have that information.
    But over the last 5 years, we have outperformed--if you 
take all of the funds that we make available, about 10 funds, 
we have outperformed the appropriate market index for each one 
of those funds an average of 3.05 percent over 5 years.
    Do I think that--and if you take a look at the peer 
performance reviews of the investment managers who we retained 
and the funds that we retain, they are not necessarily in the 
top 5 percent or 10 percent of their peer group every year. I 
think it depends upon the way that you are looking at the 
    I don't know that I necessarily agree with Mr. Hutcheson's 
statistics, not knowing what his basis is.
    Chairman Miller. I would say that Mr. Hutcheson is one of 
among many--and I am not vouching for his statistic, I am just 
saying that this is a comparison that is made in every economic 
journal at the end of every quarter and the end of every year, 
when they put in a special section on mutual funds, and they 
compare how it is done.
    Mr. Butler, I don't know if you want to chime in on this, 
    Mr. Butler. Well, I would just refer to the Stanford 
professors about 30 years ago who threw darts at the Wall 
Street Journal and proved that a randomly selected group of 
stocks would beat 85 percent of all efforts to manage money 
over any rolling 10-year period of time.
    It led to five different Nobel Prizes for research coming 
out of that original dart-throwing exercise. So I think it is 
pretty well-established that, at the end of the day, low fees 
are the primary determinant factor for investment results that 
are optimal.
    Chairman Miller. If I might, I would just like to take one 
minute of the committee's time here. The question here, I 
think, is the transparency and information available and the 
value of that. And, you know, you have what we get in our TSP, 
the Thrift Savings Plan, in a relatively simple form at the 
very bottom, it has cost to participant. And it is fixed basis 
points across all of the funds, except for the L funds, and 
those are variable funds, so, as of this date, that was not 
available to them.
    You have the vanguard approach, which is, again, a one-
page, very simply laid out cost to this. And this is to the 
plan, not to the participant. This is to the plan. And then you 
have what, I believe, that ING reached an agreement with 
Attorney General Spitzer on this, where you have to charge--one 
is the end-year balance without fees, end-of-year balance after 
the fees.
    So I don't know whether these are the right things to do or 
not, but the point is, there does appear that there can be a 
simplification of explanations, both to plans and to the 
participants, in those plans. And that is the quest of this 
committee, to see whether or not some of these might make 
sense, in terms of helping the participants and the plans make 
these decisions.
    And with that, I will yield to Mr. McKeon.
    Mr. McKeon. Thank you, Mr. Chairman.
    Ms. Bovbjerg, in the colloquy that you had with the 
chairman, you talked about the Department of Labor has received 
input, and you don't know where they are in the process of 
coming out with regulations or proposals?
    Ms. Bovbjerg. Well, they have three initiatives in process 
right now. And I believe that they told us that the regs would 
be forthcoming later this year. They have been collecting a lot 
of comments on those initiatives.
    Our recommendation to them was a little different than 
those initiatives. We would have recommended that they require 
sponsors to provide a total of the fees associated with the 
plan by type, in the Form 5500, and they have not taken action 
on that yet, but they also hadn't said they wouldn't. They are 
considering it.
    Mr. McKeon. How much do you think could be done by the 
Department of Labor, versus what we should try to do in 
    Ms. Bovbjerg. Well, some things, for example, with regard 
to the 5500, can be done by regulations in the Department of 
Labor. Other things, you are so right, have to be done through 
    We had recommended in our recent report on fees a couple of 
things that Congress might consider. Both would require 
amendments to ERISA. One was to require service providers to 
provide information on their financial relationships to 
sponsors. And the other--and that would be an explicit 
requirement. Now it is not a requirement. Some sponsors know; 
some sponsors don't.
    And another would be to require sponsors to provide 
participants information on fees that would allow them to make 
comparisons across funds.
    Mr. McKeon. It sounds to me like all of you are in 
agreement that something should be done for disclosure 
    Ms. Bovbjerg. I think we are.
    Mr. McKeon. Well, that is what I heard in the testimony. 
The concern I have is one that I addressed in my opening 
statement, is unintended consequences. And how do you simplify 
without making it much more complicated?
    It seems like every time we try to simplify--not our 
committee, but the Ways and Means, when they try to simplify 
the tax code, pages upon pages are added to the tax code. And 
that is a concern I have.
    The prospectus that the chairman showed--well, they are all 
familiar with them, as we are. They are very complicated. I 
have bought stocks for my life, and I am sorry to admit that I 
usually don't read every word in those things. And it would be 
nice to have a little summary or something to go with them, but 
a lot of that is a result of laws that have been passed or 
    So I am really sympathetic to the need to simplify. I am 
just concerned of, once we start trying to simplify, what we 
end up with at the end of the road. You know, if we sat down 
with these four people in a room--a few of us--we could 
probably work something out that would be good and be 
profitable. And I am concerned as we move forward that we just 
don't make things worse at the end of the day.
    So, Mr. Chairman, what I would like to ask all of them and 
others, as we go through this process, to keep involved. And if 
you will watch where we are skewing things one way or another, 
please try to bring it back. I don't know if you are planning 
on moving forward with legislation on this, but that would be 
my big concern, is that we----
    Chairman Miller. I am thinking about it now.
    Ms. Bovbjerg. Could I chime in for a minute? I perceive 
that part of it is the concern about not overburdening 
sponsors, and another part is the concern about plain English, 
which is something that we at GAO worry about across a lot of 
different programs, and something that the Social Security 
Administration has to worry about, with the benefit statements 
they send out to a much wider ranger of Americans than people 
who actually have pensions.
    It is something that I think any disclosure of initiatives 
that we as a government take in this area, we might consider 
some language about plain English, making it accessible.
    Mr. McKeon. Like the things that the chairman just showed, 
I think were good, simple. The problem is, we pass laws, the 
president signs the law, regulators write what they think that 
we meant when we passed the law. And by the time it all gets 
done, plain English is totally gone.
    And, I mean, we did that--when we go to the doctor's now, 
we all have to sign a new form. And I am a little chagrined 
every time I go in the doctor's office and have to sign that, 
because it was federal legislation that required that. And it 
just gets put somewhere in a file, nobody ever reads it, nobody 
ever does anything with it, but it just was a result of some 
    So I would be happy to join with you, if you think that is 
an approach----
    Chairman Miller. I appreciate the comments. I hadn't smoked 
out what we would do yet. I would like to think about it. But 
when I read much of this testimony, it along with the GAO and 
its make a fairly compelling case that inaction is probably not 
an option for the committee.
    And I appreciate your concerns and your willingness to work 
on this and to, certainly, use these witnesses as resources.
    And we always know that, when the law leaves here, it is 
clearly written, so it is not open to ambiguous interpretation. 
But we know we can start with a clear statement of purpose.
    Mr. Kildee?
    Mr. Kildee. I will be brief. I think we have a vote on the 
    But, Mr. Butler, what do you think it would take to get the 
401(k) industry to move towards a simple, one-page fee 
disclosure that captures all the fees?
    Mr. Butler. Well, I think it would be very simple. First of 
all, you have to appreciate that the entire industry today 
operates in a seamless, electronic environment. So those of us 
who are actually keeping track of this money--I won't make it 
too absurdly simple, but I would almost say that, with a few 
keystrokes, we can determine what the actual costs are and 
report them very effectively.
