Hidden fees
As in most retirement plans, Oakland County, Mich., employees pay fees to the investment companies that manage their retirement funds. And, those fees are listed in quarterly statements that Oakland County sends to its retirement plan participants. “We don’t hide any fees from the participants,” says Doug Williams, the county’s retirement administrator. “We’re very upfront with all our information.”
As with all matters financial, retirement plan participants cannot expect a free lunch when it comes to paying fees on their accounts, but Congress is concerned that some plan providers are dining on champagne and caviar with the fees they collect from investors. Legislators worry that not all plan sponsors take the time, like Oakland County, to keep costs at a minimum and inform participants about how much they are paying for plan management services.
Seeking full disclosure
With more than 50 million American workers investing $2.7 trillion in 401(k) plans nationally, the amount of fees that participants are paying has become a major issue on Capitol Hill. While the number of 401(k) participants includes a small number of public sector employees, congressional data found that an additional 3.8 million public sector workers have invested $161 billion in 457 deferred compensation plans, as of the first quarter of 2007.
What irks some legislators most is the lack of information available to participants in an easily understandable format. “Today, because of weak disclosure rules, most workers don’t even know how much they are paying in fees,” said Rep. George Miller, D-Calif., chairman of the House of Representatives Education and Labor Committee, during committee hearings last March.
According to a U.S. Government Accountability Office (GAO) report, 83 percent of American workers said they do not know how much they are paying in fees for their retirement plans. The question of the size of fees is hardly insignificant, because assets in retirement plans may remain in accounts for decades. The GAO gave as an example a 45-year-old person who leaves $20,000 in a retirement account for 20 years. If the average net return were 6.5 percent (a 7 percent investment return minus a 0.5 percent charge for fees), the account would grow to $70,500. If the fee were 1.5 percent, the person would end up with $58,400. “Even a seemingly small difference in the fees that workers pay can make an enormous difference in the overall size of their [retirement] account balance,” Miller said at the hearings.
The GAO report said that for the system to work more effectively, better information should flow to the plan sponsors and to the participants. “For plan sponsors, understanding their expenses helps fulfill their fiduciary responsibility to act in the best interest of plan participants. It is important that both plan sponsors, typically the employer, and participants, as investors, receive and understand the fee information necessary to make informed decisions,” the report stated. In July, Miller introduced legislation, the 401(k) Fair Disclosure for Retirement Security Act of 2007, that details rules and regulations to resolve the issues uncovered by the GAO report.
At a House Ways and Means Committee hearing on the proposed legislation in October, Chairman Charles Rangel, D-N.Y., said the issue was important “for millions of American workers who are being asked to shoulder the cost of saving adequately for their retirement.” A number of industry experts, including several familiar with the public sector, testified at the session, much of which focused on the nature of disclosure, both at the employer and at the participant levels. A number of presenters cited the need for fuller disclosure to employers but advocated less detailed and simpler information for participants.
In testimony before the committee, Mindy Harris, president of the Lexington, Ky.-based National Association of Government Defined Contribution Administrators (NAGDCA), said that many of the abuses identified by the committee do not take place in the public sector. “The very nature of ‘local’ control and ‘open government’ laws dictates a great deal of oversight in state and local government plans,” she said, citing specifically governmental rules on procurement that require regular review of most contracts and employee participation in plan oversight committees.
Rather than pursuing regulations that add costs for employers and participants, she said, the goal should be to “enhance or simplify” the current procedures. To support her testimony, she reported the results of a survey of NAGDCA’s membership, in which plan sponsors said they pay “a great deal” of attention to fees when selecting providers but acknowledge that participants only modestly understand the fees in their plans. The plan sponsors gave their providers a four out of five rating for educating them on fees. And, 70 percent of respondents said they review their plan’s administrative fees and investment management fees at least annually, many using a consultant to assist them.
The process for selecting plan providers receives “so much public attention,” Harris said in an interview, that she is confident that the public sector does not have the problems that Congress has identified in the private sector. “We have public bids when we select a provider,” she says. “We are already doing what the legislation is trying to accomplish.”
Neither Miller nor Rangel has a timetable for legislation that would fix the problems they perceive in the system, but a committee staffer indicated that the regulation of retirement plans is considered “a big issue” that will be “high on the Democratic agenda” in 2008.
Too much information
Another group involved in the debate over fees, the Simsbury, Conn.-based Society of Professional Asset-Managers and Record Keepers (SPARK) Institute, has raised “significant concerns” over Miller’s legislation. SPARK represents the retirement services industry in Washington, including providers in the public sector.
