[Senate Hearing 110-365] [From the U.S. Government Publishing Office] S. Hrg. 110-365 HIDDEN 401(K) FEES: HOW DISCLOSURE CAN INCREASE RETIREMENT SECURITY ======================================================================= HEARING before the SPECIAL COMMITTEE ON AGING UNITED STATES SENATE ONE HUNDRED TENTH CONGRESS FIRST SESSION __________ WASHINGTON, DC __________ OCTOBER 24, 2007 __________ Serial No. 110-16 Printed for the use of the Special Committee on Aging Available via the World Wide Web: http://www.gpoaccess.gov/congress/ index.html U.S. GOVERNMENT PRINTING OFFICE 41-835 PDF WASHINGTON : 2008 ---------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 SPECIAL COMMITTEE ON AGING HERB KOHL, Wisconsin, Chairman RON WYDEN, Oregon GORDON H. SMITH, Oregon BLANCHE L. LINCOLN, Arkansas RICHARD SHELBY, Alabama EVAN BAYH, Indiana SUSAN COLLINS, Maine THOMAS R. CARPER, Delaware MEL MARTINEZ, Florida BILL NELSON, Florida LARRY E. CRAIG, Idaho HILLARY RODHAM CLINTON, New York ELIZABETH DOLE, North Carolina KEN SALAZAR, Colorado NORM COLEMAN, Minnesota ROBERT P. CASEY, Jr., Pennsylvania DAVID VITTER, Louisiana CLAIRE McCASKILL, Missouri BOB CORKER, Tennessee SHELDON WHITEHOUSE, Rhode Island ARLEN SPECTER, Pennsylvania Debra Whitman, Staff Director Catherine Finley, Ranking Member Staff Director (ii) C O N T E N T S ---------- Page Opening Statement of Senator Herb Kohl........................... 1 Opening Statement of Senator Gordon H. Smith..................... 2 Panel I Barbara Bovbjerg, director of Education, Workforce and Income Security Issues, U.S. Government Accountability Office, Washington, DC................................................. 4 Bradford Campbell, assistant secretary of Labor, Employee Benefit Security Administration, Washington, DC........................ 29 Panel II Jeff Love, director of Research, AARP, Washington, DC............ 44 Mercer Bullard, assistant professor, The University of Mississippi, School of Law, University of Mississippi.......... 51 Michael Kiley, president, Plan Administrators, Inc., DePere, WI.. 87 Robert Chambers, chairman, American Benefits Council, Charlotte, NC............................................................. 100 APPENDIX Prepared Statement of Senator Robert P. Casey, Jr................ 119 Prepared Statement of Senator Susan Collins...................... 120 Statement on A Primer on Plan Fees from American Bankers Association, Committee on Investment of Employee Benefit Assets, The ERISA Industry Committee, The Financial Services Roundtable, Investment Adviser Association, Investment Company Institute, National Association of Manufacturers, Profit Sharing/401k Council of America, Securities Industry and Financial Markets Association, Society for Human Resource Management, and the United States Chamber of Commerce.......... 121 Statement submitted on behalf of the ERISA Industry Committee, Society for Human Resource Management, National Association of Manufacturers, United States Chamber of Commerce, and the Profit Sharing/401k Council of America......................... 124 Statement of the Investment Company Institute an additional information.................................................... 130 Information submitted by AARP.................................... 175 (iii) HIDDEN 401(K) FEES: HOW DISCLOSURE CAN INCREASE RETIREMENT SECURITY ---------- -- WEDNESDAY, OCTOBER 24, 2007 U.S. Senate, Special Committee on Aging, Washington, DC. The Committee met, pursuant to notice, at 10:32 a.m., in room SD-628, Dirksen Senate Office Building, Hon. Herb Kohl (chairman of the committee) presiding. Present: Senators Kohl and Smith. OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN The Chairman. This hearing will come to order. Good morning. I would like to welcome our witnesses and thank them for their participation. We are here today to bring attention to an important issue affecting the retirement security of millions of Americans. More and more Americans are relying on 401(k) plans to provide their retirement income. Although these plans have only been around since the 1980's, they now cover over 50 million people and exceed $2.5 trillion in total assets. Out of private sector workers that have any type of retirement benefit, two thirds have only their 401(k) savings to secure their financial well being into their retirement. Although 401(k)'s have become the primary pension fund for most Americans, there are few requirements for fund managers to tell participants how much they are paying in fees. Most fees are either absent or obscured in participant statements and investment reports. Not surprisingly, we will hear today that fewer than one in five participants know the fees they are paying. Unfortunately, the lack of disclosure and the lack of understanding can have serious consequences for an individual's retirement savings. The slightest difference in fees can translate into a staggering depletion in savings, greatly affecting one's ability to build a secure retirement. According to the Congressional Research Service, families who save their retirement funds in high fee accounts could have one-quarter less in retirement than those who work for employers who offer low-fee accounts. For couples who save their entire lifetime, the CRS study found that an annual fee of 2 percent could reduce savings by nearly $130,000 compared to a more reasonable fee of 0.4 percent. Investigations by this Committee