    I see it being a de minimis additional effort and probably 
not something that would increase costs in any way.
    Mr. Kildee. You think it is not rocket science to do?
    Mr. Butler. It is not rocket science.
    Mr. Hutcheson. Could I, Congressman Kildee? I agree. I 
believe that the solution is very simple. I believe in letting 
the markets work and letting competition drive prices. And I do 
not believe that this would impair, or impede, or discourage 
employers from maintaining plans. I believe that it would 
greatly increase confidence in letting that competition go, 
unencumbered and unimpeded.
    And I just wanted to share and elaborate on something. 
William Sharpe, who won the Nobel Prize in Economics, said that 
the market generally is supposed to be efficient. And when you 
start actively managing investments, whether at the mutual fund 
level, or at the plan level, or at the sub-plan level, the 
participants level, the fees start to be added, and there is a 
direct correlation, an exact correlation between the returns of 
what the participants receive and the costs.
    So active-managed funds and index funds are the same before 
costs. You add costs and fees, and there becomes the disparity.
    And what happens is, is that when a participant receives 
their participant statement, they show that their funds and 
their plan are meeting the benchmarks or matching this index or 
that index, but that is for the fund. That is for the fund 
    Those statements do not show what that particular 
participant's return was. And that has to be corrected, 
because, with all due respect, a good-manned firm may have 
great performing funds at the fund level, but once you start 
adding in various costs, the actual participant returns are 
very different. And that is an important clarification that I 
wanted to make.
    But coming back to this, I believe strongly that it is 
simple. If we strip out all the ambiguity, all the obscurity, 
and let the market work based on fully transparent, fully 
disclosed information, the fees will go down. There will be 
good competition. There will be confidence in the system.
    Plan sponsors will appreciate it. I don't see plan sponsors 
bailing out of this. I see them embracing this. And it is in 
the best interest of American business to shore up the economic 
security of its workforce, because 20 years from now, we have 
got a big pool of baby boomers who are going to be retired who 
won't have enough money to meaningfully participate in the 
    And a lot of businesses are going to wonder why they are 
struggling. It is because a whole segment of the economy was 
removed because they didn't have enough money. There is no 
money to spend.
    And so it behooves plan sponsors to deal with this. It is 
in everybody's interests.
    Mr. Kildee. And they are going to be in the 401(k)-type 
rather than the defined benefit-type, so we have a large number 
of people who will be affected by this then.
    Mr. Hutcheson. That is correct.
    Mr. Kildee. Ms. Bovbjerg, can we learn anything from the 
Thrift Savings Plan that we have in the federal government that 
can help us in the 401(k)s?
    Ms. Bovbjerg. The Thrift Savings Plan discloses information 
in a clear way, as Chairman Miller was showing. I think it is 
important to remember that the Thrift Savings Plan is somewhat 
different from 401(k)s, in that their administrative costs are 
exceedingly low compared to other forms of--you know, other 
types of plans, that some of that has to do with the way that 
that plan is administered throughout the government.
    It also has to do with--they have been very effective in 
keeping their costs low, I have to acknowledge that. I just 
think it is difficult to make that comparison, because you are 
dealing with a less diverse group of people. We are dealing 
with federal employees. They can all read; they all speak 
English. You know, it is quite different than a much broader 
type of plan coverage.
    Mr. Kildee. Thank you very much.
    Thank you, Mr. Chairman.
    Mr. Boustany. Thank you, Mr. Chairman.
    We would all agree that disclosure and transparency are 
very good things. Mr. Chambers, is there a danger in 
oversimplifying, when providing information to participants, 
that could lead to poor choices? Could you elaborate on that 
and what sort of problems that that might create?
    Mr. Chambers. Surely, thank you.
    Despite some of the comments that have been made earlier 
today about fees being the most important--and, perhaps--I am 
not suggesting anyone has said the only important, but the most 
important factor here--a large number, certainly in my 
experience, the predominant number of financial advisers have 
indicated that there are many different things that should be 
put into focus as you are making an investment decision. 
Clearly, fees are one of them.
    The gentleman to my right, Mr. Hutcheson, I think just 
mentioned the fact that, you know, you look at total return. 
That is generally going to be net of some fees, perhaps all 
fees, depending upon what is being paid out of the funds.
    Risk is an issue. Diversification is an issue. There are 
many, many issues that need to go into an investment decision. 
Perhaps that is why Mr. McKeon is no longer investing in 
stocks, because of all of the different things that you have to 
consider when you are making an investment decision.
    So I think that the big problem with oversimplification 
here is an overemphasis on fees. Yes, they are important. Yes, 
they should generally be disclosed. But they can--just looking 
at that and that alone can lead to some very bad investment 
    Mr. Boustany. I thank you for that answer.
    Ms. Bovbjerg, in looking at ERISA, Section 404, could you 
basically state what it requires and what was its intended 
purpose? And in the view of GAO, is it really meeting that 
    Ms. Bovbjerg. I don't know if I can do all that right here 
and now. I can talk a little about 404(c), which is 
particularly relevant----
    Mr. Boustany. 404(c) is particular, yes.
    Ms. Bovbjerg [continuing]. To this topic, that plans that 
fall under 404(c) are essentially seeking freedom from 
liability for investment choices that the participants make. In 
return, they have to disclose certain things beyond what other 
plans would have to do.
    We had a little trouble trying to figure out what 
proportion 401(k)s sell under 404(c). We thought it was 50 
percent to 60 percent, somewhere in there. Those are the plans 
that the Labor Department is thinking about focusing new fee 
reporting requirements on.
    Now, the way we see some of the fee reporting, it is all 
over. It is effective in some plans, but not uniformly. 
Participants have to ask for certain things; they have to know 
to ask for certain things; they have to pull information from 
several different sources.
    You know, and 404(c) plans, it is easier to get that 
information, no question about it. But is it complete? It is 
just not clear to us that it is.
    Mr. Boustany. I thank you.
    I yield back.
    Chairman Miller. Mr. Yarmouth?
    Mr. Yarmuth. Thank you, Mr. Chairman.
    I only have one question, and I think I know the question, 
but it seems like there is nothing to prohibit any of the 
providers from disclosing their fee structure. And my question 
is--and anyone can address is--why is unreasonable that this 
wouldn't become a huge competitive advantage, in what is 
apparently a pretty competitive field, 700,000 plans out there?
    Why couldn't we allow--just allow the markets, the 
providers to use that as their advantage? The lowest fee 
structure, if they advertised it, would give them a competitive 
    Mr. Hutcheson. If I might, thank you for that question.
    The reason--and I will try not to be too complicated here, 
or complex, rather--401(k) are today governed partially in a 
fiduciary environment, as they were originally intended and 
contemplated, and partially in a non-fiduciary environment. 
They are exemptions that exist that permit non-fiduciary 
investment firms and others to participate in 401(k) plans, 
where otherwise they might have been prohibited from doing so, 
had the exemption not been given.
    And so this intermingling or blending of non-fiduciary and 
fiduciary philosophies is the root cause of this. And if you 
bifurcate the two, fiduciary standards of care demand 
transparency and open competition based on equal information 
between the buyer and the seller.
