High Maintenance Fees Can Strip Thousands of Dollars from Retirement Savings

WASHINGTON, D.C. - Senator Tom Harkin (D-IA) and Senator Herb Kohl (D-WI), Chairman of the U.S. Senate Special Committee on Aging, introduced legislation today to protect American workers by ensuring they can access information on the cost of 401 (k) plans' management fees.  The Harkin/Kohl Defined Contribution Fee Disclosure Act of 2009 would require 401(k) plan providers to disclose all fees so that workers saving for retirement can make a fully informed decision about which plan is best for them.
Choosing a plan with a lower management fee can boost Americans' retirement savings by thousands of dollars.  In 2007, AARP found that if a 35-year-old invested $20,000 in a 401(k) plan over 30 years, earning a 6.5 percent return and paying 0.5 percent in fees, that individual would end up with $132,287 in savings.  But if their fees increased to 1.5 percent, only $99, 679 would be left for their retirement - a 25 percent reduction in the account balance.
"It is absurd that millions of Americans rely on 401(k) plans for their retirement security and yet they aren't told what fees they are paying to maintain these accounts," said Senator Harkin.  "This bill will shed light on the 401(k) selection process and give Americans more control over their retirement future. In an economy with more and more defined benefit plans being slashed or frozen everyday, it is vital that employees have access to all the information they need to maximize their retirement savings."
"I believe there is a basic right for consumers to clearly know how much products and services are costing them," said Senator Kohl.  "Disclosure is especially important in the case of 401(k)s, as the slightest difference in fees can translate into a staggering depletion in savings, greatly affecting one's ability to build a secure retirement."
Currently, it is difficult for 401(k) participants to access information on what fees they are being charged and how these fees affect their final account balance.  The Defined Contribution Fee Disclosure Act helps employees obtain this information in an easily understandable format by doing the following:
  • Increasing the information given to employers who sponsor 401(k) plans.   Employers determine what 401 (k) plans their employees can choose from.  Therefore, the employers need to have comprehensive list of all of the fees that they are paying and why.  This information would then be passed on to participants upon request.
  • Giving participants information about the overall levels of fees when they choose investment options and on their quarterly statement.   The pre-selection notice would include other critical information for plan selection such as historical returns, the level of risk, and basic investment guidance.  A quarterly statement would help people to understand over time how much they have paid in fees, and help them to compare fees against returns.
  • Require disclosure of relationships between all parties with financial interest in the plan.  The U.S. Government Accountability Office (GAO) found that, "labor and plan sponsors also may not have information on arrangements among service providers that could steer plan sponsors toward offering investment options that benefit service providers but may not be in the best interest of participants."  Increasing disclosure of these business arrangements is key to consumer protection.
In addition to ensuring workers have the information they need to make good retirement fund decisions, Senator Harkin has fought to ensure workers get a pension in the first place. Last Congress, Harkin introduced the Restoring Pension Promises to Workers Act, which would require that if a company is profitable enough to afford gold-plated pensions for its executives, then it must provide at least a basic pension for rank-and-file employees. Harkin also chaired a hearing on 401(k) fees in the Senate Health, Education, Labor, and Pensions Committee.
Last Congress, Kohl held two Aging Committee hearings on 401(k)s and retirement security.  The first addressed the need for disclosure of 401(k) fees and was held in conjunction with the introduction of Defined Contribution Fee Disclosure Act of 2007.  The second hearing identified an alarming increase in 401(k) plan loans and withdrawals.  As a result, Kohl introduced legislation with Senator Chuck Schumer (D-NY) to ban the use of 401(k) debit cards and set a limit on plan loans to protect retirement savings.  On February 25, the Aging Committee will hold a hearing to examine, among other things, 401(k) "lifecycle" or "target-date" funds.
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