[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
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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/
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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
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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
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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
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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.
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