    It is the non-fiduciary component of 401(k) plans that is 
obscuring this, partially due to that exemption or to 
exemptions. And when I say ``that exemption,'' I am referring 
to the Merrill exemption that permits them to participate in 
401(k) plans and receive various forms of compensation without 
being held to a fiduciary standard.
    And if we help everybody to a fiduciary standard, this 
might self-correct.
    Mr. Yarmuth. Can I just ask for clarification? Do I 
understand you correctly that what you are saying is that 
different providers have different obligations under these 
plans, and therefore the fees wouldn't be apples to apples?
    Mr. Hutcheson. Exactly. You can take two physicians' 
offices. Both of them have 20 employees. One of them has 
service providers that acknowledge their fiduciary status and 
behave as such. The other physician's office has the exact same 
mutual funds, or funds, but yet their service providers are 
hiding behind an exemption that protects them from fiduciary 
    And, therefore, they are not held to the same standards of 
disclosure, and that has to be eradicated from the 401(k) 
system. I believe that it will self-correct if that happens.
    Mr. Chambers. My experience is that, although certainly 
there are some folks who will perform a service as a fiduciary 
and others who will perform the same service as a non-
fiduciary, is that I don't see any less disclosure of fees in 
one situation, as opposed to the other.
    And, clearly, plan sponsors, if they wish to off-load 
fiduciary status onto someone rather than retaining it 
themselves, they certainly have the capacity and the 
marketplace to do that. As Mr. Hutcheson just pointed out, 
there are organizations out there who will accept this role.
    There are other organizations, though, that say, ``I will 
do it in a different fashion,'' and that is the marketplace. 
There is a decision. I don't believe that in under any 
circumstances do you need to homogenize that, do you need to 
invariably go out and find someone who is willing to serve as a 
fiduciary to perform the function to the exclusion of someone 
who is not, particularly for purposes of this hearing, if both 
of them are charging relatively the same fee or, even if they 
are not, if they are disclosing it.
    Mr. Hutcheson. If I may just clarify, because 401(k) plans 
are a fiduciary animal, they are subject to trust laws. And 
trust laws have fiduciaries. And fiduciaries must be able to 
discharge their duties unimpeded. They must not have obscured 
information or they must not have information withheld.
    Let me give you a specific example. I was asked by the 
chairman of an organization to come in and explain how their 
investment providers are managing their fee for free. Well, 
clearly, that can't be the case, but that is what the chairman 
was told. And we are talking about $100 million plan.
    And I categorically and summarily disagree absolutely. The 
fiduciaries simply didn't know what the pay or cost structure 
was of the plan. None only does ERISA demand that fiduciaries 
know, but if fiduciaries don't really understand whose getting 
paid, then they can't discharge their duties.
    And they are withholding information, because they are not 
held to a fiduciary standard. And I believe strongly that they 
should be.
    Mr. Butler. If I may, as a further answer----
    Mr. Yarmuth. I think I am glad I asked this question.
    Mr. Butler. Pardon me?
    Mr. Yarmuth. I think I am glad I asked this question.
    Mr. Butler. Well, what I would like to do is just elaborate 
and talk about money for a minute, as opposed to fiduciaries. 
Mr. Chambers, in his written testimony, presented an elegant, 
perfect example of how fees are charged.
    He used as an example $150 for the total cost of operating 
a plan for, say, a participant; $50 of that cost would be for 
the actual administration of the plan, $100 would be for the 
money management portion.
    And then he pointed out that, on the $100 of the money 
management portion, which is going to the mutual fund, they are 
going to give up or pay $10 of it back to the company doing the 
administration. So the administration company is actually 
getting $60, and the mutual fund company is getting a net of 
    In the real world, you can expand that to a real situation. 
Let's say that we have a $10 million plan. It has 150 
employees, probably an engineering firm, a law firm, company 
that has been around for at least 15 to 20 years. And so now, 
instead of $150, we have actually 1.5 percent, which would be 
pretty typical, $150,000 is what is now being paid, one way or 
the other, to administer this plan of $10 million.
    We have got $100,000 going to the mutual fund. They are 
giving up $10,000 of it and paying it to the record-keeper. 
Somebody understanding that there is that breakdown of cost 
could now start shopping for the record-keeping services. And 
on this particular plan, they would be able to get those 
services for something in the neighborhood of roughly $10,000 a 
year. They don't need to pay $50,000.
    The $10,000 for the record-keeping is really for the 
seamless electronic environment that allows people to dial up 
their account on the Internet, and that is a basic commodity in 
the industry today.
    So now you have a plan sponsor who has an opportunity 
possibly to save his participants about $40,000. And at this 
point, he is now looking at the other component of the plan, 
which is the mutual fund company that is charging $90,000. And 
a person confronted with that information is going to say to 
himself, ``Maybe I can get this money managed for something 
closer to $40,000, instead of $90,000,'' and he could.
    So now he is just saved his participants, including 
himself, because he has his own account to think about, he 
saved himself and his participants about 1 full percentage 
point per year. The magic of compound interest works against us 
when we start taking fees or paying fees out of money that 
could otherwise be compounding, tax-deferred.
    It is counterintuitive. In this particular example, let's 
say we have saved about--we have increased our returns by about 
10 percent, let's say. So you ask yourself, ``Well, why is that 
leading to 20 percent more money downstream?'' And the answer 
to that is, because that additional 1 percent compounded adds 
up to 20 percent of the total account balance.
    He has essentially saved his participants 20 percent of 
what they otherwise would have spent, and effectively he has 
increased everybody's retirement nest egg by 25 percent. And 
that is what this is really all about; that is why these 
hearings are so important.
    Chairman Miller. The gentleman's time has expired.
    Mr. Kline?
    Thank you for the question.
    Mr. Kline. Well, I am going to let us continue down that 
line. It looked like Mr. Chambers wanted to have something to 
say. I would like you to do that, and then I would like to 
address my question.
    Mr. Chambers. Thank you, sir.
    The point that I was going to make is, that that is exactly 
the problem that I have highlighted. Mathematically, that makes 
great sense. But should the employer or whoever it is who is 
making the decision on who is going to be investing plan assets 
or whose products will be available, who is going to be 
administering the plan, that they should do that, either solely 
on the basis of fees or largely on the basis of fees?
    There was no indication here about what the relative 
performance of the two record-keeper. Does the record-keeper, 
does the new program permit all the bells and whistles that the 
employer and the employees want? That costs money. Does the 
investment adviser, who is being selected, because, in fact, 
they charge fewer dollars, you know, per thousand, what is 
their relative rate of return over a long period of time?
    All of this needs to be put into the perspective of a lot 
of different people making decisions on the basis of a lot of 
different points.
    Thank you.
    Mr. Kline. Thank you. I knew you were chomping at the bit 
there, so to speak.
    I don't know, Mr. Chairman, do the witnesses have this----
    Chairman Miller. I don't know, but we will get it to them.
    Mr. Kline. Okay.
    Chairman Miller. Yes, it was shown up. Maybe it can be put 
back up on the plasma screen.
    Mr. Kline. It seems to me like there is some agreement here 
in the committee--and maybe throughout the room--that 
transparency and visibility into these funds is a useful thing.
