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WASHINGTON-Providers of 401(k) plans need to provide fuller disclosure of the plan's fees voluntarily, or the federal government may require it.
That was one of several themes that arose during an all-day hearing on 401(k) fees held by the U.S. Department of Labor last week. During a brief appearance at the hearing, Labor Secretary Alexis Herman said, "We want to make sure if there is a problem in this area, that we find the problem and fix it."
The hearing came amid studies showing that 401(k) fees are increasing and that the burden of paying some of those fees is shifting from plan sponsors to plan participants, with a commensurate reduction of workers' retirement accounts, noted several speakers.
"To the degree that 401(k) fees and expenses come directly out of the gains of workers' retirement accounts, they reduce the amount of future benefits that will be available to those workers. It is essential that steps be taken to ensure that plan sponsors and participants understand what fees are being charged and that they are reasonable," said Olena Berg, the assistant Secretary of Labor for pension and welfare benefits.
More than 25 million workers have more than $1 trillion invested in 401(k) plans, she noted. A healthy economy and a "booming stock market" have resulted in double-digit returns for 401(k) and other retirement plans. "These high returns earned on plan investments may be obscuring the fees paid for such investments," she said.
In addition, "there may be some confusion concerning investment choices. Even when employees choose their plan investments, employers retain responsibility for selecting and monitoring the menu of investment options which the workers choose from," said Ms. Berg.
"Employees, however, need to understand that there is a cost associated with the services they request. For example, it is more expensive to administer a plan with a wide range of investment options and trading as compared to one which permits only quarterly investment options and limited trading. Both employers and employees should know that there are trade-offs between the services and the fees," Ms. Berg said.
Trade-off or not, witness after witness told Ms. Berg and other members of the Labor Department panel examining 401(k) fees that fees charged in connection with the accounts should be fully disclosed. "Participants need clear, accurate and understandable disclosures," said Shaun O'Brien, retirement policy analyst with the AFL-CIO in Washington.
"All fees should be noted and explained," he said.
Full disclosure of all fees is necessary, agreed Ted Benna, president of the 401(k) Assn. in Cross Fork, Pa., and the designer of the first 401(k) plan. Mr. Benna said the disclosure also should include who is paying the fee-the plan sponsor or the plan participant.
"Participants think they are getting a fund at a normal management fee" and then find out they are paying much more, said Mr. Benna. He said the problem of fee disclosure is particularly focused on employers who have 250 or fewer participants in their plans.
The question of disclosure can be handled two ways, he said. The 401(k) industry can voluntarily disclose fees or face being required to do so by the government, he said.
Even small fees can have a large impact over time, said Stephen J. Butler, president of Pension Dynamics Corp., a Lafayette, Calif.-based consulting firm. The result is "the magic of compound interest working against us," he said. He would like to see the development of some standard for measuring the costs of 401(k) plans.
Not all speakers favored greater fee disclosure, particularly if mandated by government.
"Current fiduciary standards adequately protect 401(k) plan participants in the vast majority of cases, and mandating the form and content of fee disclosures to plan fiduciaries or participants would increase the cost of maintaining 401(k) plans without providing commensurate value to participants," said Lynn Dudley, vp-retirement policy for the Assn. of Private Pension & Welfare Plans in Washington.