have found that fees at 2 percent or higher are not uncommon. One small business owner we talked to with contract fees around 2 percent, and most of the plans assets in a money market account had a net return that was almost a negative 1 percent a year. The small business owner was distressed when he finally discovered the high charges, and was ready to cancel his 401(k) plan altogether. Giving small business owners all the facts in an easy-to- understand manner will help them find lower cost options and make it more likely that they will offer retirement savings plans to their employees. Fees are not the only factor that 401(k) participants should consider when deciding how to invest their savings. A wise investor should diversify portfolio and consider a funds risk and return. But while returns are unpredictable and will fluctuate from year to year, fees are something that are fixed, are known in advance, and could be easily controlled by plan enrollees. Furthermore, we believe there is a basic right for consumers to clearly know how much products and services are costing them. This week, Senators Harkin and myself are introducing the Defined Contribution Fee Disclosure Act of 2007. This bill will help shed some light on these fees by requiring complete transparency to both employers and participants. This will allow employers to be able to negotiate with pension fund managers in order to get the lowest possible fees for their employees. Participants will be able to make informed choices between investment options and potentially increase their retirement savings by thousands of dollars. Ultimately, this legislation will help to lower costs for everyone by fostering competition among pension managers. So, we welcome our witnesses as we discuss the importance of fee disclosure to employers and plan participants and consider its impact on the retirement savings of older Americans. We turn now to my able Ranking Member and my friend, Gordon Smith, from Oregon. OPENING STATEMENT OF SENATOR GORDON H. SMITH, RANKING MEMBER Senator Smith. Thank you, Chairman Kohl. I appreciate your holding this important hearing. Our topic today is hidden 401(k) fees and how disclosure can increase retirement security. One of my priorities on this Committee has been to ensure that Americans are financially secure in retirement. With uncertainty surrounding Social Security and the shift from employer-sponsored defined benefit plans to defined contribution plans, more and more of the responsibility for preparing for retirement rests on one's own shoulders. Unfortunately, though, American retirement savings rate for 2006 was a negative 1 percent. This is the lowest rate since 1933 during the Great Depression. Clearly, Americans need to save more for retirement. I have been working over the past few years on ways to help Americans do just that. For example, I worked to enact legislation that would encourage employers to adopt automatic enrollment in 401(k) plans. This is a simple idea that has been shown to increase plan participation significantly. I was very pleased that we were able to enact automatic enrollment as part of PPA--that is Pension Protection Act, if any of you, like me, get too many alphabets around here--and I am confident that provision is helping to increase participation rates in 401(k) plans. Now, I am pushing for other proposals to increase Americans' retirement savings. For example, one of my bills would require employers to allow long-term, part-time employees to make contributions to their 401(k) plans. However, the goals of these proposals may be undermined by excessive 401(k) plan fees. Fees are one of many factors, such as investment risk and diversification, that participants should consider when investing in a 401(k) plan. But excessive fees can undercut Americans' retirement security by reducing their savings. Simple as that. In light of this, I was very disturbed to hear about AARP's recent survey results on 401(k) participants, their awareness and understanding of fees. About two-thirds of the respondents stated that they do not pay fees, and when told that 401(k) providers typically charged fees for administering the plans and that the fees may be paid by either the plan sponsor or participants, 83 percent then acknowledged that they do not know how much they pay in fees. Clearly, 401(k) participants need additional information on plan fee and expenses. However, it is important that, as we get them more information, we don't overwhelm them. The additional information need to be concise, meaningful and readily understandable. If we bombard participants with too much information, they will do what most people would do--they will ignore it. Since any new disclosure requirements will carry costs for participants, overloading them helps no one. So, I am pleased that the Labor Department has begun a series of regulatory initiatives to increase transparency and disclosure of plan fees and expense information. I look forward to hearing more about these initiatives today, and I would like to continue to work with the Labor Department to ensure that participants have the fee information they need to make prudent investment decisions. Thank you, Senator Kohl. The Chairman. Thank you very much, Senator Smith. We are pleased to welcome our first panel here this morning. The first witness will be Barbara Bovbjerg. Ms. Bovbjerg is the director of Education, Workforce and