[Senate Hearing 110-365]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-365

  HIDDEN 401(K) FEES: HOW DISCLOSURE CAN INCREASE RETIREMENT SECURITY

=======================================================================

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             WASHINGTON, DC

                               __________

                            OCTOBER 24, 2007

                               __________

                           Serial No. 110-16

         Printed for the use of the Special Committee on Aging



  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html


                        U.S. GOVERNMENT PRINTING OFFICE

41-835 PDF                     WASHINGTON : 2008
----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, 
Washington, DC 20402-0001



















                       SPECIAL COMMITTEE ON AGING

                     HERB KOHL, Wisconsin, Chairman
RON WYDEN, Oregon                    GORDON H. SMITH, Oregon
BLANCHE L. LINCOLN, Arkansas         RICHARD SHELBY, Alabama
EVAN BAYH, Indiana                   SUSAN COLLINS, Maine
THOMAS R. CARPER, Delaware           MEL MARTINEZ, Florida
BILL NELSON, Florida                 LARRY E. CRAIG, Idaho
HILLARY RODHAM CLINTON, New York     ELIZABETH DOLE, North Carolina
KEN SALAZAR, Colorado                NORM COLEMAN, Minnesota
ROBERT P. CASEY, Jr., Pennsylvania   DAVID VITTER, Louisiana
CLAIRE McCASKILL, Missouri           BOB CORKER, Tennessee
SHELDON WHITEHOUSE, Rhode Island     ARLEN SPECTER, Pennsylvania
                     Debra Whitman, Staff Director
            Catherine Finley, Ranking Member Staff Director

                                  (ii)
















                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening Statement of Senator Herb Kohl...........................     1
Opening Statement of Senator Gordon H. Smith.....................     2

                                Panel I

Barbara Bovbjerg, director of Education, Workforce and Income 
  Security Issues, U.S. Government Accountability Office, 
  Washington, DC.................................................     4
Bradford Campbell, assistant secretary of Labor, Employee Benefit 
  Security Administration, Washington, DC........................    29

                                Panel II

Jeff Love, director of Research, AARP, Washington, DC............    44
Mercer Bullard, assistant professor, The University of 
  Mississippi, School of Law, University of Mississippi..........    51
Michael Kiley, president, Plan Administrators, Inc., DePere, WI..    87
Robert Chambers, chairman, American Benefits Council, Charlotte, 
  NC.............................................................   100

                                APPENDIX

Prepared Statement of Senator Robert P. Casey, Jr................   119
Prepared Statement of Senator Susan Collins......................   120
Statement on A Primer on Plan Fees from American Bankers 
  Association, Committee on Investment of Employee Benefit 
  Assets, The ERISA Industry Committee, The Financial Services 
  Roundtable, Investment Adviser Association, Investment Company 
  Institute, National Association of Manufacturers, Profit 
  Sharing/401k Council of America, Securities Industry and 
  Financial Markets Association, Society for Human Resource 
  Management, and the United States Chamber of Commerce..........   121
Statement submitted on behalf of the ERISA Industry Committee, 
  Society for Human Resource Management, National Association of 
  Manufacturers, United States Chamber of Commerce, and the 
  Profit Sharing/401k Council of America.........................   124
Statement of the Investment Company Institute an additional 
  information....................................................   130
Information submitted by AARP....................................   175

                                 (iii)



























 
  HIDDEN 401(K) FEES: HOW DISCLOSURE CAN INCREASE RETIREMENT SECURITY

                              ----------                              --



                      WEDNESDAY, OCTOBER 24, 2007

                                       U.S. Senate,
                                Special Committee on Aging,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:32 a.m., in 
room SD-628, Dirksen Senate Office Building, Hon. Herb Kohl 
(chairman of the committee) presiding.
    Present: Senators Kohl and Smith.

        OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN

    The Chairman. This hearing will come to order. Good 
morning. I would like to welcome our witnesses and thank them 
for their participation. We are here today to bring attention 
to an important issue affecting the retirement security of 
millions of Americans.
    More and more Americans are relying on 401(k) plans to 
provide their retirement income. Although these plans have only 
been around since the 1980's, they now cover over 50 million 
people and exceed $2.5 trillion in total assets. Out of private 
sector workers that have any type of retirement benefit, two 
thirds have only their 401(k) savings to secure their financial 
well being into their retirement.
    Although 401(k)'s have become the primary pension fund for 
most Americans, there are few requirements for fund managers to 
tell participants how much they are paying in fees. Most fees 
are either absent or obscured in participant statements and 
investment reports. Not surprisingly, we will hear today that 
fewer than one in five participants know the fees they are 
paying.
    Unfortunately, the lack of disclosure and the lack of 
understanding can have serious consequences for an individual's 
retirement savings. The slightest difference in fees can 
translate into a staggering depletion in savings, greatly 
affecting one's ability to build a secure retirement.
    According to the Congressional Research Service, families 
who save their retirement funds in high fee accounts could have 
one-quarter less in retirement than those who work for 
employers who offer low-fee accounts. For couples who save 
their entire lifetime, the CRS study found that an annual fee 
of 2 percent could reduce savings by nearly $130,000 compared 
to a more reasonable fee of 0.4 percent.
    Investigations by this Committee have found that fees at 2 
percent or higher are not uncommon. One small business owner we 
talked to with contract fees around 2 percent, and most of the 
plans assets in a money market account had a net return that 
was almost a negative 1 percent a year. The small business 
owner was distressed when he finally discovered the high 
charges, and was ready to cancel his 401(k) plan altogether.
    Giving small business owners all the facts in an easy-to-
understand manner will help them find lower cost options and 
make it more likely that they will offer retirement savings 
plans to their employees.
    Fees are not the only factor that 401(k) participants 
should consider when deciding how to invest their savings. A 
wise investor should diversify portfolio and consider a funds 
risk and return.
    But while returns are unpredictable and will fluctuate from 
year to year, fees are something that are fixed, are known in 
advance, and could be easily controlled by plan enrollees. 
Furthermore, we believe there is a basic right for consumers to 
clearly know how much products and services are costing them.
    This week, Senators Harkin and myself are introducing the 
Defined Contribution Fee Disclosure Act of 2007. This bill will 
help shed some light on these fees by requiring complete 
transparency to both employers and participants. This will 
allow employers to be able to negotiate with pension fund 
managers in order to get the lowest possible fees for their 
employees.
    Participants will be able to make informed choices between 
investment options and potentially increase their retirement 
savings by thousands of dollars. Ultimately, this legislation 
will help to lower costs for everyone by fostering competition 
among pension managers.
    So, we welcome our witnesses as we discuss the importance 
of fee disclosure to employers and plan participants and 
consider its impact on the retirement savings of older 
Americans.
    We turn now to my able Ranking Member and my friend, Gordon 
Smith, from Oregon.