    But I am concerned that we sometimes do confuse the famous 
apples and oranges, and I am just trying to understand. I 
think, Ms. Bovbjerg, you were talking about this issue earlier, 
not confusing or not trying too hard to compare the Thrift 
Savings Plan with some other 401(k)s.
    And this, clearly, is doing exactly that. It is comparing 
the Thrift Savings Plan with some--I don't know if that is a 
real fund, but it shows a significant difference, when you 
compare the TSP with this notional 401(k). It looks like those 
are dollars per individual.
    What I would like you to do is go back where you were a 
couple of questioners ago and talk about why it is that the 
Thrift Savings Plan comes in at asset-based fees of 0.6 percent 
and why it is not. We are a little apples and oranges here when 
we try to compare other 401(k)s. Could you do that for us, kind 
of pick up where you were? Thank you.
    Ms. Bovbjerg. Absolutely.
    I think I would also like to say that this is a graph that 
is similar in spirit to one that was in our report on fees that 
looks at what, if your fees were 1 percent higher over a 20-
year period, what would that mean? It would be about a 17 
percent loss of income, assets.
    The Thrift Savings Plan uses administrators across the 
federal government to help people sign up to make changes. The 
Department of Education has them; the GAO has them; Congress 
has them.
    Mr. Kline. And these are public employees rather than----
    Ms. Bovbjerg. These are public employees, and they are--
Congress pays for its office. GAO pays for its personnel office 
that has these people in the Department of Education, so----
    Mr. Kline. Thus reducing the costs?
    Ms. Bovbjerg. Yes. So the six basis points is not really 
what the administrative cost is of the Thrift Savings Plan, but 
that is not to take away from the fact that Thrift Savings Plan 
is very efficiently run. So the administrative costs are still 
pretty low.
    Mr. Kline. Okay, thank you.
    Yes, Mr. Hutcheson?
    Mr. Hutcheson. The underlying investments in the Thrift 
Savings Plan are what we call index funds generally. They are 
passive funds. You are getting the broad market.
    In the private sector, funds very similar to what is in the 
Thrift Savings Plan are available to employers. They might be 
slightly more expensive, because it is a price based on the 
assets in the plan. But what we are seeing here is a perfect 
example of what Professor Sharpe, who won the Nobel Prize in 
Economics, and also many other people have said.
    If you track the broad market as closely as possible, you 
will get market returns, and you really, over the long haul, 
can't do better than that.
    Mr. Kline. Sure, I understand. You are proposing that we 
use the index funds. But what I was trying to get at is that 
there is--in the fee world, which we are trying to get 
visibility in the fees--what is now shown here, was what Ms. 
Bovbjerg pointed out--that because the taxpayers are paying, in 
some part, for the administration of this, because we have 
public employees who are doing part of this work, the Thrift 
Savings Plan is not the best apple-to-apple comparison and what 
fees are.
    Thank you, Mr. Chairman. I yield back.
    Chairman Miller. Thank you.
    Mr. Wu?
    Mr. Wu. Thank you, Mr. Chairman.
    First, I want to ask the panel--and, Bob, you in 
particular--do we have pretty much uniformity of agreement that 
disclosure of the various fees is non-objectionable, as long, 
as you said, Bob, that it does not drown out other valuable 
information, that disclosure of brokerage fees, 12b-1 fees, and 
so on and so forth, that all of those disclosures are 
    Mr. Chambers. Well, I generally agree, but I think that 
where the rubber hits the road is going to be in terms of what 
fees needed to be disclosed and how we slice and dice the fees 
that are out there.
    And to go back to one of the points that the chairman made 
earlier, and when he was alluding to my Toyota example, when 
you go to buy a car, there is not fee disclosure on how much 
Toyota paid for the glass, and there is not fee disclosure on 
how much Toyota paid for the computer components. There is an 
overall fee.
    And I agree: There are ways to assess whether that 
particular automobile is better than another automobile, 
through miles per gallon, you know, performance, which is what 
we are talking about here.
    So I think that the council's concern--well, the overall 
concept is, yes, we are very favorably behind the idea of full 
and fair disclosure of fees. But I do think that where we are 
going to run into issues is, exactly how are we going to be 
slicing and dicing that? Because I don't know that it is 
necessarily essential for a plan participant--to mix the two 
metaphors now--that a plan participant needs to know how much 
the glass costs in the car.
    And I can see, for example, that, if you have a large 
financial institution which has been empowered through 
contract, you know, to perform services for a plan, and if, for 
example, that financial institution decides that it is going to 
take one of the functions that it is contractually bound to 
perform, and to hand it off to one of its affiliate companies, 
you know, say it has a captive trust company, for example, I 
don't know that that necessarily is something that needs to be 
disclosed. That is internal proprietary information.
    But by and large, overall fees, yes, we are very much in 
favor of that.
    Mr. Wu. Yes. And because of the limitations of time, let me 
just say that, in contrast to, say, a Toyota, because of the 
difficulty of predicting future market performance, because the 
market is basically different from being able to calculate the 
speed or safety of a car, some of the rear-view mirror things, 
if you will, like fees, take on a disproportionately important 
role, I would like to be--I would be very interested in hearing 
from all the panelists what disclosures you all feel are 
important and the best display format for that, so that it is 
most useful for investors.
    And I would like to ask that question and get that set of 
answers over time in writing, because I would like to turn to 
Mr. Hutcheson for a second. And I am not sure that this came 
out, Matt, in your oral testimony, but in going through your 
written testimony last night, there was a recurring theme of 
non-fiduciary functions and fiduciary functions and having 
those mixed together, and a core problem of mixing those non-
fiduciary and fiduciary functions together.
    But as I read the materials, one of the non-fiduciary 
functions was actually the investment decisions of the plan's 
beneficiary. And I would like to take me through this a little 
bit. It is one of the--where you are going with this, if we 
take it all the way out with a fiduciary plan, is that we 
ultimately get the plan beneficiary off the loop, in terms of 
decisionmaking about investment vehicles.
    Mr. Hutcheson. That is right. I personally believe--and 
just to clarify before I answer the question--that no person 
can time the market. I just don't believe it. I think there is 
empirical research that shows that there is only a few points 
in time each year where the market really takes a big leap 
forward, and you have to be in the market at that point in 
    And so placing decisions in people who have no financial or 
economic or investing experience, and not only just placing 
investment decisions, but we are talking about trust assets 
subject to fiduciary prudence.
    So 404(c) says that a participant will not be deemed a 
fiduciary to the extent that they are directing these trust 
assets, and that is kind of a conflict in fundamental fiduciary 
prudence and trust oversight, as we have been accustomed to, 
many, many years, decades before 404(c) was enacted.
    And very short, I believe that participants play with their 
accounts based on recommendations of friends, what they see in 
the news. They have the ability to make changes. 404(c) says 
that you have to be able to change your allocations quarterly 
or more frequently, as the market dictates. Why would they want 
to be changing their accounts based on what happens yesterday?
    That is not prudent. It makes no economic sense. It is not 
based on good, sound investment research or theory. It in 
itself, I believe, is bad public policy. And it, in my opinion, 
goes contrary to fundamental laws of fiduciary prudence.
    Mr. Chambers. May I add one point, please, to that? And 
that is--well, actually two points.