Income Security Issues, for the U.S. Government Accountability Office. At the GAO, she oversees evaluative studies on age and retirement income policy issues, including social security, private pension programs, and the Employee Benefit Security Administration of the Department of labor. Our second witness will be Brad Campbell. Mr. Campbell is the assistant secretary of Labor for the Employee Benefit Security Administration, which oversees more than 700,000 defined contribution retirement plans that cover almost 150 million Americans. In this capacity, he is responsible for the administration and enforcement of Title I of the Employee Retirement Security Act, which is known as ERISA. He has been with the Department of Labor since 2001. We welcome you both, and, at this time, we will take your testimony. Ms. Bovbjerg. STATEMENT OF BARBARA BOVBJERG, DIRECTOR, EDUCATION, WORKFORCE AND INCOME SECURITY ISSUES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, DC Ms. Bovbjerg. Thank you very much, Mr. Chairman, Senator Smith. I am pleased to be here today to speak about disclosing fee information to 401(k) participants and providing better fee and cost information to 401(k) sponsors, because fees can significant erode an individual's 401(k) savings, as you noted. Information about the fees being charged is important because we expect individuals to be responsible for making wise decisions about their accounts. Sponsors, as fiduciaries, need the information necessary to make plan design and administration choices that are in the best interest of the participants. Today I will present information about how such disclosure might take place. I will speak first about what information could be most useful, and then about how such information might be presented. My statement is drawn from our work last year on 401(k) fees and from reports we have issued over the last several years, addressing the presentation of financial information. But first let me speak about the ``what,'' what information to provide. Although it is clear that participants need basic fee information, it is not so clear what information is most relevant to them. Most would agree that participants at least need to know what direct expenses are charged to their accounts. In our earlier report on this topic, we recommended that participants at least get information that allows them to make comparisons across investment options within their plans. We suggested that expense ratios could meet this need in most instances. Industry professionals we have contacted suggested additional investment-specific needs might easily be disclosed as well, including sales charges, surrender charges, wrap fees, things of that nature. Some also suggest that participants receive information on returns net of fees to encourage the participant to consider fees in the context of returns rather than just focusing on fee levels alone. However, as I will note in a moment, when I move to discussing the format for disclosure, keeping it simple is really important if participants are to read and make use of the information provided. Participants are not the only parties who need better information. Plan sponsors would benefit from a broad range of information as they seek to fulfill their roles as fiduciaries. In addition to information on plan fees, sponsors need information, for example, on service providers' business arrangements and revenue-sharing options to ensure that plans' fees and expenses are reasonable and not affected by conflicts of interest. In our prior work, we also made recommendations to require plan service providers to offer sponsors information of this nature. Some have also suggested that sponsors and participants may not know how to evaluate fees they are paying absent some sort of benchmark for comparison. Because participants have no control over investment options available to them, benchmarks may be most important for the sponsors, as they make decisions that affect plan costs. But whether or not benchmarks are provided, a consistent approach to fee and cost disclosure, one that allows comparison across options within a plan and across plans overall, because people do move around, would benefit both participants and sponsors. Let me move now to the format in which fee information might be disclosed. In prior work we found that certain practices help people understand complicated information. The use of simple language, straightforward and attractive layout, brevity and multiple means of distribution are all key to documents the general public will obtain, read and comprehend. Distribution, layout and document length determine whether people will even look at the information. If they can't obtain the disclosure easily, for example if it is provided only electronically and they don't have regular access to a computer, they will almost certainly never read it. Or if it is too long, crammed with text or in tiny, tiny typeface, even if participants receive it, experience with other disclosures suggests they won't read it. Yet even the most attractively designed document must still be written in accessible and simple language, and provide only the most basic and important information if it is to be read and understood. Clearly, design and means of conveying 401(k) fee information will be crucial to achieving not just disclosure, but also improved participant understanding. To conclude, 401(k) participants, and even