  OPENING STATEMENT OF SENATOR GORDON H. SMITH, RANKING MEMBER

    Senator Smith. Thank you, Chairman Kohl. I appreciate your 
holding this important hearing. Our topic today is hidden 
401(k) fees and how disclosure can increase retirement 
security.
    One of my priorities on this Committee has been to ensure 
that Americans are financially secure in retirement. With 
uncertainty surrounding Social Security and the shift from 
employer-sponsored defined benefit plans to defined 
contribution plans, more and more of the responsibility for 
preparing for retirement rests on one's own shoulders. 
Unfortunately, though, American retirement savings rate for 
2006 was a negative 1 percent. This is the lowest rate since 
1933 during the Great Depression.
    Clearly, Americans need to save more for retirement. I have 
been working over the past few years on ways to help Americans 
do just that. For example, I worked to enact legislation that 
would encourage employers to adopt automatic enrollment in 
401(k) plans. This is a simple idea that has been shown to 
increase plan participation significantly.
    I was very pleased that we were able to enact automatic 
enrollment as part of PPA--that is Pension Protection Act, if 
any of you, like me, get too many alphabets around here--and I 
am confident that provision is helping to increase 
participation rates in 401(k) plans.
    Now, I am pushing for other proposals to increase 
Americans' retirement savings. For example, one of my bills 
would require employers to allow long-term, part-time employees 
to make contributions to their 401(k) plans. However, the goals 
of these proposals may be undermined by excessive 401(k) plan 
fees.
    Fees are one of many factors, such as investment risk and 
diversification, that participants should consider when 
investing in a 401(k) plan. But excessive fees can undercut 
Americans' retirement security by reducing their savings. 
Simple as that.
    In light of this, I was very disturbed to hear about AARP's 
recent survey results on 401(k) participants, their awareness 
and understanding of fees. About two-thirds of the respondents 
stated that they do not pay fees, and when told that 401(k) 
providers typically charged fees for administering the plans 
and that the fees may be paid by either the plan sponsor or 
participants, 83 percent then acknowledged that they do not 
know how much they pay in fees.
    Clearly, 401(k) participants need additional information on 
plan fee and expenses. However, it is important that, as we get 
them more information, we don't overwhelm them. The additional 
information need to be concise, meaningful and readily 
understandable.
    If we bombard participants with too much information, they 
will do what most people would do--they will ignore it. Since 
any new disclosure requirements will carry costs for 
participants, overloading them helps no one.
    So, I am pleased that the Labor Department has begun a 
series of regulatory initiatives to increase transparency and 
disclosure of plan fees and expense information. I look forward 
to hearing more about these initiatives today, and I would like 
to continue to work with the Labor Department to ensure that 
participants have the fee information they need to make prudent 
investment decisions.
    Thank you, Senator Kohl.
    The Chairman. Thank you very much, Senator Smith.
    We are pleased to welcome our first panel here this 
morning. The first witness will be Barbara Bovbjerg. Ms. 
Bovbjerg is the director of Education, Workforce and Income 
Security Issues, for 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 Employee Benefit Security 
Administration of the Department of labor.
    Our second witness will be Brad Campbell. Mr. Campbell is 
the assistant secretary of Labor for the Employee Benefit 
Security Administration, which oversees more than 700,000 
defined contribution retirement plans that cover almost 150 
million Americans. In this capacity, he is responsible for the 
administration and enforcement of Title I of the Employee 
Retirement Security Act, which is known as ERISA. He has been 
with the Department of Labor since 2001.
    We welcome you both, and, at this time, we will take your 
testimony.
    Ms. Bovbjerg.

 STATEMENT OF BARBARA BOVBJERG, DIRECTOR, EDUCATION, WORKFORCE 
  AND INCOME SECURITY ISSUES, U.S. GOVERNMENT ACCOUNTABILITY 
                     OFFICE, WASHINGTON, DC

    Ms. Bovbjerg. Thank you very much, Mr. Chairman, Senator 
Smith. I am pleased to be here today to speak about disclosing 
fee information to 401(k) participants and providing better fee 
and cost information to 401(k) sponsors, because fees can 
significant erode an individual's 401(k) savings, as you noted.
    Information about the fees being charged is important 
because we expect individuals to be responsible for making wise 
decisions about their accounts. Sponsors, as fiduciaries, need 
the information necessary to make plan design and 
administration choices that are in the best interest of the 
participants.
    Today I will present information about how such disclosure 
might take place. I will speak first about what information 
could be most useful, and then about how such information might 
be presented. My statement is drawn from our work last year on 
401(k) fees and from reports we have issued over the last 
several years, addressing the presentation of financial 
information.
    But first let me speak about the ``what,'' what information 
to provide. Although it is clear that participants need basic 
fee information, it is not so clear what information is most 
relevant to them.
    Most would agree that participants at least need to know 
what direct expenses are charged to their accounts. In our 
earlier report on this topic, we recommended that participants 
at least get information that allows them to make comparisons 
across investment options within their plans. We suggested that 
expense ratios could meet this need in most instances.
    Industry professionals we have contacted suggested 
additional investment-specific needs might easily be disclosed 
as well, including sales charges, surrender charges, wrap fees, 
things of that nature. Some also suggest that participants 
receive information on returns net of fees to encourage the 
participant to consider fees in the context of returns rather 
than just focusing on fee levels alone.
    However, as I will note in a moment, when I move to 
discussing the format for disclosure, keeping it simple is 
really important if participants are to read and make use of 
the information provided. Participants are not the only parties 
who need better information. Plan sponsors would benefit from a 
broad range of information as they seek to fulfill their roles 
as fiduciaries.
    In addition to information on plan fees, sponsors need 
information, for example, on service providers' business 
arrangements and revenue-sharing options to ensure that plans' 
fees and expenses are reasonable and not affected by conflicts 
of interest. In our prior work, we also made recommendations to 
require plan service providers to offer sponsors information of 
this nature.
    Some have also suggested that sponsors and participants may 
not know how to evaluate fees they are paying absent some sort 
of benchmark for comparison. Because participants have no 
control over investment options available to them, benchmarks 
may be most important for the sponsors, as they make decisions 
that affect plan costs.
    But whether or not benchmarks are provided, a consistent 
approach to fee and cost disclosure, one that allows comparison 
across options within a plan and across plans overall, because 
people do move around, would benefit both participants and 
sponsors.
    Let me move now to the format in which fee information 
might be disclosed. In prior work we found that certain 
practices help people understand complicated information. The 
use of simple language, straightforward and attractive layout, 
brevity and multiple means of distribution are all key to 
documents the general public will obtain, read and comprehend.
    Distribution, layout and document length determine whether 
people will even look at the information. If they can't obtain 
the disclosure easily, for example if it is provided only 
electronically and they don't have regular access to a 
computer, they will almost certainly never read it. Or if it is 
too long, crammed with text or in tiny, tiny typeface, even if 
participants receive it, experience with other disclosures 
suggests they won't read it.
    Yet even the most attractively designed document must still 
be written in accessible and simple language, and provide only 
the most basic and important information if it is to be read 
and understood. Clearly, design and means of conveying 401(k) 
fee information will be crucial to achieving not just 
disclosure, but also improved participant understanding.
    To conclude, 401(k) participants, and even sponsors, need 
better and more consistent information about plan fees. 
Focusing on the most basic fee information, providing it in a 
way that participants will read and understand it, and being 
consistent in its provision across plans will be key. Providing 
information of this nature will not only inform plan 
participants in making retirement, saving and investment 
decisions, it may also have the salutary effect of sharpening 
competition and, in the end, reducing fees charged to 401(k) 
plans.
    That concludes my statement, Mr. Chairman. I hope that my 
full statement can be submitted for the record.
    [The prepared statement of Ms. Bovbjerg follows:]


    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    The Chairman. We will do that. Thank you, Ms. Bovbjerg.
    Mr. Campbell.

    STATEMENT OF THE HONORABLE BRADFORD CAMPBELL, ASSISTANT 
SECRETARY OF LABOR, EMPLOYEE BENEFITS SECURITY ADMINISTRATION, 
                         WASHINGTON, DC

