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Chairman of Aging Committee Holds Hearing on Need for Disclosure, Announces Bill

WASHINGTON - Today U.S. Senate Special Committee on Aging Chairman Herb Kohl (D-WI) held a hearing on the devastating effect hidden 401(k) fees can have on retirement savings and the need for simple and clear disclosure.  Although only established in the 1980s, 401(k) defined benefit plans have become the main retirement savings vehicle for most Americans, covering over 50 million people and exceeding $2.5 trillion in assets.  Under federal pension law (ERISA), there is no requirement for plan sponsors to provide participants with information on the fees associated with differing investment options.  Because most fees are netted from their account balances, most plan participants are unaware of the costs of their plans. According to a study conducted in July of this year by AARP, only 17 percent of 401(k) enrollees knew that they were paying any fees.  Two-thirds of the respondents, or 65 percent, thought they paid no fees for their 401(k) plan.
"I believe there is a basic right for consumers to clearly know how much products and services are costing them," said Chairman 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."
Chairman Kohl and Senator Tom Harkin (D-IA) will introduce the Defined Contribution Fee Disclosure Act of 2007 in coming weeks, a bill that would require complete transparency of 401(k) fees to both employers and participants. The legislation will enable employers to negotiate with pension fund managers in order to get the lowest possible fees for their employees. Also, participants will be able to make informed choices between investment options that charge differing fees, and will have the opportunity to significantly increase their retirement savings.  Ultimately, this legislation will help to lower costs for everyone by fostering competition among pension managers. 
The U.S. Government Accountability Office (GAO) recently estimated that a 45 year old with $20,000 in his 401(k) would have $70,555 at age 65 if he is getting a 6.5 percent return and only paying 50 basis points (0.5 percent) in fees. However, increasing the fees by just 1 percentage point would leave him with only $58,400 at retirement age. AARP used those assumptions and realized that over 30 years, $20,000 with 0.5 percent in fees would grow to $132,287, while paying 1.5 percent in fees would reduce that growth to $99, 679-a 25 percent reduction in the account balance.  Even a difference of only 50 basis points, from 0.5 percent to 1.0 percent, would reduce the value of the account by $17,417, or a little over 13 percent over the 30-year period.
At the hearing, Barbara Bovbjerg, Director for Education, Workforce and Income Security Issues at GAO, gave committee members an overview of the current law governing 401(k) fees, stating that it does not adequately require disclosure of fees and expenses. Bovbjerg also offered insight into how best to present this information to consumers. Assistant Secretary of Labor Bradford Campbell, head of the Employee Benefits Security Administration, offered a preview of new disclosure regulations that the Department of Labor intends to release.
On the second panel, Jeff Love shared the results of AARP's aforementioned study on 401(k) fees. Mercer Bullard, one of the nation's leading advocates for fund participants and founder of Fund Democracy, offered testimony about the lack of attention most consumers give to fees, the need to provide consumers with clear information on quarterly statements, and the ability of plan managers to present fee information.  Michael Kiley, of De Pere, Wisconsin, testified on behalf of the American Society of Pension Professionals & Actuaries (ASPPA) and the Council of Independent 401(k) Recordkeepers (CIKR). Kiley explained how disclosure would help drive down prices and allow consumers to choose a better product. Lastly, Robert Chambers, chairman of the American Benefits Council, shared with committee members the industry perspective.
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