Congress to 401(k) Plans: Disclose Fees

EDITOR'S NOTE: This article was originally published in the June 2009 issue of Kiplinger's Retirement Report. To subscribe, click here.

You may be diligent about studying your 401(k) statement when it arrives in the mail. You likely see the balance for each investment, your contributions and prices of shares. But you probably can't tell just how much your plan is costing you.

That could change. Congress is considering legislation that would require plan administrators to disclose detailed fee information to both employers and participants. "Typical 401(k) plan members don't know how much they're paying in fees, and they would probably be surprised," says Sandy Mackenzie, strategic policy adviser with the AARP Public Policy Institute. Lawmakers are expected to approve some form of fee disclosure, but plan administrators, sponsors and mutual fund companies are pushing for changes to the current bill.

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The 401(k) Fair Disclosure for Retirement Security Act in the House does not require annuity sellers, mutual fund companies and plan administrators to lower fees. Instead, supporters argue that employees have a right to know what they're paying. Workers could then compare the costs of the plan's investment offerings; if any cost too much, they could ask employers for cheaper options.

Investment-management fees are the largest cost. They're charged by companies managing mutual funds, annuities and other products. A company subtracts fees from a participant's gains and adds them to losses before it calculates the annual return. With a mutual fund, these fees are listed in a prospectus as the "expense ratio," but you need to multiply the ratio by the balance of each fund you own to figure out your own costs. Annuity products' fees are more obscure.

In addition, plan administrators charge fees to operate the plan, such as processing fund selections and preparing account statements. These fees are charged as a percentage of a participant's assets or as a flat fee, but they are not listed in individual statements.

The legislation would require 401(k) providers to give employers a breakdown of administrative, investment-management and other fees. The bill would also require sponsors to offer at least one index fund, which typically has lower fees than a managed fund. If the legislation passes, workers' statements would show, in dollar amounts, the fees that have been subtracted from their accounts.

Many employers are not even aware of each fee they're charged. Some providers package their fees. The bill would require providers to issue a fee breakdown. David Wray, president of the Profit Sharing/401(k) Council of America, which represents employers, says disclosure would give sponsors "the ability to comparison shop more effectively" for providers.

Rick Meigs, president of 401(k)HelpCenter.com, says fee disclosure will be "a huge benefit" to smaller employers. Large employers can demand fee information and better deals. But small firms typically don't see the fee breakdown and thus can't compare provider costs.

Groups representing providers, employers and mutual fund companies are advocating changes. The 401(k) providers argue that calculating an exact fee total for each employee would be impossible. "You have contributions coming into an account, you have market fluctuation, you have participants coming in and out," says Larry Goldbrum, executive vice-president for the SPARK Institute, a trade group. He says providing expense ratios rather than dollar amounts for each person's investments is enough.

Mutual fund companies say they already disclose expense ratios, and support requiring insurance companies and other product providers to disclose fees. But they're concerned that employees will choose investments based solely on their fees. "Fees have to be disclosed along with risks, past performance and investment objectives," says Michael Hadley, an associate counsel at the Investment Company Institute.

Meanwhile, says Wray, "Plan sponsors are very worried about being sued." Because employers have a fiduciary duty to avoid high fees, they fear that workers will retaliate if they're dissatisfied with plan costs. Employers are pushing for a measure that would help insulate them from lawsuits.

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