    Mr. Campbell. Yes, Mr. Chairman, Senator Smith and the 
other members of the Committee. I want to very much thank you 
for the opportunity to testify today about the significant 
progress we have made at the Department of Labor in 
promulgating regulations to improve the disclosure of fee, 
expense, and conflict of interest information in 401(k) and 
other employee benefit plans. Our regulatory initiatives in 
this area are a top priority for the Department of Labor.
    Over the past 20 years, the retirement plan universe has 
undergone some significant changes that affect both the workers 
and plan fiduciaries. More workers now control the investment 
of their retirement savings in participant-directed individual 
account plans such as 401(k) plans. At the same time, the 
financial services marketplace has increased in complexity.
    Plan fiduciaries who are charged by law with the 
responsibility of making prudent decisions when hiring service 
providers and paying only reasonable expenses have found their 
jobs more difficult as the number and type of fees proliferate, 
and as the relationships between financial service providers 
become more complex.
    These trends have caused the department to conclude that, 
despite the success of our fiduciary and participant education 
efforts, that a new regulatory framework is necessary to better 
protect the interests of America's workers, retirees and their 
families. That is why we initiated three major regulatory 
projects, each of which address a different aspect of this 
problem.
    The first regulation addresses the needs of participants 
for concise, useful, comparative information about their plan's 
investment options. The second regulation addresses the needs 
of plan fiduciaries, who require more comprehensive disclosures 
by service providers to enable them to carry out their duties 
to prudently select those service providers, and understand the 
nature of the fees and expenses charged for services that are 
being provided under those contracts. The third regulation 
addresses disclosures by plan administrators to the public and 
the government via the Form 5500, which is the Annual Report 
filed by pension plans.
    It is essential to understand that the disclosure needs of 
each of these groups is different, and that, therefore, the 
disclosures that we are going to require via our regulations 
are also different. Participants are choosing investments from 
among a defined universe of options. To do this, they need 
concise summary information that allows them to compare these 
options in meaningful ways that take into account the fees that 
they are paying, the historical rates of return, the nature of 
the investment and other factors that are relevant to that 
determination.
    Plan fiduciaries are trying to decide if the services they 
are contracting for they are receiving, and if the prices they 
are paying are reasonable and necessary, taking into account 
the needs of the plan as a whole. Fiduciaries need to know 
whether the services provided will be influenced by 
compensation arrangements between the service providers and 
third parties, what services are provided, their necessity, and 
their reasonableness. This process by which plan fiduciaries 
make prudent decisions necessitates a far more detailed and 
comprehensive disclosure.
    In response to our request for information earlier this 
year on participant disclosures, it is fairly clear that there 
is a basic agreement, as Ms. Bovbjerg just also indicated from 
GAO's perspective, that participants are generally not going to 
benefit from very lengthy and detailed disclosures in making 
those investment decisions, because participants are likely to 
ignore them. Because the participants are also typically 
bearing the cost of producing these documents, if we produce 
voluminous disclosures that aren't useful to participants, we 
could perversely increase the amount of fees participants are 
paying without providing any additional utility.
    It is important to note, I think, that we are not at the 
beginning of our regulatory initiatives. We are quite well 
advanced. One of the three projects, the Form 5500 disclosures, 
will be finalized as a final regulation within the next several 
weeks, and we have completed drafting our proposed regulation 
for disclosures by service providers to plan fiduciaries. It is 
currently under review in the regulatory process and should be 
promulgated as a proposed regulation within the next several 
months. We, as I indicated, concluded a request for information 
on participant disclosures, which we are using to issue a 
proposed regulation this winter.
    I want to commend the Committee for its interest in 
disclosure in this area. I do want to note that it is important 
that, should the legislation be pursued, that Congress bear in 
mind the regulatory process and the progress we have made on 
our regulations.
    I also note that the regulatory process is very well suited 
to resolving some of these issues that are coming up. A great 
deal of technical issues are arising in terms of what 
information should be provided, and how one compares apples to 
apples across different investment options. As a deliberative, 
open and inclusive process, the regulatory process has been 
working well, and we believe will help us resolve these issues 
in a way that is amenable to the Committee.
    So, in conclusion, Mr. Chairman, I want to thank you for 
your interest in this issue, because it is very important to 
ensuring the retirement security of America's workers. I am 
committed to completing our projects in a timely manner, and I 
look forward to answering any questions you may have.
    [The prepared statement of Mr. Campbell follows:]


    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    The Chairman. Thanks, Mr. Campbell.
    Ms. Bovbjerg, what would you say is the best way to provide 
401(k) participants with information about the fees they are 
paying so that they can make wise investments?
    Ms. Bovbjerg. Clearly, comprehensively, but simply. That of 
course is the trick. We have had difficulties in doing this in 
even things like our Social Security statements.
    We have had difficulties with the disclosures that we make 
to credit card holders, for example. I think that the trick in 
these efforts is to focus on providing information and 
improving understanding, and not simply meeting a legal 
requirement.
    We reported last year with regard to credit card 
disclosures that it was the tiny typeface problem. It was too 
much information. It was prepared in a way to meet a legal 
requirement rather than actually explain something to 
individuals who varied tremendously in their ability to 
understand these things.
    The Chairman. I have heard employers say that it is 
impossible to determine all the fees that individual 
participants pay. While I do understand that some fees are 
assessed plan-wide and difficult to calculate to the penny, 
what is your understanding of the ability of plans to 
reasonably estimate the actual fees that are paid by 
participants?
    Ms. Bovbjerg. I think that it is their fiduciary duty to 
know what fees the plans are charging for participants, whether 
it is directly assessed to the participant or whether it is 
being assessed to the sponsor.
    The Chairman. Mr. Campbell, the Department of Labor has 
been talking about fee disclosure, as you know, since back in 
the 1990's. So what date can we expect the Department of Labor 
to have regulations that would require clear disclosure of fees 
to all employers and to all plan participants?
    Mr. Campbell. Yes, sir. The first of our three initiatives 
will be final regulation within the next several weeks. That is 
the Form 5500 disclosures to the public and the government.
    The second regulatory initiative, service provider 
disclosures to plan fiduciaries, will be proposed within the 
next several months. We will be issuing a proposed regulation 
governing disclosures to participants by plans this winter. So 
these are moving along very well.
    I would say with respect to the previous initiatives you 
are referring to in the 1990's, those were in the same area, 
but they are not these initiatives. These initiatives were 
begun last year. We are making very good progress by the 
standards of regulatory time, recognizing that it is a 
deliberative process and does have to follow the legal 
requirements of the process.
    The Chairman. Current ERISA law dictates that the plan 
sponsors should ensure that all 401(k) fees are reasonable. How 
has the Department of Labor been defining reasonable? How has 
the Department of Labor been enforcing this requirement? How 
many cases have been brought specifically on this issue?
    Mr. Campbell. The requirement in the statute, as you say, 
is that these fees must be reasonable, and plan fiduciaries 
bear the duty of ensuring that. The determination is on a facts 
and circumstances basis.
    The fiduciary is responsible for looking at each service 
provider, the services they are providing, the cost of those 
services, doing due diligence and comparing them to other 
service providers to ensure that they are following--again, to 
use the same word--a reasonable process in gathering the 
information necessary to make that determination.
    The Labor Department does review, when we do 
investigations, the fees and expenses that are being paid. Over 
the last several years, we have brought I believe on the order 
of 350 or so cases that involve fee and expense issues. This is 
part of the reason we concluded that, rather than piecemeal 
enforcement, a regulatory effort was necessary to globally 
address these issues.
    One of the more significant regulations with respect to the 
reasonableness of fees is ensuring that fiduciaries have the 
information they need to assess whether they are reasonable. 
One of those considerations, for example, would be indirect 
payments coming to service providers from third parties.
    Fiduciaries need to be aware of those so they can factor 
that into whether they are paying a reasonable amount and how 
the assets of the plan are being used in connection with the 
Financial Services industry. Providing that disclosure will 
help ensure that those fees are reasonable.
    The Chairman. Thank you, Mr. Campbell.
    We turn now to Senator Smith.
    Senator Smith. Thank you, Mr. Chairman. Your excellent 
testimony answered most of my questions. Barbara, when you 
indicated in your answer to Senator Kohl that information needs 
to be clear, comprehensive and simple, those are sort of at 
cross-purposes, and that is the problem I suppose the industry 
has, and you acknowledge.
    Have you seen an example that we could highlight for the 
hearing purposes that really accomplishes all those three 
objectives?
    Ms. Bovbjerg. We provided a little table in my statement 
that suggests a way that you could disclose this information. 
It is a composite of things we have gotten from different 
sources, including some of the work from the Department of 
Labor.
    It is pretty simple. It shows asset allocation, and it 
shows, on a percentage basis, the fees that are assessed 
against assets. It suggests that you would show the loan fees 
or things of that nature in dollars.
    There are many different ways to do it. I recognize that 
you are concerned that a comprehensive disclosure may include 
too many things. You want to capture the main things.
    I don't want to suggest that you could capture everything 
and provide it to people, and that they would still read it and 
understand it. But I think you might focus on the main things, 
and try to keep it simple when you do that.
    Senator Smith. Brad, you indicated in your testimony that 
this is a high priority. I am glad to hear that. I think it is 
important, and so I commend the department for making it such a 
high priority.
    Thank you, Mr. Chairman.
    The Chairman. Well, we thank you, Senator Smith, and we 
thank you, Ms. Bovbjerg, Mr. Campbell. Your testimony has been 
informative, valuable, and we appreciate your being here. Thank 
you so much.
    Ms. Bovbjerg. Thank you for having us.
    Mr. Campbell. Thank you, sir.
    The Chairman. We are going to turn now to our second panel. 
There is a scheduled vote, and then another vote to start at 11 
a.m., so I hope we can figure it out to see that we get our 
testimony and questions in.
    Our first witness on the second panel will be Jeff Love. 
Mr. Love is the director of Strategic Issues Research at the 
AARP. Mr. Love has extensive experience in research methods, 
providing this expertise for AARP on their top legislative 
issues. Mr. Love is here today to testify on some of his 
findings regarding participant awareness of 401(k) fees.
    Second witness will be Mercer Bullard. Mr. Bullard is 
recognized as one of the nation's leading advocates for mutual 
fund shareholders, and he is currently an assistant professor 
of Law at the University of Mississippi. In 2000, Mr. Bullard 
founded Fund Democracy, a nonprofit membership organization 
that advocates for mutual fund shareholders.
    Our third witness will be Michael Kiley. Mr. Kiley is the 
founder and CEO of Plan Administrators, Inc., and has over 20 
years of experience in providing affordable retirement plan 
servicing to small businesses. His company is a two-time winner 
of the U.S. Chamber of Commerce Blue Ribbon Small Business 
Award.
    Mr. Kiley is an active member of the American Society of 
Pension Actuaries, the National Institute of Pension 
Administrators, Society of Professional Administrators and 
Record-Keepers, and a Corporate Executive Board Retirement 
Services Roundtable.
    Senator Smith.
    Senator Smith. I will introduce Bob Chambers. OK.
    Bob Chambers is a partner at Helms, Mullis & Wicker. Mr. 
Chambers is testifying on behalf of American Benefits Council, 
the American Council of Life insurers, and the Investment 
Company Institute. Mr. Chambers will provide the plan sponsor 
perspective to the Plan C disclosure issue.
    The Chairman. Thank you so much. Mr. Love, we will take 
your testimony.

