[Congressional Record Volume 153, Number 191 (Thursday, December 13, 2007)]
[Senate]
[Pages S15467-S15468]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. HARKIN (for himself and Mr. Kohl):
  S. 2473. A bill to amend the Employee Retirement Income Security Act 
of 1974 to provide special reporting and disclosure rules for 
individual account plans and for other purposes; to the Committee on 
Health, Education, Labor, and Pensions.
  Mr. HARKIN. Mr. President, I am here today to introduce, along with 
Senator Kohl, the Defined Contribution Fee Disclosure Act. This 
legislation is designed to address what may seem at first glance like a 
small issue, but in fact has a dramatic impact on the retirement 
security of millions of Americans who have 401(k) plans. Not many 
people realize this, but the Employee Retirement Income Security act, 
ERISA, does not require plan sponsors to provide participants with 
information on the level of fees that participants are charged by the 
various plans they have to choose between.
  The number of people participating in defined contribution plans 
grows every year, and unfortunately, these plans are a bigger part of 
their nest egg as employers freeze their defined benefit plans. One of 
the key challenges as we move away from guaranteed benefits is making 
sure people have all the relevant information to help them decide which 
plan will best serve their needs. Recently, AARP conducted a survey in 
which it asked individuals with 401(k) plans if they even knew what 
they paid each year in fees. Only 17 percent of people asked said that 
they know what their fee levels were.
  This is far from an academic matter. In fact, this could be 
disastrous for folks when they reach retirement. One person--who wishes 
to remain anonymous--recently shared with me a story that highlights 
what's at stake. She noticed one day that her 401(k) wasn't actually 
earning anything at all. After some examination, she found that the 
agent who set up the plan for the company received a fee of 2 percent 
annually for the first five years, reduced to .25 percent after that, 
paid by the employees and not the company. The investment firm charged 
a fee of 1.25 percent which they said was standard for companies with 
under $1 million in their 401ks. So, last year, she was paying 3.25 
percent in fees and earning less than 4 percent from her money market 
fund. She didn't have a clue about the fees until she inquired after 
she realized she wasn't making any money on the fund.
  So looking back at this AARP survey, of those 17 percent who said 
they knew what their fees were, 33 percent thought they weren't being 
charged any fees at all. Some companies will even tell people they are 
not being charged fees. While it is true that in some cases, employers 
pay fees, that is hardly the norm. And investment managers don't do 
their jobs for charity. These fees that people don't know about can 
have a big effect on what they end up with at retirement.
  The U.S. Government Accountability Office recently estimated that a 
45 year old with $20,000 in his 401(k) would have $70,555 at age 65 for 
his retirement, assuming he was getting a 6.5 percent return and only 
paying 0.5 percent in fees. But that figure decreases dramatically if 
the fees are increased by just a single percentage point, to 1.5 
percent. At that figure the same individual, investing the same amount 
of money, would have only $58,400 for his retirement, or more than 
$12,000 less.
  AARP took the GAO assumptions and created some additional examples. 
Consider this case: if a 35 year old invested $20,000 in a 401(k) plan 
over 30 years, paying 0.5 percent in fees, that individual would have 
$132,287 for retirement. But increase the fees to 1.5 percent, and the 
amount available for retirement is only $99,679--that is a 25 percent 
reduction in the account balance. Even if the fee only increased from 
0.5 percent to 1 percent, the value of the retirement account would be 
reduced by $17,417, or a little over 13 percent over the 30-year 
period.
  If you awoke one day to find that your bank account, or your 
retirement account, had declined in value by 25 percent, you would 
understandably be alarmed, and you would act quickly to fix the 
problem. But with high 401(k) fees, the reduction in benefits isn't 
immediately obvious. It happens slowly, over time, and often flies 
under people's radar screens because they are not told the level of 
fees they are paying, or they don't understand that some 401(k) plans 
charge far lower fees for providing the same amount of services. It is 
that problem--that information gap--that the Defined Contribution Fee 
Disclosure Act is designed to fix.
  My bill would provide participants with easily understandable 
information about the fees that they are paying. This information will 
be provided to them before they pick which plans they want to invest 
in, and again, regularly, on their quarterly statements.