sponsors, need better and more consistent information about plan fees. Focusing on the most basic fee information, providing it in a way that participants will read and understand it, and being consistent in its provision across plans will be key. Providing information of this nature will not only inform plan participants in making retirement, saving and investment decisions, it may also have the salutary effect of sharpening competition and, in the end, reducing fees charged to 401(k) plans. That concludes my statement, Mr. Chairman. I hope that my full statement can be submitted for the record. [The prepared statement of Ms. Bovbjerg follows:] [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] The Chairman. We will do that. Thank you, Ms. Bovbjerg. Mr. Campbell. STATEMENT OF THE HONORABLE BRADFORD CAMPBELL, ASSISTANT SECRETARY OF LABOR, EMPLOYEE BENEFITS SECURITY ADMINISTRATION, WASHINGTON, DC Mr. Campbell. Yes, Mr. Chairman, Senator Smith and the other members of the Committee. I want to very much thank you for the opportunity to testify today about the significant progress we have made at the Department of Labor in promulgating regulations to improve the disclosure of fee, expense, and conflict of interest information in 401(k) and other employee benefit plans. Our regulatory initiatives in this area are a top priority for the Department of Labor. Over the past 20 years, the retirement plan universe has undergone some significant changes that affect both the workers and plan fiduciaries. More workers now control the investment of their retirement savings in participant-directed individual account plans such as 401(k) plans. At the same time, the financial services marketplace has increased in complexity. Plan fiduciaries who are charged by law with the responsibility of making prudent decisions when hiring service providers and paying only reasonable expenses have found their jobs more difficult as the number and type of fees proliferate, and as the relationships between financial service providers become more complex. These trends have caused the department to conclude that, despite the success of our fiduciary and participant education efforts, that a new regulatory framework is necessary to better protect the interests of America's workers, retirees and their families. That is why we initiated three major regulatory projects, each of which address a different aspect of this problem. The first regulation addresses the needs of participants for concise, useful, comparative information about their plan's investment options. The second regulation addresses the needs of plan fiduciaries, who require more comprehensive disclosures by service providers to enable them to carry out their duties to prudently select those service providers, and understand the nature of the fees and expenses charged for services that are being provided under those contracts. The third regulation addresses disclosures by plan administrators to the public and the government via the Form 5500, which is the Annual Report filed by pension plans. It is essential to understand that the disclosure needs of each of these groups is different, and that, therefore, the disclosures that we are going to require via our regulations are also different. Participants are choosing investments from among a defined universe of options. To do this, they need concise summary information that allows them to compare these options in meaningful ways that take into account the fees that they are paying, the historical rates of return, the nature of the investment and other factors that are relevant to that determination. Plan fiduciaries are trying to decide if the services they are contracting for they are receiving, and if the prices they are paying are reasonable and necessary, taking into account the needs of the plan as a whole. Fiduciaries need to know whether the services provided will be influenced by compensation arrangements between the service providers and third parties, what services are provided, their necessity, and their reasonableness. This process by which plan fiduciaries make prudent decisions necessitates a far more detailed and comprehensive disclosure. In response to our request for information earlier this year on participant disclosures, it is fairly clear that there is a basic agreement, as Ms. Bovbjerg just also indicated from GAO's perspective, that participants are generally not going to benefit from very lengthy and detailed disclosures in making those investment decisions, because participants are likely to ignore them. Because the participants are also typically bearing the cost of producing these documents, if we produce voluminous disclosures that aren't useful to participants, we could perversely increase the amount of fees participants are paying without providing any additional utility. It is important to note, I think, that we are not at the beginning of our regulatory initiatives. We are quite well advanced. One of the three projects, the Form 5500 disclosures, will be finalized as a final regulation within the next several weeks, and we have completed drafting our proposed regulation for disclosures by service providers to plan fiduciaries. It is currently under review in the regulatory process and should be promulgated as a proposed regulation within the next several months. We, as I indicated, concluded a request for information on participant disclosures, which we are