STATEMENT OF JEFF LOVE, DIRECTOR OF RESEARCH, AARP, WASHINGTON, 
                               DC

    Mr. Love. Thank you, Mr. Chairman. Mr. Chairman Kohl, 
Senator Smith, thank you very much for having us this morning. 
AARP appreciates the opportunity to speak with you today about 
a very important topic and a survey we conducted on that topic. 
As you noted, I am Jeffrey Love. I am the director of Research 
at AARP.
    We have a survey that we recently fielded on awareness and 
understanding of fees by those participants who are involved in 
them. In recent years, 401(k) retirement savings plans and 
other defined contribution plans have become the main stay of 
many Americans' retirement security.
    More than 60 percent of workers with pension coverage have 
only a 401(k) or other defined contribution plan, compared to 
20 percent a generation ago. All evidence suggests that worker 
reliance on defined contributions will continue to escalate.
    In light of the prevalence of 401(k) plans and the critical 
role that 401(k) plans can play in an individual's retirement 
security, AARP commissioned a nationally representative survey 
of 1,584 401(k) plan participants, ages 25 and older, in order 
to gage awareness and knowledge of fees and expenses charged by 
401(k) plan providers.
    The survey was fielded from June 8 through June 24, 2007, 
by Knowledge Networks of Menlo Park, CA, to members of a 
nationally representative panel online. The survey findings are 
in a document titled, ``401(k) Participant Awareness and 
Understanding of Fees.'' This is available outside on the table 
and has been made available to the panel. You can also find it 
on AARP's Web site, AARP.org.
    Now, the findings. What the survey reveals, as Senator 
Smith noted earlier, that many 401(k) participants lack even 
basic knowledge of the fees associated with their plans, 
including whether or not they pay fees at all and, if so, how 
much they pay. When asked whether they pay fees for their 
401(k) plan, nearly two-in-three, 65 percent plan participants, 
reported they pay no fees, and about one-in-six say that they 
do pay fees. Only about 17 percent recognize that they pay fees 
on their 401(k)'s. Another 18 percent admitted they do not know 
whether or not they pay fees or not. They had no idea.
    After being told that 401(k) plan providers often charge 
fees for administering their plans and that these fees may be 
paid either by the employer or by the plan--or the employees 
who participate in the plan, the vast majority, 83 percent of 
respondents, acknowledged they do not know how much they pay in 
fees.
    About one-in-six, only 17 percent participants, reported 
they know how much they pay to their 401(k) fees. That is only 
one-in-six. But over half, 54 percent, are not too or not at 
all knowledgeable about the impact these fees will have on 
their total retirement savings.
    Similarly, few can identify the different types of fees 
assessed by plan providers. When given possible definitions of 
three types of fees, about half can identify an administrative 
fee, 38 percent can identify a redemption fee, and only 14 
percent can correctly choose the definition of an expense 
ratio.
    We know that 87 percent of all 401(k) plans are 
participant-directed. The participants make decisions about how 
their money will be invested. We also know from our survey that 
eight in ten participants consider information about fees to be 
important in their investment decisions, and that most 
participants sense that the fees have a potential to reduce 
their return on investment in their 401(k) plans.
    The lack of participant knowledge about fees, coupled with 
the expressed desire for a better understanding of fees, 
suggests that information about plan fees should be distributed 
regularly, in plain language, to current and perspective plan 
participants. Six in ten, 61 percent, feel that information 
about fees should be distributed on a regular basis, and almost 
eight in ten, 77 percent, prefer this information to be written 
in paper.
    AARP recommends that fee information be presented in a 
chart or graph that depicts the range of possible effects that 
total annual fees and expenses can have on a participant's 
account balance in a year and over the long-term. Providing 
such information about fees will help current and perspective 
plan participants make better choices and better comparisons 
and improved choices about their investments.
    If workers don't start getting around understanding what 
401(k) fee information and the effect it has on their plans, 
they risk seeing a sizable portion of their retirement saving 
eaten up by fees, which they are unaware.
    Thank you.
    [The prepared statement of Mr. Love follows:]


    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    

    The Chairman. Thank you, Mr. Love.
    We turn now to Mr. Bullard.

