Labor Department officials warned Wednesday that excessive fees could be draining anticipated retirement income from the 401(k) accounts of American workers.
“There have been reports that employers and employees may not be receiving adequate information about fees assessed to their accounts,” said Labor Secretary Alexis Herman.
These concerns prompted the agency to begin fact-finding hearings Wednesday on whether sponsors of the popular tax-deferred retirement plans are fulfilling their responsibilities to millions of participants who are depending on this income for their old age.
“In part, the enormous popularity of 401(k) plans is the reason we are here,” said Olena Berg, assistant labor secretary for pension and welfare benefits administration. “Today, more than 25 million workers have put aside over $1 trillion in their 401(k) accounts.”
Because a booming stock market has provided high returns, many of these investors don’t know how much they are paying in fees, Berg said. That is a concern, because fees and expenses that come directly out of the gains of workers’ retirement accounts “reduce the amount of future benefits.”
In addition to the hearings, the Labor Department has begun a “special enforcement project” to ensure that 401(k) savings “are not eroded because of excessive or undisclosed fees.”
The Wall Street Journal reported this week that a growing number of employees are paying higher fees to the “vendors” of 401(k) retirement plans - mutual fund companies, insurers or brokerage firms that set up and run the plans. A study of more than 122 such vendors showed employees of large companies paying as much as $300 a year in fees and employees of small firms paying as much as $700 a year, the Journal reported.
The Labor Department is investigating whether there is adequate disclosure about these fees and whether the charges are excessive.
While the mutual fund industry discloses such fees under federal securities laws, one witness testified, the Labor Department “may wish to consider imposing similar requirements on providers of other investment options, as well as with regard to plan-level fees.”
The agency “should take steps to assure that participants will be provided with full disclosure about expenses they will bear,” testified Matthew Fink, president of the Investment Company Institute, the national association of the mutual fund industry.
Currently, there is no simple way to compare fees being charged by different vendors, said Kenny Lee Adams, president of (k)la, a San Francisco-based company that publishes the (k)form Catalog, a comprehensive guide to 401(k) information.
Since there are no clear standards for comparing 401(k) vendor fees, and no two vendors price the same way, “it’s the old analogy of trying to compare prices for apples and oranges, and too often sponsors end up paying for a fruit salad,” Adams said.
Adequate fee information is vital because an employee’s ability to create retirement wealth is directly correlated to the employer’s ability to select the right 401(k) vendor, Adams said.