    One is, I don't think that that is a correct statement of 
trust law, number one. It is difficult for someone to be a 
trustee for himself or herself. And, therefore, you are not a 
fiduciary, which involves acting on behalf on someone else. So 
I don't think that that is a correct statement.
    Number two, you need to take a look at the program, I 
think, that Mr. Hutcheson is proposing. Now, you know, one of 
the comments or one of the things that we talk about is the 
series of movies that were out a number of years ago, you know, 
``Back to the Future.''
    Well, I think that what he is suggesting is the opposite, 
which is ``Forward to the Past.'' There is, if you take a look 
at what he is suggesting--which is a very viable program for 
employers who are so inclined. I am not trying to say that it 
is a bad program at all. I don't think that it is particularly 
viable in the view of most employers with whom I work.
    It is essentially the creation of a television set that 
only gets one channel, and it is a channel that, whoever it is 
that is putting that set together, is developing. One set of 
investments, you know, no loans, no this, no that.
    Why would an employee want to make a decision to change an 
investment because of what happened yesterday? There may be 
something else in his or her life that dictates that. It also 
may be that they no longer have confidence in the investments 
that they previously made.
    Chairman Miller. The gentleman's time is expired. Thank 
    Mr. Wu. Thank you, Mr. Chairman.
    Chairman Miller. Mr. Andrews?
    Mr. Andrews. Thank you, Mr. Chairman.
    I very much appreciate the witnesses, and I appreciate this 
hearing. I view this hearing as a continuation of work that 
this committee has done on a bipartisan basis over the last 
number of years, reflecting a number of points of consensus.
    The first point of consensus is that it is a reality that 
individuals are managing their own investment decisions, and I 
think there is a consensus that we should not impede that 
individual choice or individual freedom.
    In the wake of the Enron scandal a few years ago, there 
were some discussions of putting legal limitations on choices 
people could make in their own 401(k) plans. I, frankly, 
opposed those suggestions, and I am glad they are not the law.
    The second point of consensus is that people should--we 
should facilitate people getting sound investment advice. Now, 
there is still significant disagreement over what that means. 
There was a compromised reach in the act of 2006. We will 
evaluate the efficacy of that compromise and continue the 
discussion, but I think it is obviously true that sound 
investment advice is better than no investment advice or, 
frankly, a lot better than investment advice from an 
incompetent source who doesn't know what he or she is talking 
    The third point of consensus is that we should maximize 
transparency so that people making these individual choices 
have the widest array of facts in front of them so they can 
make the best choices, which leads us to today's discussion, 
which is, what should the form and nature of that transparency 
    I will confess to you, I come to this discussion as an 
agnostic. I am very interested in what you think as to how we 
can answer that question. But in my simple agnosticism, I would 
make the following proposition.
    We talk about people buying cars? I think the best example 
is someone selling their house. It is the single most important 
economic decision most Americans make. And when most Americans 
sell their home, they ask one question. They ask two questions, 
really: How much am I going to get for the house? What is the 
sale price going to be? And how much of the sale price am I 
going to get to keep?
    I actually practiced real estate law before I did this and 
represented hundreds of homebuyers, and they would ask the 
realtor how much they were going to get for the home, how much 
the contract was going to be for. And they would ask me, as 
their attorney, how much they were going to get to keep.
    And we have disclosure laws, RESPA, in the real estate 
context that tells someone how much of the proceeds they have 
to pay to someone else, the real estate commission and other 
fees, and how much they get to keep.
    I think that is the basis on which we should build this 
disclosure. I think we should build it on the proposition--if 
my 401(k) were invested, and I got to keep everything, every 
dollar earned on that investment decision, how much would that 
be? And then how much are we going to get in a net return, 
after whatever fees, or contracts, or considerations are paid?
    Does anybody disagree with that as a conceptual framework 
for approaching this problem?
    Okay. Now, I think there is a second category of this 
disclosure we also have to think about. And I am not sure 
whether the present law covers this or not, and that is the 
situation where, to use the analogy, the sale price of my house 
is too low because the realtor was conflicted in some way, that 
the realtor sold the house to her sister-in-law rather than to 
the highest bidder.
    Does anyone think that the present ERISA statute does not 
prohibit that situation? Does anybody think that the present 
statute doesn't prohibit the situation where the person making 
some plan decisions is depriving me of the highest price or the 
best investment?
    Mr. Butler. If I may, I think there are all kinds of 
opportunities for that to happen right now, under the current 
situation. Forbes magazine talked about the extent to which the 
brokerage industry's own mutual funds do very poorly as 
investments, comparatively speaking.
    And the reason for that is because the brokerage industry's 
source of revenue, to a large extent, has to do with trading 
commissions. So the mutual funds that they operate, in many 
cases, are feeding troughs for their trading operation. And 
that is an example that I see in the industry, along the lines 
of what you were just talking about.
    Mr. Andrews. Okay. Because my time--do you agree with that 
conclusion of Mr. Butler or not?
    Mr. Butler. Yes, I do. I would say that----
    Mr. Andrews. No, I know you agree. I asked Mr. Chambers if 
he agrees with you.
    Mr. Chambers. I don't always agree with myself, so I need 
to deal with that.
    Mr. Andrews. Okay.
    Mr. Chambers. Before I respond to that, to respond to your 
comment or your question, I am concerned with your using the 
word ``best'' in conjunction with what ERISA requires, as 
opposed to what is reasonable, which is, in fact, what the 
statutory standard is.
    Mr. Andrews. Of course, it doesn't require what is 
reasonable. It requires what is in the best interests of the 
participant party.
    Mr. Chambers. Best interest, yes, but not necessarily the 
best result.
    Mr. Andrews. Okay. You would agree, that is not synonymous 
with reasonable, though. If you make a reasonable choice that 
is not in the fiduciary interest of your----
    Mr. Chambers. No, but somebody has to act reasonably. And 
one of the ways that they have to act reasonably is within the 
best interests of the participants and the beneficiaries.
    I think that, if everyone had to go around chasing the best 
investment results, or if everyone had to go around chasing the 
lowest conceivable method of administrative fees, I think that 
this would be a very different world.
    Mr. Andrews. Of course, that is not what I asked, though. I 
asked whether you thought that the statute prohibits someone 
making a conflicted or self-interested decision in the 
investment context.
    Mr. Chambers. I think that, yes, the statute does currently 
prohibit that.
    Mr. Andrews. Effectively?
    Mr. Chambers. Pardon me?
    Mr. Andrews. Effectively? Do you think there is any 
loopholes in that?
    Mr. Chambers. Are there loopholes? I don't know that I 
would call this a loophole, but remember that, for example, 
employers have issue--every employer that sponsors a plan 
invariably has issues about its role as the settlor of the 
plan, the sponsor of the plan, versus its role as a fiduciary 
of the plan. And that is something that is inherent in 
    So I don't know that you would call that a loophole, but 
certainly that is something that everyone has to be concerned 
    Mr. Andrews. My time is expired. I would just ask if Mr. 
Hutcheson wanted to respond.
    Chairman Miller. Mr. McKeon wanted to tag on----
    Mr. Andrews. Sure, Mr. Chairman, I would yield.
    Mr. McKeon. Will the gentleman yield?