     STATEMENT OF MERCER BULLARD, ASSISTANT PROFESSOR, THE 
    UNIVERSITY OF MISSISSIPPI, SCHOOL OF LAW, UNIVERSITY, MS

    Mr. Bullard. Good morning, Chairman Kohl, Ranking Member 
Smith. Thank you for the opportunity to discuss 401(k) fees 
here with you this morning.
    We are here today because 401(k) fees are crucially 
important to the retirement security of over 40 million 
investors. At the risk of restating oft-repeated data, I would 
like to direct your attention to the chart on my right.
    The three purple bars on the chart show the balances after 
an initial $10,000 investment in a 401(k) plan S&P 500 Index 
Fund, assuming three different expense ratio scenarios--.4 
percent, .8 percent, and 1.2 percent. I would like to thank 
Craig Israelsen, an economics professor with Brigham Young 
University, for putting this chart together for this hearing.
    The plan with the .4 percent expense ratio has a balance of 
about $69,000 after taxes, the .8 percent expense ratio about 
$64,000, and the 1.2 percent expense ratio about $60,000. 
Obviously, what appears to be a relatively small difference in 
fees produces a significant difference in value.
    The blue bar on the left shows the after-tax balance in a 
taxable account, not a 401(k) plan, invested in the Vanguard 
S&P 500 Index Fund from 1987 to 2006. This is a real fund, and 
its expense ratio during this period ranged from .26 percent to 
1.18 percent. The balance is $3,500 greater than the .4 percent 
fee in the 401(k) plan and $13,000, or 21 percent higher, than 
the 1.2 percent 401(k) plan. Now, not only do fees matter 
within a 401(k) plan, the 401(k) fees can actually undermine 
the tax benefits of the 401(k) plan altogether and leave 
employees better off investing elsewhere.
    Now, this chart actually reminds us that fees matter, but 
does more than that. I would like to use it to make just three 
points about fee disclosure.
    First, note that the bar chart translates expense ratios 
into hard dollars. Why is it that the GAO and the SEC, 
congressional witness and Chairman Kohl discuss the impact of 
fees this morning? Why don't they simply say fees are important 
because 1.2 percent is greater than .8 percent, or that .8 
percent is twice as much as .4 percent? Why do they always use 
dollars when they describe the impact of fees?
    The answer is that we understand dollar amounts better than 
percentages. We appreciate the fact that a $10,000 difference 
in our balance when we begin retirement will have a significant 
impact on our standard of living. Yes, fees do matter, and they 
matter enough to highlight for plan beneficiaries. Then, 
shouldn't they be disclosed in the same way that virtually all 
commentators use to illustrate the importance of fees?
    Perhaps fee-savvy investors understand that a .4 percent 
difference in fees will have a substantial impact on their 
balances, but we are here today because the Committee 
recognizes that many 401(k) beneficiaries are not fee-savvy. We 
regulate fee disclosure precisely to communicate with investors 
who are not fee-sensitive, not with those investors who are 
fee-savvy.
    So my first point is 401(k) fee disclosure should provide 
investors with a close estimate of the dollar amount of fees 
that they actually pay. My second point is the fee comparisons 
are crucial to effective fee disclosure. The reason this chart 
is effective is not just that it discloses fees in dollar 
amounts.
    It is also effective because it shows you the results that 
you would have achieved under different scenarios. Information 
has no meaning without context, and investors who are not 
sensitive to fees in the first place are unlikely to have the 
context in which to understand stand-alone expense ratios or 
even stand-alone dollar amounts.
    The third point that this chart illustrates is that it is 
effective because most of the people in this room have actually 
looked at it, at least those of you who can see it. I had this 
chart created precisely to get my audience's attention.
    The chart is fairly effective because, in a context where I 
own 5 minutes of your time, I can make it something that you 
think about. The same principle applies with respect to fees. 
Fee disclosure is most effective when the delivery vehicle is 
one that investors are likely to use.
    Mr. Campbell has discussed the excellent educational tools 
and materials on fees his office has made available to the 
public. But the investor who seeks out those materials is not 
the investor who is least sensitive to fees. A short form 
summary of each investment option has been bandied about is a 
crucial document for investors, but it is unlikely that 
beneficiaries who are insensitive to fees will use it.
    Investors who are insensitive to fees are likely, however, 
to review their quarterly statements. Most people like to see 
how much money they have invested, the value of their accounts, 
how much they have earned in good times, and even how much they 
have lost in bad times. The quarterly statement is like the 
chart over there because it is a delivery vehicle that works.
    When I see an unexplained $10 charge on my bank account 
statement, I find out what it is for. Imagine the effect if the 
investor in the 401(k) Index Fund with a 1.2 percent expense 
ratio sees on his quarterly statement that he paid $225 in fees 
last quarter and that, right next to that number, shows that he 
would have paid on $37 in fees if he had been invested in an 
Index Fund in the plan that charge only .2 percent, $225 versus 
$37. I hope that you will agree that that is effective fee 
disclosure.
    Thank you again for the opportunity to appear before the 
Committee. I hope I can help you with any questions you may 
have.
    [The prepared statement of Mr. Bullard follows:]


    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    
    The Chairman. We thank you, Mr. Bullard. We are going to 
recess the hearing now. We will be back as soon as we can. We 
ask for your forbearance and your indulgence.
    Senator Smith. We apologize. I have always complained that 
the leadership never checks with the aging Committee when they 
schedule votes.
    The Chairman. There are two votes, so we are not sure how 
they will fall. But we will be back just as soon as we can be 
here. Thank you.[Recess]
    We will reconvene now, and we have our third witness. Mr. 
Kiley from Wisconsin, we will take your testimony.
    Mr. Kiley.

  STATEMENT OF MICHAEL KILEY, PRESIDENT, PLAN ADMINISTRATORS, 
                       INC., DE PERE, WI

    Mr. Kiley. Good morning. My name is Michael Kiley. I am the 
founder and CEO of Plan Administrators, Inc., based in De Pere, 
WI. My firm is a two-time winner of the U.S. Chamber Blue 
Ribbon Small Business award, is a national provider of 
retirement plan services to thousands of small businesses 
throughout the country and their employees.
    I am here today on behalf of the Council of Independent 
401(k) Record Keepers, which is an organization of independent 
retirement plan service providers. The members of CIKR provide 
services for over 70,000 retirement plans covering three 
million participants with approximately $130 billion in 
retirement assets.
    CIKR is a subsidiary of the American Society of Pension 
Professionals and Actuaries, which has thousands of individual 
members nationwide. I would like to thank Chairman Kohl, 
Senator Smith and the other members of this Committee for 
examining the important issue of 401(k) plan fee disclosure.
    As an independent service provider, my firm fully supports 
and actively practices full fee disclosure. The 401(k) plan 
industry delivers investments and services to plan sponsors and 
their participants using two primary business models, commonly 
known as bundled and unbundled.
    Generally, bundled providers are large financial services 
companies whose primary business is manufacturing and selling 
investments. They bundle their proprietary investment products 
with affiliate-provided plan services into a package that is 
sold to plan sponsors.
    By contrast, unbundled, or independent providers, are 
primarily in the business of offering retirement plan services. 
They will couple such services with a universe of unaffiliated, 
nonproprietary investment alternatives.
    Whether a firm is a bundled investment firm or an unbundled 
independent, the full scope of services offered to plans and 
their participants is relatively the same. In other words, the 
only real difference to the plan sponsor is whether the 
services are provided by just one firm or more than one firm.
    When a business owner wants to provide a retirement plan 
for their workers, they need to find someone to operate the 
plan and someone to provide the investments. Under ERISA, the 
business owner must follow prudent practices and procedures 
when choosing the providers for each of these services.
    This prudent evaluation should include an apples-to-apples 
comparison of services provided and the costs for those 
services. The only way to determine if a fee for a service is 
reasonable is to compare it to the fees charged by other 
service providers.
    The retirement security of employees is completely 
dependent on the business owner's choice of retirement plan 
service providers. If the business owner chooses a plan with 
unreasonably high fees, the workers' retirement income will be 
severely impacted. It is imperative that the business owner 
have the best information to make the best choice.
    The Department of Labor has proposed rules that would 
require enhanced disclosures on unbundled or independent 
service providers while exempting the bundled providers from 
doing the same thing. While we appreciate DOL's interest in 
addressing fee disclosure, we do not believe that any exemption 
for a specific business model type is in the best interest of 
plan sponsors or their participants.
    Without uniform disclosure, plan sponsors will have to 
choose between a single price model and a fully disclosed 
business model that will not permit them to appropriately 
compare other provider services and fees. Knowing only the 
total cost will not permit plan sponsors, particularly less 
sophisticated small business owners, to evaluate whether 
certain plan services are sensible and reasonably priced.
    In addition, if a breakdown of fees is not disclosed, plan 
sponsors will not be able to evaluate the reasonableness of 
fees as participant account balances grow. Take for example a 
$1 million plan serviced by a bundled provider that is only 
required to disclose a total fee of 125 basis points, or 
$12,500. If that plan grows to $2 million--we hope it does--the 
fee doubles to $25,000 although the level of plan services and 
the cost of providing such services have generally remained the 
same.
    The bundled providers want an exemption while demanding 
that unbundled providers be forced to adhere to disclosure 
rules and regulations. Simply put, they want to be able to say 
that they can offer retirement plan services for free while we 
are required to disclose the fees for the same services.
    Of course, there is no free lunch, and there is no such 
thing as a free 401(k) plan. In reality, the costs of these 
free plan services are being shifted to participants without 
their knowledge. The uniform disclosure of fees is the only way 
that plan sponsors can effectively evaluate the retirement plan 
services they offer to their workers.
    To show it can be done, attached to my written testimony is 
a sample of how a uniform plan fiduciary disclosure could look 
by breaking plan fees into only three simple categories--
investment management, record keeping and administration, and 
selling cost and advisory fees, we believe plan sponsors will 
have the information they need to satisfy their ERISA duties 
and their duties to their workers.
    The private retirement system in our country is the best in 
the world. Competition has forced innovations in investments 
and service delivery.
    However, important changes are still needed to ensure that 
the retirement system in America remains robust and effective 
into the future. By enabling competition and supporting plan 
sponsors, the uniform disclosure of fees and services, American 
workers will have a better chance at building retirement assets 
and living the American dream.
    Thank you.
    [The prepared statement of Mr. Kiley follows:]