using to issue a proposed regulation this winter. I want to commend the Committee for its interest in disclosure in this area. I do want to note that it is important that, should the legislation be pursued, that Congress bear in mind the regulatory process and the progress we have made on our regulations. I also note that the regulatory process is very well suited to resolving some of these issues that are coming up. A great deal of technical issues are arising in terms of what information should be provided, and how one compares apples to apples across different investment options. As a deliberative, open and inclusive process, the regulatory process has been working well, and we believe will help us resolve these issues in a way that is amenable to the Committee. So, in conclusion, Mr. Chairman, I want to thank you for your interest in this issue, because it is very important to ensuring the retirement security of America's workers. I am committed to completing our projects in a timely manner, and I look forward to answering any questions you may have. [The prepared statement of Mr. Campbell follows:] [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] The Chairman. Thanks, Mr. Campbell. Ms. Bovbjerg, what would you say is the best way to provide 401(k) participants with information about the fees they are paying so that they can make wise investments? Ms. Bovbjerg. Clearly, comprehensively, but simply. That of course is the trick. We have had difficulties in doing this in even things like our Social Security statements. We have had difficulties with the disclosures that we make to credit card holders, for example. I think that the trick in these efforts is to focus on providing information and improving understanding, and not simply meeting a legal requirement. We reported last year with regard to credit card disclosures that it was the tiny typeface problem. It was too much information. It was prepared in a way to meet a legal requirement rather than actually explain something to individuals who varied tremendously in their ability to understand these things. The Chairman. I have heard employers say that it is impossible to determine all the fees that individual participants pay. While I do understand that some fees are assessed plan-wide and difficult to calculate to the penny, what is your understanding of the ability of plans to reasonably estimate the actual fees that are paid by participants? Ms. Bovbjerg. I think that it is their fiduciary duty to know what fees the plans are charging for participants, whether it is directly assessed to the participant or whether it is being assessed to the sponsor. The Chairman. Mr. Campbell, the Department of Labor has been talking about fee disclosure, as you know, since back in the 1990's. So what date can we expect the Department of Labor to have regulations that would require clear disclosure of fees to all employers and to all plan participants? Mr. Campbell. Yes, sir. The first of our three initiatives will be final regulation within the next several weeks. That is the Form 5500 disclosures to the public and the government. The second regulatory initiative, service provider disclosures to plan fiduciaries, will be proposed within the next several months. We will be issuing a proposed regulation governing disclosures to participants by plans this winter. So these are moving along very well. I would say with respect to the previous initiatives you are referring to in the 1990's, those were in the same area, but they are not these initiatives. These initiatives were begun last year. We are making very good progress by the standards of regulatory time, recognizing that it is a deliberative process and does have to follow the legal requirements of the process. The Chairman. Current ERISA law dictates that the plan sponsors should ensure that all 401(k) fees are reasonable. How has the Department of Labor been defining reasonable? How has the Department of Labor been enforcing this requirement? How many cases have been brought specifically on this issue? Mr. Campbell. The requirement in the statute, as you say, is that these fees must be reasonable, and plan fiduciaries bear the duty of ensuring that. The determination is on a facts and circumstances basis. The fiduciary is responsible for looking at each service provider, the services they are providing, the cost of those services, doing due diligence and comparing them to other service providers to ensure that they are following--again, to use the same word--a reasonable process in gathering the information necessary to make that determination. The Labor Department does review, when we do investigations, the fees and expenses that are being paid. Over the last several years, we have brought I believe on the order of 350 or so cases that involve fee and expense issues. This is part of the reason we concluded that, rather than piecemeal enforcement, a regulatory effort was necessary to globally address these issues. One of the more significant regulations with respect to the reasonableness of fees is ensuring that fiduciaries have the information they need to assess whether they are reasonable. One of those considerations, for example, would be indirect payments coming to service providers from third parties. Fiduciaries need to be aware of those so they can factor that into whether they are paying a reasonable amount and how the assets of the plan are being used in