    In your example, if the realtor brings an offer to me to 
sell my house, I can accept or reject it. So I don't see where 
that really plays a role, a comparable role.
    The first part, where you talked about just final net 
return, it sounds great to me. I don't know where----
    Mr. Andrews. Yes, if the gentleman would yield, here is the 
analogy of the realtor bringing an offer. Someone has to make a 
decision which options to give the plan participant. You could 
    Mr. McKeon. But it all washes out with the net return.
    Mr. Andrews. It washes out----
    Chairman Miller. I will take your answer off the air.
    Mr. Andrews. Thank you.
    Chairman Miller. Mr. Sarbanes?
    Mr. Sarbanes. Thank you, Mr. Chairman, and thank you for 
holding the hearing.
    I have a brief question. In my view, when it comes to 
information, there are two ways you can hide the ball. You can 
not disclose enough information, or you can disclose so much 
that it becomes impossible for the consumer of the information 
to sift through it and understand it. You see that happen in 
many, many different arenas.
    So, Mr. Butler, I wanted to ask you to address this, 
because it is not just about more disclosure. It is about 
better disclosure. And I feel as though I get plenty of 
information on a lot of things that represent ``full 
disclosure'' that I can't make heads or tails of. And this is 
another arena were that would be the case.
    So it is about how you package it. And your index, 
obviously, attempts to do that. But if you could just speak to 
the pitfalls of too much disclosure or how we package or 
present the information in a way that is really constructive 
for the consumer.
    Mr. Butler. I would love to address that.
    First of all, the need to know, from a decisionmaking 
standpoint, really centers on the company management people who 
are basically charged with deciding what kind of plan and which 
vendors they are going to use. That is why my first book was 
called ``The Decisionmaker's Guide to 401(k) Plans.''
    The participants really then wind up being the 
beneficiaries of hopefully some informed decisionmaking. When 
you are looking at the component costs of one of these plans--
and the example that I was using earlier--what is important is 
for these decisionmakers to be able to basically understand 
each component cost so that they can effectively decide whether 
or not they want to be part of a package deal or not.
    And the example that I used, we presupposed that we had 
mutual funds and then a separate company, let's say, as a 
record-keeper. But, in fact, in about 70 percent of all 401(k) 
plans, it is all in the same building. It is the mutual fund 
that also has three floors of record-keepers keeping track of 
the money and doing the compliance-related issues.
    And so the important thing is for this bundled provider to 
be able to present to the decisionmakers, their clients, what 
the component costs are so that the decisionmakers can decide 
whether or not they want to be part of a package deal. Or can 
they create a much better opportunity for their participants by 
breaking things up and shopping for better opportunities?
    It is like, when you buy a car, you might decide that you 
don't want the manufacturer's Bose stereo because you can get a 
much better deal buying a stereo independently.
    Mr. Sarbanes. Do you think that the ``decisionmakers'' can 
be as susceptible to getting too much information, as 
beneficiaries can, or because they are better versed and this 
is their responsibility, to make these decisions, that they are 
sort of protected against that?
    Mr. Butler. My experience, in the smaller company 
environment--and, bear in mind, 70 percent of all Americans 
work for companies that have less than 100 employees--my 
experience is that decisionmakers in that environment tend to 
be the company owners, who are by definition successful 
businesspeople, many are self-styled investment experts 
themselves, or mutual fund experts.
    Also, the CFO or controller will also be part of that de 
facto decisionmaking committee. And these people are very, very 
sophisticated. They make the right decisions if given the right 
    Mr. Sarbanes. Thank you.
    Mr. Chambers. May I comment?
    Mr. Sarbanes. Sure.
    Mr. Chambers. I guess I agree with most of what Mr. Butler 
just said. The one issue that I have is, that I am not sure 
that it is appropriate or essential to get a bundled provider 
to explain what the cost allocation is or the expense 
allocation is, if it is not making those services available 
independent of one another.
    In other words, the way--and I just went through this with 
a client--that is a small employer, about 100, 150 employees, 
and they wanted to look at new record-keeping investment 
systems. And they went to some programs that were bundled, and 
we found out what the total costs were from that. And then they 
went to other programs which were not bundled, and we found out 
what the total costs were there.
    I don't know that it would be essential to receive 
information from the bundled program, for example, about how 
much it was allocating to provide record-keeping, as opposed to 
some other component, if that is not available from that same 
organization. I don't know that that is information that is 
going to help you to make a meaningful decision.
    Mr. Sarbanes. Well, I hear that, and I worry--it is a fair 
point, although it could also be the beginning of a slide, kind 
of slippery slope, in terms of what comparative information is 
    I yield back. Thanks.
    Ms. Shea-Porter. Thank you, Mr. Chairman.
    I can remember when the fees for banking and mortgages were 
so absolutely confusing, and there has been some streamlining. 
And probably my son, who is 17, is the only one who still pays 
10 percent monthly on his balance at a bank, and we are going 
to straighten that out.
    But the reason I brought that up was because it is 
difficult for people who are not knowledgeable to understand. 
And it is pretty clear on the bank statements to me now, you 
know, what the fees will be. And I will be teaching my 17-year-
old shortly the same thing.
    But when you try to compare different plans, I think there 
is an obligation--this actually is to Ms. Bovbjerg--an 
obligation to be as explicit as possible. And I think it is 
possible to be simple, as well, when you are explaining the 
    And I listened to my colleague talk about the costs of the 
TSP, for example, and I wanted to ask you to address that. He 
said that federal employees were picking up some of the cost of 
the administration. Do you have any idea how much the federal 
employees are actually picking up? And is it possible to 
compare those two plans?
    I am fortunate enough to be in the TSP, and it is clear, 
and the administrative fees are lower. So could you address 
that, please?
    Ms. Bovbjerg. And you have touched on one of the reasons 
that makes it so difficult to compare the Thrift Savings Plan 
to other types of retirement saving vehicles.
    When I brought up the thing about the Thrift Savings Plan, 
I did want to say that, you know, this graph is essentially 
showing the math between two things. And the math is correct, 
but it is the implication that six basis points is sort of 
normal I was a little concerned about.
    The Thrift Savings Plan has certain levels of expenses. 
And, in fact, we will be reporting on these costs for 
Congressman Davis in a couple of months. But the Thrift Savings 
Plan does take its--gets revenue from not only, you know, from 
not having to do things, but also from the money that is what I 
would call ``left on the table,'' you know, the federal 
government matches and puts in 1 percent.
    And for people who come to the federal government, the 
people who leave before they invest, can only take their money, 
and they leave the federal money on the table. That also nets 
the administrative costs for the TSP. That is one of the 
reasons why they look so low.
    I would like to say that, in terms of reporting to 
individuals, it is critical that it be simple, that it be 
clear, it be all in one place, and that people don't have to go 
ask for it, because they will never find it. Only a certain 
percentage of people will know to do that.
    But it is hard. It is hard for the Social Security 
Administration to produce a benefits statement that 270 million 
Americans can understand. And they put a lot of effort into it. 
So I don't want to discount what I know are the concerns about, 
how do you really make something that people will find 
accessible? It is not easy, but it is important.
    Ms. Shea-Porter. Right, but it is doable, that is what you 
are saying.
    Ms. Bovbjerg. It is doable.