    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    
    The Chairman. Thank you, Mr. Kiley.
    Mr. Chambers.

   STATEMENT OF ROBERT CHAMBERS, CHAIRMAN, AMERICAN BENEFITS 
                     COUNCIL, CHARLOTTE, NC

    Mr. Chambers. Thank you, Chairman Kohl.
    My name is Robert Chambers. As indicated previously, I am 
in the Charlotte, North Carolina-based law firm of Helms 
Mulliss & Wicker. I am also the Chairman of the Board of the 
American Benefits Council this year, which is one of the 
organizations on whose behalf I am testifying today. The others 
are the American Council of Life Insurers and the Investment 
Company Institute.
    All three organizations very much appreciate the 
opportunity to present testimony with respect to 401(k) plan 
fees. Our goal, like yours, is that the 401(k) system remain 
fair and equitable, that it function 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. Yet, at the same time we think there 
is room for improvement through more universal disclosure of 
fee and other information to both fiduciaries and to plan 
participants.
    There are three pieces of the fee disclosure puzzle that we 
have been discussing today. One is disclosure by service 
providers to employers and to other fiduciaries. The other is 
disclosure by fiduciaries to plan participants. Finally, 
disclosure by fiduciaries to the government.
    This comports, as we heard, with the GAO's recommendations 
in their 2006 report, and with the three-part project that the 
Department of Labor is currently pursuing, and about which we 
heard in the last panel.
    Admittedly, we as these three organizations on whose behalf 
I am testifying today may have some concerns with some of the 
details in the department's proposals when they are issued. 
Frankly, we usually do, but we absolutely agree with their 
general approach.
    Now, I would like to use the remaining portion of my time 
to raise five points that the Council, ACLI and ICI think that 
require your attention.
    First, the 401(k) system in the United States is voluntary. 
It depends on the willingness of employers to you--to offer 
plans and the willingness of employees to use them. Fee 
disclosure reform does not--must not undermine these basic 
building blocks.
    If a new regiment is overly complicated or overly costly, 
or if it may lead to increased employer liability, some 
employers are going to drop their plans. Others are going to 
comply, but they may pass the costs on to participants in the 
form of plan expenses or reduced employer contributions.
    Further, and most important, many employees will be 
confused by the over-emphasis on fees when compared to equally 
valuable investment considerations, such as diversification, 
investment objectives, actual investment performance and risk 
and return factors, and they will make either 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 this concept through a 
disproportionate focus on plan fees.
    Second, every new feature that is added to a 401(k) plan 
adds new cost. Some of these enhancements are mandatory, such 
as the new benefit statement rules, and others, such as 
automatic enrollment, are permissive. But all of them are 
enhancements. They have all been adopted by Congress, and they 
all cost money to administer.
    Additional fee disclosure will result in additional cost. 
The legislature and regulatory agencies must coordinate their 
efforts when improving fee disclosure rules. Gearing up to 
comply with one new set of disclosure rules is going to be 
expensive, but shifting to another set of rules shortly 
thereafter will be enormously expensive and confusing to both 
plan fiduciaries and participants.
    Remember, these costs will need to be absorbed by 
participants and plan sponsors. Many sponsors could accommodate 
these increased costs by reducing plan contributions, as I 
previously noted, resulting in smaller benefits for 
participants. Therefore, we must measure carefully the value of 
what may be gained against the cost of annual disclosure. It 
will be particularly poor stewardship if our collective efforts 
to reduce costs in the end actually reduce savings.
    Third, in our system of commerce, it is quality and 
features of a product or a service that permit one manufacturer 
or service provider to charge more than a competitor. Some cars 
cost more than others, as do computers and wine. Similarly, 
401(k) plan fees should not be evaluated independently from the 
product or service that is provided.
    If asked, every participant would be willing to pay higher 
fees if the total net return on the investment is increased. 
Enhanced disclosure will enable participants to determine 
whether the quality of the product or the provider warrants its 
costs. The two are inextricably tied to each other.
    Fourth, we acknowledge that fee levels differ among 
different plans, just like cable TV service. Some people want 
only basic service. Some employers provide only a basic 401(k) 
plan. But other viewers want hundreds of channels, providing 
they expect an even more expansive spectrum of entertainment. 
Many employers want to provide a similarly broad span of 
retirement plan features for their participants.
    I know I have just a few seconds left. May I beg your 
indulgence just for one more point after this? Thank you.
    Many employers want to provide a similarly broad span of 
retirement plan features for their participants. More features, 
more costs. Enhanced disclosure will help employers to decide 
which choices to make available and will help participants to 
make decisions among the choices presented. It is also true 
that many smaller employers pay comparatively higher 401(k) 
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 marketplace. While it may not 
increase the negotiating power of smaller employers, it is 
going to provide them with a better shopping opportunity.
    Finally, fee information should be disclosed in the manner 
in which fees are charged, and this is where I think there is 
some disagreement on the panel. As you know, some services are 
bundled together and some are sold separately.
    Certainly, service providers must disclose the services 
that they provide and the costs of those services. But they 
should also be permitted to distinguish between those services 
that are bundled together and those services that the plan 
fiduciary may purchase separately. This is particularly 
important when ascribing fees to those services.
    Specifically, a service provider should not be required to 
ascribe separate fees to services that are not sold separately. 
For example, if a plan record-keeper has a captive trust 
company, how the fees are split internally is of no 
significance to, and may actually confuse a plan fiduciary 
where the fiduciary is not able to purchase those services 
separately at that price. Further, the split may be proprietary 
information, and may not accurately reflect other aspects of 
the relationship between the group of the bundled service 
providers.
    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 over-emphasize fees relative to other 
factors in the investment decisionmaking process, or undermine 
confidence in the retirement system or create new costs, which 
could result in decreased retirement benefits.
    Thank you.
    [The prepared statement of Mr. Chambers follows:]