In a statement before the Ways and Means hearing, SPARK maintained that the rules proposed on fee disclosure are “needlessly cumbersome, inflexible and counterproductive to the goal of increasing retirement savings.” In particular, SPARK is concerned that disclosing “detailed and complex information” will confuse participants rather than help them understand the fees’ effects on their accounts. In addition, the proposed legislation duplicates some existing regulations, will make proprietary information public and could lead to lawsuits, the institute said.
Larry Goldbrum, general counsel for the SPARK Institute, says that the industry, in general, supports a move toward “more disclosure, more transparency.” But, he points to two significant issues that the legislation must address. First, comparing different plans’ fees can be very difficult because the services offered are so variable. “Everybody always expects to pay the lowest fee,” he says. “But all things aren’t always equal. Some services are more robust, and you would pay a premium for that. If you pay less, you get less. Math is math.”
Second, he notes that some providers include more education services, which raise costs but also enhance value to participants. Plus, the additional level of education tends to reduce the time that the employer spends helping employees understand the retirement program.
SPARK would like to see the government, either through legislation or preferably regulation, adopt minimum standards that would provide sufficient guidance without trying to “go too much into the minutiae that fit all scenarios,” Goldbrum says. “We shouldn’t get the employee bogged down in detail. We’re not going to change employee behavior. We could just be giving them more information they choose to ignore.”
In December, the Department of Labor proposed regulations that would enhance disclosure to plan fiduciaries by requiring that contracts between certain service providers and plans provide for specific and detailed information. The proposal requires that all services furnished to a plan and all compensation, direct and indirect, to be received by the service provider be disclosed in writing. The proposal also requires the disclosure of possible conflicts of interest for the service provider that may affect the performance of plan services.
Goldbrum sees those proposals as a good first step in finding the right balance, and he says the legislators’ concerns about information for the participants may not lead to better investor involvement, especially if the disclosure becomes too complex. He points to testimony from Barbara Roeper before the Securities and Exchange Commission (SEC) on employee fund selection. Roeper, director of investor protection for the Washington-based Consumer Federation of America, told the SEC that when it comes to providing information to participants, “less is more.”
“I think what mutual fund investors need to know in this area is what they’re paying for the operation of the fund,” she said. “And they don’t need to know how it all breaks down. It’s not something that we need to focus on when we’re talking about how we work effectively in this area for the average investor.”
Williams echoes Roeper’s comments on trying to motivate participants to take a more active interest in Oakland’s retirement accounts. “Getting people to read their statements is a struggle,” he says. “A lot of them don’t even open their envelopes.”
Oakland County offers participants meetings to discuss the funds and fees, but many employees still don’t take advantage of the opportunity. “They really just want us to take their money and tell them what they have when they are ready to leave,” Williams says.
Because of that, Williams sees age-based funds that target distribution tied to the participant’s retirement date as a good investment alternative for employees. He notes that some fund companies add charges for the funds, “but we try to push the fee back down.”
In its handbook on “State and Local Government Deferred Compensation Programs,” the Chicago-based Government Finance Officers Association (GFOA) calls fees “the component over which plan sponsors may exert the greatest control,” noting that investment results are uncertain, but fees are guaranteed. The handbook, written in cooperation with Washington-based ICMA-RC, calls the obligation to ensure reasonable fee levels a key fiduciary responsibility, and it lays out the types of fees that often are charged and the factors that drive the costs that providers charge. GFOA is expected to issue further recommendations on the disclosure and reasonableness of fees charged to deferred compensation plans and participants in the coming year.
More action on every level would please Congress. “It is critically important for people to consider the cost to administer a plan and who pays the cost,” said Rep. Jim McDermott, D-Wash., chairman of the Income Security and Family Support Subcommittee of Ways and Means. “A shift in our economy to personal plans dramatically emphasizes the need to make every investment dollar count — and grow.”
Robert Barkin is a Bethesda, Md.-based freelance writer.
Common hiding places
Plan-level asset fee: A fee based on the size of the assets in a plan, for plan administration or sometimes risk and mortality
Participant fee: A flat dollar fee based on each participant served
Investment fund fees and expenses: Fees charged for operating the investment funds in the plan
General account/Stable value expenses: Insurance companies receive undisclosed spreads between the return received on the underlying investments in the general account and the yield paid to participants. Sometimes, there are separate rates for new contributions and money that has aged. Mutual fund-type accounts have disclosed expenses for stable value funds.
Transaction fees: Fees charged for specific services
Sales charges and market value adjustments: Charges assessed when assets are withdrawn by the employer or a participant, either in the form of contingent deferred sales charges or adjustments to the value of the assets being transferred. Front-end charges in retirement plans are rarely assessed.
SOURCE: “State and Local Government Deferred Compensation Programs,” Government Finance Officers Association in cooperation with ICMA-RC