    Ms. Shea-Porter. Right, and still leave a healthy profit 
for those who are the administrators.
    Ms. Bovbjerg. I can't say what it would cost, different 
kinds of sponsors. And, certainly, I know that the Department 
of Labor is weighing, you know, sponsor burden against the 
outcome and trying to figure out how they can best achieve some 
sort of optimal result.
    Ms. Shea-Porter. Okay, thank you.
    Chairman Miller. Thank you very much.
    And thank you for all of your testimony.
    A couple of things here. One is, I guess the question I 
would ask--and I appreciate Mr. Andrews raising the point, if 
you had a net-net-net figure, would that tell you what you 
really need to know as a consumer, or would these other 
packages of information be more informative, or what have you? 
And that is obviously to be discussed further.
    But the real question for me is, again, a lot of people--
you know, you can have $100 million plan, and a lot of people 
are struggling to put in $6,000, $7,000 into this plan. And 
they don't have a lot of room for risk and fees and the rest of 
    And the question that I would raise is, are we sure that we 
are getting the value added for that? And is there a reasonable 
reason why somebody made a decision to go in that direction? Or 
was it a conflicted decision? Or was it a decision that really 
didn't meet that reasonableness when you consider who is in the 
    You know, the Miller family doesn't have a lot of margin of 
error for mistakes. My employer apparently does, because we 
have got $1 trillion debt he is running around with. But, you 
know, the sponsor of this plan, the owner of the business, and 
maybe the officers, depending on the size of it, they may have 
a lot of income. People working for them may have reasonable 
income or good income. But good income today doesn't give you a 
lot of room for risk.
    So, you know, the question is, how does that factor in? And 
I guess the disappointment I see is that you have a lot of 
people dipping into other people's money. You know, I didn't 
put the money into the 401(k) plan so a lot of strangers could 
come in and start dipping into this, under manufactured titles, 
for fees of questionable services, whether I need them or not 
need them.
    Now, I am an individual, and so then we have to go to the 
plan, we have to go to the sponsors, and I think that is the 
central question for me, that this really is about other 
people's monies. And I think that, also, you are in an 
atmosphere where people have determined--maybe it is the advent 
of the Internet--but if you can charge a real small fee a 
billion times, you can become a really rich company. And people 
say, ``Oh, that fee doesn't matter.''
    Well, as we have seen, every one of you have given us a 
comparison chart of what it would mean--let's just use the 1 
percent differential. That is a lot of money to a middle-class 
working American, at the end of the time, when they think they 
are going to retirement, and what are they going to be able to 
extract if they don't want to eat up the principal of that nest 
    Those are big differences. One of you said that the 
difference was the--between the 1 percent and 1.5 percent, 1.5 
percent differential, the person who was on the bad end of that 
bargain would have to work an additional 7 years. I mean, these 
are big consequences to workers and to families.
    And I guess my concern--I mean, one of the things discussed 
with the members of the committee and with others, is the 
question really, are they getting value added here?
    You know, I have listened to I don't know how many 
financial shows over 20 years, where one side is saying, ``This 
should be the position for most American investors, an index 
fund. It is safe, it is low cost, and the rest of that.''
    And the other people say, ``Oh, no, you can go out there, 
and you can beat the market,'' and there is a lot of reasons 
why people say that, because they are out there trying to beat 
the market, and they need clients to do so. And that may be 
good for some people, but it may not be good for this plan that 
is becoming a larger and larger percentage of people's 
    This isn't their mad money; this is their retirement. By 
default, this has become one of the two remaining legs on the 
retirement stool in this.
    You know, we have been talking about a comparison of the 
thrift plan, but I think IBM and Xerox are even more efficient 
in these 401(k) plans than the thrift. Does anybody have any 
knowledge of that, that they--one of you had it in your 
statement, I am sorry.
    Mr. Butler. My understanding is that Xerox charges .03 
percent to their employees. They probably have some other 
costs, but they are paying those costs as a tax-deductible 
corporate business expense, instead of having participants pay 
it with money that would otherwise be compounding tax-free.
    Chairman Miller. That is because of a separate decision 
they made, how they would allocate the costs. So that is a 
benefit, I guess, that you would argue they feel strongly 
enough financially to be able to shift.
    Mr. Butler. Exactly. And there is no way that Xerox would 
then be paying 100 basis points as a corporate business 
expense. They have just figured out what the fixed cost is for 
each participant in the plan, and it is probably about $50 a 
year to keep track of the money, per person.
    Chairman Miller [continuing]. Xerox is not a small 
business, with, you know, 100, 150 employees. So there is some 
    Mr. Chambers. I think you need to look at it as an employer 
contribution to the plan. And Xerox could ask the employees to 
pay whatever the amount is and be providing a larger employer 
contribution in the form of a match or, perhaps, in a profit-
sharing contribution. And the employees would be in the same 
    So I think that you are correct, but there is another way 
to do it, which is the way that a lot of employers are doing 
    Mr. Hutcheson. Chairman Miller, I don't think that anybody 
is suggesting radical open-heart surgery. I think what we are 
suggesting is, is asking that plans be governed by prudent 
fiduciaries in possession of full and correct information. Once 
they are in possession of all the information, if they want 
bells and whistles, and the fiduciaries certainly have the 
discretion to purchase them on behalf of the participants and 
beneficiaries to whom they serve.
    Without full information, the fiduciaries are impeded. And 
if we have a seller and a fully informed buyer, the free market 
system will take care of this. But as it is today, the 
purchasers of retirement services do not understand, not even 
the Department of Labor fully understands what the nature of 
the economics are or is.
    And, thus, we have a situation. That is what needs to be 
remedies. We need to empower the fiduciaries with correct, full 
information, and let knowledgeable fiduciaries and the 
knowledgeable deliverers of services negotiate on equal 
    Mr. Chambers. I don't disagree with that at all. I think we 
need to maintain confidence in this system. I think we need to 
improve confidence in this system.
    And I think that, again, all of us on the panel agree that 
there needs to be another methodology of providing this 
information to all three of the constituencies that we have 
been discussing, participants, and the fiduciaries, and the 
government, in order to pursue this. I don't disagree with that 
at all.
    But I think it is important to make sure, as I have 
mentioned before, that the cost of doing this is not going to 
overwhelm the benefit that comes from it, that, in fact, we 
wind up not diminishing end-of-the-road retirement benefits, 
simply because we have overemphasized fees, compared to all of 
the other important considerations that go into the 
administration of these plans and the investment of their 
    Chairman Miller. Should the plan sponsor know whether or 
not there is conflicting financial arrangements for the 
placement of those funds?
    Mr. Chambers. I think that the plan sponsor needs to 
understand what the relationships are. And I think, then, that 
the plan sponsor needs to make a decision as to whether there 
is a conflict there, whether the conflict is----
    Chairman Miller. So they should have the information? You 
would agree that they should have the information?
    Mr. Chambers. I think that they need to have information 
relating to what the role of each service provider is. And then 
they can decide whether or not there is a conflict.
    One of the issues that are out there is that you may have a 
service provider that has a relationship at this end of the 
spectrum with a financial organization, and you have entirely 
independent people working at that plan level. So the question 
is, is there a conflict?