    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    
    The Chairman. Thank you.
    Mr. Chambers, you warn in your testimony, you just said 
that participants could be confused by an overly complicated 
disclosure of fees. My bill, along with Senator Harkin, would 
give one number to participants on their quarterly statement, 
with the option for them to request further information.
    Do you think that giving participants a single fee number 
quarterly and allowing those that want to get further 
information is too complicated?
    Mr. Chambers. I think, Senator, the complication may be in 
coming up with one number for each participant. Clearly, from 
their perspective, if you give them one number, that is fine. 
It may be misleading for those people. It is not going to be 
comparative, as some of the other folks on this panel have 
suggested. I would be concerned that it would be giving them 
information in a vacuum.
    Admittedly, clean, crisp, simple, but I am not sure that it 
is the information that they would need.
    The Chairman. Mr. Bullard, do you think giving participants 
a single number to represent their fees on their quarterly 
statement with the option for more information would be overly 
confusing, or would you recommend that?
    Mr. Bullard. I would recommend it strongly, and I have 
heard arguments before that it might be misleading, which is 
always the argument that industry makes when, after having 
argued that we can't provide them with too much information 
because it will be too complex, once we winnow it down to some 
essential, simple information, it becomes misleading.
    There is going to be a tradeoff, as Senator Smith 
suggested, and that tradeoff is going to be between 
comprehensive information and clear, simple information. A 
dollar disclosure, what they actually paid in fees, or very 
close estimate of that amount, will only have the effect, even 
if it is not a perfect representation of what they paid, of 
making them think harder about their fees. It begins to get the 
ball rolling.
    One thing I think I agree with Mr. Chambers about. Is that 
more price transparency puts downward pressure on fees. I am a 
firm believer that that particular disclosure would do more to 
reduce the costs of investing in 401(k) plans than any other 
proposal that this Committee might adopt.
    The Chairman. Do you think that Mr. Chambers is 
representing interests that wanted to have higher fees?
    Mr. Bullard. I think Mr. Chambers is representing an 
industry that has already expended large sums on compliance. 
Unfortunately, the debate is always about new regulations 
rather than looking at old ones in which the people he has 
represented have already invested a fair amount of capital.
    I think the DOL should always be looking at how to reduce 
costs and eliminating old rules that are no longer important at 
the same time they are thinking about coming up with new rules.
    But as far as the costs of quarterly statements goes, in 
the past the industry has argued, and I think I quoted in my 
testimony that the mutual fund industry said that it would be 
``breathtakingly high.'' Within a year, MFS Investment 
Management announced that it was going to be providing the same 
quarterly statement disclosure that the industry insisted was 
completely unaffordable.
    So here is one provider that not only finds it affordable, 
but apparently believes it is profitable. I think that we need 
to move on and think about the behavioral effect it would have 
on people, if you could give them what I described as the $225 
versus $37 disclosure.
    I have no doubt that, even for the least sophisticated 
investor, that would put enormous downward pressure on fees.
    The Chairman. To all the members of the panel, would you 
agree that it is really important that people enrolled in 
401(k) plans know what the fee is? How we get there, whether it 
is difficult or easy, but it is very, very important that they 
know their fee? Anybody disagree with that?
    Mr. Chambers. I agree with that statement.
    The Chairman. Bullard. Mr. Love.
    Mr. Love. Certainly. Certainly agree with that.
    Mr. Kiley. I guess I would probably say the test is whether 
they can name the expense ratio, their investment option 
charges--probably not. But I think what we are getting at here 
is that they are conscious of their fees and the impact that it 
has on their bottom line.
    The Chairman. Right.
    Mr. Bullard. In fact, the expense ratio does not convey 
that. If you asked your average person, particularly one that 
is not that sensitive to fees, when they get into the checkout 
line, instead of them saying, ``That will be $12.50,'' they 
say, ``That will be .2 percent of what you have got in your 
wallet.'' They will have no idea what you are talking about.
    What we want people to understand is, it is a dollar 
number, so they can see they are getting these heavy hits on 
their balance quarter in and quarter out. It should represent a 
meaningful decision on the part of the plan to pay that amount 
of expense.
    Mr. Chambers is absolutely right. Sometimes that $225 
versus $37 will be explained by the fact it is a small plan, 
few participants, low balances, and a desire to have high-cost 
active funds.
    But the fact is that having those numbers will drive that 
inquiry and put a lot of pressure in places where the market is 
not efficient.
    The Chairman. Mr. Love, why is it that so few people do 
know what their fee is?
    Mr. Love. I am afraid it is probably a matter of not having 
the information available to them. The larger issue of 
financial literacy is a problem in this country. People need to 
know more about how they invest, how they save for retirement.
    If it were clearer to them, if there were charts, if there 
were single numbers, if there were dollar amounts, they would 
be much more likely to understand the consequences of the fees 
for their retirement. Right now it is not clear. It is not that 
they are being hidden. They are simply not clear.
    The Chairman. Well, being as the fee differential can 
eventually mean so much in terms of the return on their 401(k), 
why is it that those people who administer the 401(k) plans 
don't make it more clear what the fee is?
    Mr. Love. I am not sure of the answer to that. We are 
being--they can simply call for that. I mean, the actual plan 
participant who is asked, is this important to your 
consideration of your plan, always says yes. They would like to 
know what fees are when making decisions about investments. I 
am not sure why they are not clearer on the statements.
    The Chairman. You think that most people don't have an 
awareness of what the differential can mean in terms of return 
on their investment if the fee is 2 percent, versus 1 percent, 
1.5 percent? They don't really understand that.
    Mr. Chambers. They really don't understand that.
    If you ask someone clearly a comparative math problem, is 
1.5 percent more than .5 percent, most people can tell you yes, 
that is the case. But in our survey, a lot of people could not.
    But on the other hand, if you say to a participant, ``Here 
is a fund which charges 50 basis points a year, and here is a 
fund that charges 75 basis points a year,'' I think that most 
participants are going to understand one is more expensive than 
the other. But that is not the final analysis. The final 
analysis is, historically, how has this fund, charging fewer 
basis points, done compared to that fund which charges more?
    But to go back to Mr. Love's point about financial 
education, I think that that is the crux. I think that what we 
are dealing with here in connection with plan fees is, if you 
will pardon the expression, the ``low-hanging fruit'' of the 
equation. I think that the bigger issue facing this country 
and, frankly, in my view, facing Congress, because this is 
where you really join the foray here, is to try to figure out 
ways to help the Department of Labor to help employers to focus 
on how they can provide better financial education to their 
participants.
    Frankly, throwing more pieces of paper or more e-mails at 
different folks with a lot more information isn't going to get 
us over that hump. What is going to get us over that hump is 
more work similar to what the Department of Labor has done in 
the past, perhaps some tax opportunities for employees to get 
better financial information, which will then enable them to 
take the information that we are talking about today and put it 
to better use.
    Mr. Bullard. If I could just respond to two points, I would 
observe that using percentages, as Mr. Chambers just used, will 
simply not communicate the same information to those who are 
used to thinking about dollars.
    Second, no one has suggested that it is the final answer. 
The idea is to give an impetus for the market to work where we 
think it is not working efficiently.
    Third, the ultimate question is not really performance, 
when you get right down to it. Virtually every study has shown 
that there is minimal, if any, repetition, that is, persistence 
of performance among investment options. If you think about 
what Congress's concern should be, it should be looking at 
Americans as a whole.
    The fact is if you look at all Americans investing in all 
stock funds, the return of that group is going to be the 
market's return. No matter how you cut it, if there is one fund 
that is doing better by buying good stocks that another fund 
shouldn't be selling, they are buying the stocks from a fund. 
It is going to do worse than the market.
    So the bottom line is, America's going to get the market 
return, regardless of all the emphasis that some would like to 
put on performance. The only question I think for this 
Committee is how much of that market return is going to be 
given up to service providers and Wall Street.
    Mr. Kiley. Mr. Kohl, if I may, a couple of direct concerns 
that I would have.
    Within the industry, I would offer that, practically 
speaking, the way that small plans are sold and scrutinized, 
there is generally someone within the mix who has an interest 
in all of the facts of a plan. So while we cannot get the 
attention of all 20 employees and get them to invest in the 
knowledge, those 20 employees in a small employer generally 
have a high degree of trust of someone in the equation, 
generally one of their coworkers, who really does scrutinize 
the vendor material quite closely.
    So in that regard, by paying attention to that person that 
they find to be influential, they take an interest in the plan. 
I would submit that, as an industry, initiating a full, fair, 
level playing field on disclosure around fees will drive up 
interest in the area of concern, drive up interest in the fees. 
It will create downward pressure.
    In the end, it will take away an argument that we hear time 
and time again. If we do not disclose fees and if we don't do a 
good job with it--and the market will fine-tune that as time 
goes by--there is a tendency on behalf of some people to assume 
the worst. So they will avoid getting into their 401(k) plan if 
they don't see what they see to be a very full, fair disclosure 
process.
    So by engaging a full, fair disclosure process, over time 
we will bring ourselves more customers in this industry, which 
is what we are after.
    The Chairman. Is there much disagreement on what we are 
hearing here today? Mr. Chambers, are you in any particular 
disagreement with the thrust of what the other three have said 
this morning?
    Mr. Chambers. I suspect that we agree on more than we 
disagree on, which is helpful and always surprising on panels 
of this sort. I think that certainly my focus, and the focus of 
the folks who I represent--who I would, by the way, point out 
are many employers, not just service providers, and therefore 
are not in it to maximize fees.
    But I think that the focus that we are looking at is, as I 
mentioned, cost. There is significant additional cost in coming 
up with specific dollar amounts on a per-participant basis 
annually, quarterly, whatever the frequency is to be, and 
whether that cost, along with all the other costs that are 
associated with this, as I mentioned before, are actually going 
to wind up resulting in a net loss compared to where we would 
have been.
    So we are interested in transparency. We are interested in 
providing additional information. I agree completely that 
employees, if provided with information and with education on 
how to use it, that they will do a better job, and they are 
more likely to participate to a greater extent.
    I am not sure that I agree that the only way to do this is 
on dollars. I am not sure that I agree with some of the other 
things that we have said. But the positive note is that all 
four of us I think agree on more than we otherwise disagree on.
    The Chairman. Any other comments, gentlemen?
    It has been a good hearing, I think, on an important 
subject, and the Committee is going to continue to pursue 
improvements in the information that people who hold 401(k)s 
get with respect to fees and other charges. So, we appreciate 
your being here this morning, and you can expect to hear from 
us.
    Mr. Love. Thank you.
    Mr. Chambers. Thank the Chair. Appreciate it.
    The Chairman. Thank you so much. Thank you all for coming.
    Senator Smith. Thank you, Chairman.
    [Whereupon, at 12 p.m., the Committee was adjourned.]
                            A P P E N D I X

