On Defined Contribution Plans, U.S. Should Follow Other Countries: Report

The GAO finds U.S. defined contribution plan providers can learn a lot about fee disclosure from the best practices of other countries.


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 participant’s 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 including:

- 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 provider. - 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 this year.

“Guaranteeing the disclosure of hidden 401(k) fees will give Americans a fighting chance to strengthen their retirement and increase our nation’s 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 Street’s 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.