    There may be a conflict in an entirely unrelated area. Does 
the administrator or the plan sponsor need to know that? I 
think it would be very helpful, but I am not sure that in every 
situation you are going to be able to provide that information.
    Ms. Bovbjerg. Which is why recommended the Congress amend 
ERISA to explicitly require service providers to provide that 
information to plan sponsors.
    Chairman Miller. If ``A'' is placing their funds with 
``B,'' and ``B'' is getting money from ``C,'' that in itself is 
an important piece of information.
    Mr. Chambers. Right. How about if a bank is a lender to a 
particular organization, you know, is a primary lender or is 
involved--that is why I am saying----
    Chairman Miller. Well, with all due respect, you know, 
those questions are answered every day in the courtrooms of 
this country, because among the biggest players in this field, 
they are suing one another over exactly those relationships.
    We just saw a whole series of arrangements in the mutual 
fund industry, 3, 4, 5 years ago, where all kinds of privileges 
were extended based upon other arrangements. People were 
allowed to trade after 4 o'clock. People were allowed to not 
mark to market. People were allowed to go over until the next 
    You know, and they were based upon loans and placements of 
funds. I mean, that goes on in the financial services industry 
every day. Big clients get privileges, and connected people get 
privileges. So this goes on all the time.
    The question is, you know, my little firm, and I am trying 
to take care of my employees, should I know whether the person 
I am working with has these financial relationships? I will 
then make a decision about whether I think that is impacting or 
not impacting, or it may come back to me a year later when I 
see what happens. I may say, ``Whoa, whoa, let's go back and 
see what that relationship was.''
    Mr. Chambers. I believe, sir, that if you are limiting this 
primarily to the retirement plan context, I think, then, that 
it would be possible to come up with a reasonable way of 
creating disclosure that is beneficial.
    But as I was mentioning, I think it is very difficult--if I 
decide that I want to go to a bank to serve as the trustee of 
my retirement plan, and it turns out that that bank is the 
primary lender to an organization that is providing retirement 
services to me, all right, is that a conflict? And how is it 
that somebody is supposed to be disclosing that too me?
    Chairman Miller. That may or may not be. Again, when people 
look back over transactions, very often they all of a sudden 
recognize a conflict that they didn't recognize at the time. So 
the information is important.
    It has been very important to the SEC. It has been very 
important to states' attorneys generals and to others, because 
patterns do develop. We just saw a pattern develop of inside 
trading. There, the enforcement officers recognized it for the 
investment firm, and then they decided they would cut 
themselves in on it. You know, we just went through the arrest 
here this last week.
    So the information is important, not only at the time you 
can make your judgment, whether you think that is right or 
wrong; it may be important down the road, if a pattern develops 
or these people have relationships. You know, it may not be 
about your fund, but it may be about all of the investors that 
come there and the fund they go to.
    You may be part of a larger piece of action. That is all I 
am saying. So I just am asking whether or not that arrangement, 
in and of itself, should be a piece of information that is 
available. I am not determining whether it is a conflict or not 
a conflict, simply whether that disclosure is important.
    And most of these things that concern me about little 
people, it is because I see the big guys fighting it out. You 
know, they are battling over their pension plans, very large 
corporations, because somebody decided they were going to dip 
their hand into other people's money, with an insignificant 
fee, and they could drain it off.
    I mean, that is sort of the nature of financial abuse in 
the financial services industry. People come up with these 
schemes sort of, you know, every full moon.
    Any other questions?
    [Additional statements for the record follow:]
    [The prepared statement of Mr. Altmire follows:]

Prepared Statement of Hon. Jason Altmire, a Representative in Congress 
                     From the State of Pennsylvania

    Thank you, Mr. Chairman, for holding this important hearing on 
``Hidden 401(k) Fees,'' and for your continued leadership on issues of 
great importance to America's working families.
    I would like to extend a warm welcome to today's witnesses. I thank 
all of you for taking the time to be here and look forward to hearing 
from you.
    In recent years, 401 (k) plans have emerged as the most common way 
for Americans to save for their retirement. Currently, nearly 50 
million employees are enrolled in 401(k) plans as compared to 
approximately 20 million employees who are enrolled in traditional 
pension plans. With the rise of the number of employees using 401 (k) 
plans to prepare for their retirement, we must work to ensure that 
their plans operate as efficiently as possible.
    Many have raised concerns about the operation of 401(k) plans. The 
most common complaint is that administrative and management fees for 
401 (k) plans are not clearly defined and delineated. Many of these 
fees nickel and dime the retirement savings of employees who may not 
even be aware of their existence. I share these concerns and believe 
that these fees should be properly disclosed, rather than simply 
deducted from the account balances of employees.
    I also believe that we should do more to encourage employees to 
invest in 401 (k) plans and properly prepare for their retirement. 
While there is no doubt that it is increasingly difficult for workers 
to plan for a secure retirement, there is much that can be done to make 
this security more attainable. I look forward to hearing our witness' 
ideas on this issue.
    [The prepared statement of Mr. Hare follows:]

Prepared Statement of Hon. Phil Hare, a Representative in Congress From 
                         the State of Illinois

    Since the beginning of the 110th Congress, the Education and Labor 
Committee has been investigating what has been termed the ``middle 
class squeeze,'' referring to the challenges the majority of Americans 
face in acquiring financial stability, affording high healthcare costs, 
saving for college and building retirement security, despite having 
jobs with strong wages. I am happy to see today we are reviewing the 
issue of retirement and the roadblocks involved in pension and 
retirement plans that make it difficult for the middle class to build 
retirement security.
    There is no doubt that we all support employer-sponsored retirement 
plans and would like to help facilitate the expansion of those plans by 
providing the support and assistance employers need. However, I will 
not support efforts that do this on the backs of hard-working 
employees. The discussion about hidden fees in 401(k) plans, which the 
majority of American workers have, is extremely upsetting to me. Full 
disclosure of these fees is critical so that employees have full 
knowledge about their investments and the ability to compare plans to 
choose the best one for them.
Questions for the Panel
     Mr. Chambers: Would requiring the disclosure of these fees 
discourage employers from offering retirement plans because of 
increased administrative costs? What do your clients need from the 
federal government in order to provide reasonable retirement options 
for their employees?
     Ms. Bovbjerg: We as Members of Congress are privileged in 
that we have the best retirement plan in the world--the Thrift Savings 
Plan (TSP). The government will match employee contributions to this 
plan up to 5%. We also have the choice among many investment options. 
What can we do as legislators either through better disclosure 
reporting or financial offsets to expand TSP-type plans to all sectors 
of the American workforce?
     Mr. Hutcheson: How did this ``culture'' come to be that 
has allowed unscrupulous extractions from the bank accounts of 
hardworking Americans? How do we reestablish the integrity of our 
retirement structure? Can disclosure or elimination of hidden fees do 
it alone? And, what options do employees have once they know about the 
hidden fees they are paying?
    Chairman Miller. Well, thank you very much. I think your 
testimony and your comments and your responses to the members 
of the committee have been very helpful for this initial 
hearing. And we would hope that you would agree with Mr. 
McKeon, that you would continue to serve as a source of 
information to us, as we continue this discussion.
    Thank you. The committee will stand adjourned. Thank you.
    [Whereupon, at 12:55 p.m., the committee was adjourned.]