                              ----------                              


           Prepared Statement of Senator Robert P. Casey, Jr.

    I want to thank my colleague, Senator Kohl, for calling 
this important hearing. We meet today to discuss the issue of 
retirement security and particularly the role of 401(k) fee 
disclosure.
    As life expectancy for Americans is increasing and with the 
baby boom generation approaches retirement the number of older 
Americans is increasing. Last year, there were more than 37 
million Americans over the age of 65. My own state, 
Pennsylvania, has the third largest population of older 
citizens in the country--1.9 million and growing. We have a 
responsibility to ensure that all Americans have a secure 
retirement, and this is a particularly vital and acute issue 
for seniors.
    Living longer, and living more years in retirement, 
requires depending more on personal retirement funds to cover 
expenses. We have a variety of incentives and vehicles that 
allow people to save for retirement over the course of their 
lifetime, and we need to improve our efforts in that area, but 
even those who are able to save over a long period of time are 
also dependent upon the return on their investment. That is why 
it is imperative that an individual receive complete 
information on the fees that will be charged. Many people don't 
realize it, but these fees can vary widely from plan to plan, 
and that variation costs people real money. Federal pension law 
does not currently mandate that plan sponsors provide 
information on fees, leaving many participants unaware of 
exactly what they are paying or how it compares with what other 
plans might charge. We often exhort people to make responsible 
decisions, but the truth is they can only do that when they 
have good information.
    Both employers and employees need to be aware of all fees 
involved in the 401(k) plan a company offers. According to the 
AARP Public Policy Institute, over 80 percent of 401(k) 
participants report being unaware of the fees associated with 
their plans. This is a precarious situation that could leave 
many individuals with less money than they envisioned in 
retirement.
    If we can ensure that employers and employees are provided 
this information in a clear and consistent matter we can do two 
things: we can let people better understand the different 
choices they face, and we can bring market pressure on these 
plans to lower fees and save our constituents money that would 
otherwise go to someone else. The idea of holding down fees on 
investments is not a new one and investment companies outside 
of 401(k) plans do compete on cost.
    In 1975, John Bogle started the Vanguard Corporation which 
is based in Valley Forge, Pennsylvania. Pioneered the creation 
of index mutual funds. He created his index funds for a variety 
of reasons, one of them being the low costs he could pass on to 
his investors. To most people, it may sound like this hearing 
is just about a few percentage points difference, and that does 
not matter. But a few percentage points add up to real money 
over time. A $10,000 investment that earns 10% per year over 
the course of 50 years, will compound to $1,170,000. But a 
difference of just 2%, or an 8% return, will only compound to 
$470,000. This two percentage point difference can cost someone 
$700,000.
    John Bogle and others noticed this a long time ago, but we 
have failed to ensure that investors can really compare the 
fees involved in their retirement investments. For many people 
401(k)s are their only form of private retirement savings, and 
we have a responsibility to give them the tools to make it 
simple and easy to maximize their returns while minimizing 
their risk.
    Thank you again, Mr. Chairman, for calling this important 
hearing. I look forward to examining it further both here in 
the Aging Committee, and also in the Banking Committee. We need 
must ensure individuals have complete information so their 
retirement years can be secure and productive.
                                ------                                


              Prepared Statement of Senator Susan Collins

    The Chairman and the Ranking Member have performed a 
genuine public service in organizing this hearing on fee 
disclosure for 401(k) plan sponsors and participants.
    As we all know, seemingly small differences in fees can 
make enormous differences in asset accumulation over the years. 
For example, the Congressional Research Service calculated this 
month that a middle-income family investing for three decades 
in a fund with a four-tenths of one percent cost ratio will 
have 35 percent more money then if they invested in an 
otherwise identical fund with a two percent cost ratio.
    Now it is obviously true that a higher-cost fund can be 
worth its expense if it delivers top-notch results over the 
years. But even if a high-cost fund has an excellent net-of-
costs return, it is also true--as fund prospectuses and 
advertisements warn us--that ``Past performance is no guarantee 
of future results.''
    In this context, it is troubling that researchers have 
found that the great majority of participants in 401(k) savings 
plan do not understand the impact that fees can have and do not 
know what fees are being assessed on their employer's plan and 
on their accounts. All too often, the same can be said of plan 
sponsors, especially smaller businesses that may not have the 
staff or the experience to consider cost factors in selecting 
and monitoring plan administrators.
    As the new Government Accountability Office report on this 
issue concludes, ``participants need information about the 
direct expenses that could be charged to their accounts,'' 
while ``plan sponsors...need additional information to fulfill 
their fiduciary responsibilities.''
    But perhaps what is even more important is the clarity and 
quality of the information rather than the quantity of the 
information. Effective--as compared to voluminous--disclosures 
are a cornerstone for prudent decision-making by employers and 
their employees.
    When we consider that more than 40 percent of private-
sector employees participate in 401(k) plans and that 
government repeatedly stresses the importance of building 
personal savings to supplement Social Security, the inescapable 
conclusion is that we must ensure that workers and employers 
have access to understandable cost information for the funds 
that will provide for their retirement.
    Having said that, I must inject a note of caution. In our 
attempt to provide greater clarity of information for 
participants and sponsors, we need to be careful not to 
overwhelm them with new and excessive information that confuses 
rather than clarifies. From my contacts with constituents and 
from my former experience as a state business regulation 
commissioner, I know all too well how often well-intended 
regulations can have unintended consequences.
    I believe we would benefit, for example, from further study 
of the research and rulemaking that is currently underway at 
the Department of Labor before inadvertently creating 
unnecessary expense without necessarily improving the quality 
or clarity of 401(k) cost information. Adjustments and 
improvements to make the information already provided more 
useful and understandable could result in the most useful 
disclosure of all.
    Mr. Chairman, I am confident that the testimony of today's 
witnesses will help us find a prudent path toward providing 
better information to 401(k) sponsors and participants without 
imposing burdensome requirements or risking information 
overload. Again, I applaud your and the Ranking Member's 
initiative in convening this hearing on a matter of great 
importance to working Americans.



    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

                                 