  In addition, this bill does something even more important: it would 
require companies to disclose more information to plan sponsors. Right 
now, if you provide your workers with a 401(k) plan, you are required 
to act prudently and in their sole interest in your fiduciary duties. 
However, there are hidden fees that are sometimes not disclosed even to 
plan sponsors, and sometimes those sponsors also are not told about 
business arrangements between service providers to steer participants 
into investment options in which they have a stake, a classic conflict 
of interest.
  To fix this, the bill would require 401(k) plan providers to disclose 
all fees and relationships between service providers to the people 
selecting the plan a company will ultimately offer. The bottom line is 
that we want to create a situation where companies are picking several 
good options for their employees that all have decent reliable returns 
and fair fees.
  One thing my bill does not do is set a limit on fees that can be 
charged. As I have noted, high fees can make a real difference in 
account balances at retirement, but so can high returns, in a more 
positive direction, obviously. Sometimes, it is well worth paying 
higher fees if a small increase in fees will have a big effect on 
returns. In addition, some people want to purchase insurance products 
so that every month, they are buying a more secure piece of retirement. 
That is just fine, and my bill doesn't touch that. People who fully 
understand the real cost of a guaranteed return at retirement are the 
kind of people who appreciate, and will push for, more defined benefit 
plans. But they can't do that if they don't know what it costs.
  The bottom line is that people need to be investing more, and more 
confidently, in the 401(k) plans they are being offered. This is 
especially critical in a world where defined benefit plans are 
increasingly being slashed and frozen. For a growing number of workers, 
their only source of retirement income is their 401(k).
  Congress needs to focus more squarely on how we get workers to 
participate in the plans they have available, and what we can do to 
make sure the savings they grow in them are adequate. When people know 
they are being given all the facts in an easy-to-understand manner, 
they are more likely to contribute. And when the fiduciaries who are 
supposed to be looking out for them make sure all of their

[[Page S15468]]

options are good, they end up saving more money at the end of the day.
  This bill is a win for companies who want to provide their workers 
with a secure retirement, it is a win for 401(k) providers who have 
been providing reasonable fees all along, and it is a win for every 
American who has one of these plans. My colleagues and I introducing 
this measure have worked with interested parties on every side of this 
issue to make sure we're taking into account everyone's views. We also 
intend to work closely with the Department of Labor on their proposed 
regulations on this issue. While we believe that Congress has an 
obligation to address this issue, if we can all work together to 
develop regulations that address this issue in a way that will truly 
help participants and beneficiaries get a good deal, I am certainly not 
opposed to getting this done administratively. I strongly encourage my 
colleagues to cosponsor this measure.
  Mr. KOHL. Mr. President, I rise today to bring attention to the 
hidden fees associated with 401(k) plans, an important issue affecting 
the retirement security of millions of Americans. These fees, currently 
not disclosed to plan participants, can have a drastic effect on one's 
retirement savings.
  More and more Americans are relying on defined contribution plans, 
such as 401(k) plans, to provide their retirement income. Although 
these plans have only been in existence since the 1980s, they now cover 
over 50 million people and exceed $2.5 trillion in total assets. Of 
those private sector workers with any type of retirement benefit; two 
thirds have only their 401(k) savings to secure their financial 
wellbeing in retirement.
  Although 401(k)s have become the primary pension fund for most 
Americans, there are few requirements for fee disclosure to fund 
managers, and there are absolutely no regulations requiring that plan 
participants be notified about how much they are paying in fees. Most 
fees are either absent or obscured in participant statements and 
investment reports. Not surprisingly, studies have shown that fewer 
than one in five participants know the fees they are paying. 
Unfortunately, this lack of disclosure and lack of understanding can 
have serious consequences on 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 over 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.
  Today, Senators Harkin and I are introducing the Defined Contribution 
Fee Disclosure Act of 2007. We believe consumers have the right to 
clearly know how much products and services are costing them. Our bill 
will help shed some light on these fees by requiring complete 
transparency to both employers and participants. This will allow 
employers 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 lower costs for everyone by fostering 
competition among pension managers.
  I strongly encourage my colleagues to cosponsor this measure.
                                 ______