connection with the Financial Services industry. Providing that disclosure will help ensure that those fees are reasonable. The Chairman. Thank you, Mr. Campbell. We turn now to Senator Smith. Senator Smith. Thank you, Mr. Chairman. Your excellent testimony answered most of my questions. Barbara, when you indicated in your answer to Senator Kohl that information needs to be clear, comprehensive and simple, those are sort of at cross-purposes, and that is the problem I suppose the industry has, and you acknowledge. Have you seen an example that we could highlight for the hearing purposes that really accomplishes all those three objectives? Ms. Bovbjerg. We provided a little table in my statement that suggests a way that you could disclose this information. It is a composite of things we have gotten from different sources, including some of the work from the Department of Labor. It is pretty simple. It shows asset allocation, and it shows, on a percentage basis, the fees that are assessed against assets. It suggests that you would show the loan fees or things of that nature in dollars. There are many different ways to do it. I recognize that you are concerned that a comprehensive disclosure may include too many things. You want to capture the main things. I don't want to suggest that you could capture everything and provide it to people, and that they would still read it and understand it. But I think you might focus on the main things, and try to keep it simple when you do that. Senator Smith. Brad, you indicated in your testimony that this is a high priority. I am glad to hear that. I think it is important, and so I commend the department for making it such a high priority. Thank you, Mr. Chairman. The Chairman. Well, we thank you, Senator Smith, and we thank you, Ms. Bovbjerg, Mr. Campbell. Your testimony has been informative, valuable, and we appreciate your being here. Thank you so much. Ms. Bovbjerg. Thank you for having us. Mr. Campbell. Thank you, sir. The Chairman. We are going to turn now to our second panel. There is a scheduled vote, and then another vote to start at 11 a.m., so I hope we can figure it out to see that we get our testimony and questions in. Our first witness on the second panel will be Jeff Love. Mr. Love is the director of Strategic Issues Research at the AARP. Mr. Love has extensive experience in research methods, providing this expertise for AARP on their top legislative issues. Mr. Love is here today to testify on some of his findings regarding participant awareness of 401(k) fees. Second witness will be Mercer Bullard. Mr. Bullard is recognized as one of the nation's leading advocates for mutual fund shareholders, and he is currently an assistant professor of Law at the University of Mississippi. In 2000, Mr. Bullard founded Fund Democracy, a nonprofit membership organization that advocates for mutual fund shareholders. Our third witness will be Michael Kiley. Mr. Kiley is the founder and CEO of Plan Administrators, Inc., and has over 20 years of experience in providing affordable retirement plan servicing to small businesses. His company is a two-time winner of the U.S. Chamber of Commerce Blue Ribbon Small Business Award. Mr. Kiley is an active member of the American Society of Pension Actuaries, the National Institute of Pension Administrators, Society of Professional Administrators and Record-Keepers, and a Corporate Executive Board Retirement Services Roundtable. Senator Smith. Senator Smith. I will introduce Bob Chambers. OK. Bob Chambers is a partner at Helms, Mullis & Wicker. Mr. Chambers is testifying on behalf of American Benefits Council, the American Council of Life insurers, and the Investment Company Institute. Mr. Chambers will provide the plan sponsor perspective to the Plan C disclosure issue. The Chairman. Thank you so much. Mr. Love, we will take your testimony. STATEMENT OF JEFF LOVE, DIRECTOR OF RESEARCH, AARP, WASHINGTON, DC Mr. Love. Thank you, Mr. Chairman. Mr. Chairman Kohl, Senator Smith, thank you very much for having us this morning. AARP appreciates the opportunity to speak with you today about a very important topic and a survey we conducted on that topic. As you noted, I am Jeffrey Love. I am the director of Research at AARP. We have a survey that we recently fielded on awareness and understanding of fees by those participants who are involved in them. In recent years, 401(k) retirement savings plans and other defined contribution plans have become the main stay of many Americans' retirement security. More than 60 percent of workers with pension coverage have only a 401(k) or other defined contribution plan, compared to 20 percent a generation ago. All evidence suggests that worker reliance on defined contributions will continue to escalate. In light of the prevalence of 401(k) plans and the critical role that 401(k) plans can play in an individual's retirement security, AARP commissioned a nationally representative survey of 1,584 401(k) plan participants, ages 25 and older, in order to gage awareness and knowledge of fees and expenses charged by 401(k) plan providers. The survey was fielded from June 8 through June 24, 2007, by Knowledge Networks of Menlo Park, CA, to members of a nationally representative panel online. The survey findings are in a document titled, ``401(k) Participant Awareness and Understanding of Fees.'' This is available outside on the table and has been made available to the panel. You