This week U.S. defined contribution plan sponsors received a
startling piece of news: At least four countries outside the
U.S have better fee disclosure practices than those in the U.S.
The report, issued by the General Accounting Office in March,
reviewed best practices in hopes of enlightening U.S.
retirement plan providers and regulators.
It turns out that even when compared to the new,
long-awaited fee disclosure rules from the Department of Labor
expected to finally go into effect later this year, countries
like Australia and Chile do a better job of informing plan
participants of their individual account expenses.
The March 2012 report entitled, Defined Contribution
Plans: Approaches in Other Countries Offer Beneficial
Strategies in Several Areas, requested by George Miller
(D-CA), a ranking member on the Committee on Education and the
Workforce in the House of Representatives, and Robert Andrews
(D-NJ), a ranking member of the Subcommittee on Health,
Employment, Labor and Pensions, also in the House of
Representatives. Miller has long been an advocate for
retirement income security for middle class Americans.
Miller and Andrews have reason to be concerned. Pension and
retirement industry experts know that fees can take a big bite
out of a plan participants final pot of savings. That
simple math has enabled the exponential growth of the defined
contribution plan mutual fund industry, from $35 billion in
1990 to $3 trillion today. They also probably know that in an
October 2010 report on 401(k) fees, the Department of Labor
found that a one-percentage-point difference in fees could
decrease retirement savings at the end of a career by as much
as 28 percent.
The trouble is, as Miller and Anderson also well know, the
majority of plan participants the more than 51
million U.S. workers enrolled in 401(k) type
plans have absolutely no clue what fees they
are paying in their workplace savings plans.
In fact, most plan participants are unaware that they are
paying fees at all. A February 2011 survey conducted by the
AARP found that 71 percent of 401(k) plan participants said
they paid no fees.
The GAO report, which examined fee disclosure practices in
Australia, Chile, Sweden and the United Kingdom, found that,
these countries have made disclosures simpler and more
uniform to facilitate comparisons, and one has required that
providers highlight the long-term impact of fees on
participants account balances.
In addition, states the report, some
countries require that participants receive personalized
information about the total amount they pay in fees over a
given time period.
Adding to the confusion among U.S. workers is the sheer
multitude and complexity of fee schedules which include those
for plan administration; sales charges or loads for buying or
selling shares; fund management (also called investment
advisory or account maintenance fees); and miscellaneous fees
that encompass recordkeeping, toll-free numbers, investment
advice, as well as additional fees for specialized products
like target date funds and variable annuities.
The GAO report provides examples of best practices
- In Chile, pensions agency officials evaluate key
features of the DC system, such as the service
providers management of the individual accounts and the
composition and role of the board of directors of the service
- In both Chile and Australia, agency officials said
using a risk-based approach enables the pensions regulator to
take proactive measures to ensure the DC plans are operating
in the best interest of participants. These countries have
used risk-based approaches to oversee service providers for a
number of years, while the DoL has just begun to develop a
risk-based approach in its efforts to oversee U.S. DC plans
and service providers.
- In Sweden and the United Kingdom, consolidating
administrative functions eliminates the need for fund
managers to maintain individual accounts. Representatives
from service providers in both countries said this structure
allows them to significantly lower their fees.
- For individuals who do not actively choose where to
invest their contributions, some countries have established
low-cost default options through a variety of measures, such
as creating a nonprofit entity to run the default fund under
a low-cost mandate, increasing the use of online services and
eliminating marketing costs.
Rep. George Miller introduced legislation that, if passed,
would provide workers with clear, understandable information on
the fees that come out of workers pockets and would help
workers understand their investment options. It passed the
House of Representatives in 2010 but has not been reintroduced
Guaranteeing the disclosure of hidden 401(k) fees will
give Americans a fighting chance to strengthen their retirement
and increase our nations future economic security,
Miller said at that time. We need to ensure that 401(k)s
are run in the best interests of account holders, not for the
sake of boosting Wall Streets bottom line.
The GAO report concludes with a call to action by the
Secretary of Labor on two fronts. First, to consider other
countries experiences as the DoL continues its efforts to
develop a risk-based approach in supervising defined
contribution plans and their service providers, such as
adopting risk-based oversight practices developed by the
International Organisation of Pension Supervisors and used by
the countries the GAO reviewed that have helped them better
oversee their DC plans.
Second, to consider recent international initiatives to
improve fee transparency to assess their relevance and utility
for U.S. 401(k) plan participants, such as improvements that
provide summarized and personalized fee information and that
show the effects of fees over time.
On an optimistic note, the DoL generally agrees with the
recommendation that it monitor other countries
experiences with fee disclosure. According to a DoL
spokesperson, as the new rules that plans must
make the initial annual disclosure of plan-level
and investment-level information (including
associated fees and expenses) to participants no later than
August 30, 2012 go into effect, the department
will monitor their impact for possible adjustments and
improvements in the future.