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Home > Library > Stable Times > Volume 11, Issue 1
The quarterly publication of the Stable Value Investment Association
First
Quarter 2007 • Volume 11 Issue 1
Congressman Looks for More Transparency and Disclosure in 401(k) Fees
By Gina Mitchell, SVIA
The U.S. Constitution promises all men the right to life, liberty and the pursuit of happiness. Congressman George Miller (D-CA) is trying to ensure that 401(k) investors, plan sponsors and regulators understand that these basic freedoms do not currently extend to the 47 million Americans who have invested $2 trillion in 401(k) plans. Congressman Miller wants to ensure that 401(k) investors have information to assess and understand the costs associated with their 401(k) plan.
Where Are the Fees?
Witnesses testified in his March 6th hearing on ‘hidden fees’ that fees were not so much hidden, as the hearing’s title implied, but hard to find and pin down for most 401(k) investors. The General Accounting Office (GAO) reports that, “The fee information that ERISA requires 401(k) plan sponsors to disclose is limited and does not provide participants with an easy comparison of investment options.” GAO explains that plan sponsors are required to provide all participants with a summary plan description, account statements, and the summary annual report, but these documents are not required to disclose information on fees borne by individual participants. (The following GAO chart summarizes required disclosures.) Further, GAO criticized the piecemeal manner in which fee information is disclosed, which makes it hard for 401(k) investors to get a complete picture of their investments and difficult to compare investments among each other.
Required Disclosures and Frequency
| Disclosure document | Document Purpose | Information on Fees | Timing Requirement |
| Summary plan description | To explain to participants how the plan operates. | May contain information on how various fees--such as investment, record-keeping, and loan fees are charged to participants--but not required by ERISA to do so. | Within 90 days of being covered by the plan, then every 5 or 10 years depending on changes. |
| Account statement | To show the account balance due to a participant. | Typically identifies fees, such as for loans, that are directly attributable to an account during a specific period. Also may show investment and record-keeping fees, but not required by ERISA to do so. | Generally, within 30 days of a written request. Quarterly statements are required beginning in 2007. |
| Summary Annual Report | To disclose the financial condition of the plan to participants. | Contains total plan costs incurred by plan participants during the year. | Annually. |
| Prospectus or fund profile | To provide investment option information. | | Immediately following initial investment.* |
Source: GAO analysis
*Required only for 404 ( c ) plans and for securities regulated by the SEC.
Where Does the Money Go?
GAO found that investment and record-keeping fees comprise nearly all of 401(k) plan fees. Further, they found that investment management fees account for the majority of 401(k) fees, regardless of plan size. They point out that investment management fees were 84.5 percent of total fees in plans with 25 participants, compared to 98.6 percent of total fees for plans with 2,000 participants.
Who Pays?
According to GAO’s research, plan participants are shouldering more of 401(k) costs. GAO used the following chart from the Profit Sharing/401(k) Council to illustrate how costs are borne.
Who Pays for Major 401(k) Plan Fees
| | Plans with Fewer than 5,000 Participants | Plans with More than 5,000 Participants |
| Participants(percent) | Sponsors(Percent) | Participants and Sponsors(percent) | Participants(percent) | Sponsors(Percent) | Participants and Sponsors(percent) |
| Investment fees | 61.8 | 27.5 | 10.6 | 71.5 | 16.2 | 12.3 |
| Plan record keeping | 32.5 | 58.3 | 9.2 | 50.4 | 34.6 | 15.0 |
| Audit fees | 16.0 | 82.5 | 1.5 | 33.3 | 62.2 | 4.4 |
| Communication to employees | 20.0 | 70.5 | 9.5 | 34.3 | 49.6 | 16.1 |
| Investment consulting fees | 33.0 | 60.0 | 7.0 | 39.0 | 52.8 | 8.1 |
| Legal fees | 10.3 | 84.7 | 5.0 | 20.7 | 66.7 | 12.6 |
| Trustee fees | 29.4 | 66.6 | 4.0 | 47.2 | 43.2 | 9.6 |
Source: Profit Sharing/401(k) Council of America
Impact of Fees over Time
Congressman Miller points out that fees are important not only because plan participants are shouldering more of these expenses but also because they can have a tremendous and even detrimental impact on retirement savings over time. As the following chart illustrates, with a $10,000 annual contribution, a 1 percent difference in returns can reduce savings by $8,610 over 10 years, $74,942 over 20 years, and $355,395 over 30 years.
What Are the Fees?
While the hearing was full of hyperbole about hidden and excessive fees, it was a little thin on actual fee information. A 2006 study by the Investment Company Institute found that in 2005 the average asset-weighted expense ratio for 401(k) plan investing in stock mutual funds was .76 percent, compared to a .91 percent for all stock mutual funds. Data from “Plans in Transition: IOMA’s Defined Contribution Survey, 2004,” found that investment fees averaged .81 percent in 2004 for 401(k) plans for all investment options.
What about Stable Value?
IOMA reported in the same survey that stable value investment management fees of .42 percent compared favorably to the .81 percent average. IOMA found stable value fees averaged .56 percent for plans with less than $50 million in assets and .37 percent for plans with more than $50 million in assets.
Stable value funds may also have a leg up on other investment options when it comes to transparency and disclosure. SVIA’s Fee and Disclosure Template has been used by many stable value managers as a framework to provide information on stable value investment management and wrap fees to 401(k) sponsors and participants. More information about the template and the break down of stable value fees can be found on the Association’s website, www.stablevalue.org.
Bundled and Proprietary Products Take the Brunt of Fee Focus
An estimated 70 percent of all 401(k) plans are “bundled,” according to Stephen Butler, President of Pension Dynamics Corporation, a practice that combines 401(k) investment services with administration. Butler charges this ‘packaging,’ used by some insurance and mutual fund companies, obscures fees for 401(k) plans. This packaging is typically used by smaller and less sophisticated plans. Butler charges that insurance companies’ bundled offerings get by with minimal disclosure since they are regulated by state insurance commissions, an oversight which he feels Congressman Miller must address by providing federal oversight of insurance company products offered to 401(k) investors.
Butler also viewed the mutual fund practice of requiring a core percentage of a 401(k) plan’s investment options to consist of the same fund family providing a 401(k)’s administration as problematic. This is because most mutual funds do not provide superior returns across all their investment offerings, and, of course, investment fees vary.
More to Come
Congressman Miller put the hearing into perspective. He notes, “Social Security is the sole source of retirement income for half of all retirees and the primary source of income for two-thirds of all retirees. Still, Social Security was not intended to be a primary source of retirement income for workers; it was meant to supplement workers’ pensions and other retirement savings. Here’s the rub: 401(k)-style plans were never intended to be a primary source of retirement income either. They, too, were designed to give workers a way to supplement their retirement income. Today, the average 401(k) account balance among private sector workers is just $28,000…that’s why we have to make sure that workers with 401(k)s are getting the best bang for their buck. Improving 401(k) transparency is just the beginning of our efforts to ensure that all Americans have access to a secure retirement...”
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