can also find it on AARP's Web site, AARP.org. Now, the findings. What the survey reveals, as Senator Smith noted earlier, that many 401(k) participants lack even basic knowledge of the fees associated with their plans, including whether or not they pay fees at all and, if so, how much they pay. When asked whether they pay fees for their 401(k) plan, nearly two-in-three, 65 percent plan participants, reported they pay no fees, and about one-in-six say that they do pay fees. Only about 17 percent recognize that they pay fees on their 401(k)'s. Another 18 percent admitted they do not know whether or not they pay fees or not. They had no idea. After being told that 401(k) plan providers often charge fees for administering their plans and that these fees may be paid either by the employer or by the plan--or the employees who participate in the plan, the vast majority, 83 percent of respondents, acknowledged they do not know how much they pay in fees. About one-in-six, only 17 percent participants, reported they know how much they pay to their 401(k) fees. That is only one-in-six. But over half, 54 percent, are not too or not at all knowledgeable about the impact these fees will have on their total retirement savings. Similarly, few can identify the different types of fees assessed by plan providers. When given possible definitions of three types of fees, about half can identify an administrative fee, 38 percent can identify a redemption fee, and only 14 percent can correctly choose the definition of an expense ratio. We know that 87 percent of all 401(k) plans are participant-directed. The participants make decisions about how their money will be invested. We also know from our survey that eight in ten participants consider information about fees to be important in their investment decisions, and that most participants sense that the fees have a potential to reduce their return on investment in their 401(k) plans. The lack of participant knowledge about fees, coupled with the expressed desire for a better understanding of fees, suggests that information about plan fees should be distributed regularly, in plain language, to current and perspective plan participants. Six in ten, 61 percent, feel that information about fees should be distributed on a regular basis, and almost eight in ten, 77 percent, prefer this information to be written in paper. AARP recommends that fee information be presented in a chart or graph that depicts the range of possible effects that total annual fees and expenses can have on a participant's account balance in a year and over the long-term. Providing such information about fees will help current and perspective plan participants make better choices and better comparisons and improved choices about their investments. If workers don't start getting around understanding what 401(k) fee information and the effect it has on their plans, they risk seeing a sizable portion of their retirement saving eaten up by fees, which they are unaware. Thank you. [The prepared statement of Mr. Love follows:] [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] The Chairman. Thank you, Mr. Love. We turn now to Mr. Bullard. STATEMENT OF MERCER BULLARD, ASSISTANT PROFESSOR, THE UNIVERSITY OF MISSISSIPPI, SCHOOL OF LAW, UNIVERSITY, MS Mr. Bullard. Good morning, Chairman Kohl, Ranking Member Smith. Thank you for the opportunity to discuss 401(k) fees here with you this morning. We are here today because 401(k) fees are crucially important to the retirement security of over 40 million investors. At the risk of restating oft-repeated data, I would like to direct your attention to the chart on my right. The three purple bars on the chart show the balances after an initial $10,000 investment in a 401(k) plan S&P 500 Index Fund, assuming three different expense ratio scenarios--.4 percent, .8 percent, and 1.2 percent. I would like to thank Craig Israelsen, an economics professor with Brigham Young University, for putting this chart together for this hearing. The plan with the .4 percent expense ratio has a balance of about $69,000 after taxes, the .8 percent expense ratio about $64,000, and the 1.2 percent expense ratio about $60,000. Obviously, what appears to be a relatively small difference in fees produces a significant difference in value. The blue bar on the left shows the after-tax balance in a taxable account, not a 401(k) plan, invested in the Vanguard S&P 500 Index Fund from 1987 to 2006. This is a real fund, and its expense ratio during this period ranged from .26 percent to 1.18 percent. The balance is $3,500 greater than the .4 percent fee in the 401(k) plan and $13,000, or 21 percent higher, than the 1.2 percent 401(k) plan. Now, not only do fees matter within a 401(k) plan, the 401(k) fees can actually undermine the tax benefits of the 401(k) plan altogether and leave employees better off investing elsewhere. Now, this chart actually reminds us that fees matter, but does more than that. I would like to use it to make just three points about fee disclosure. First, note that the bar chart translates expense ratios into hard dollars. Why is it that the GAO and the SEC, congressional witness and Chairman Kohl discuss the impact of fees this morning? Why don't they simply say fees are important because 1.2 percent is greater than .8 percent, or that .8 percent is twice as much as .4 percent? Why do they always use dollars when they describe the impact of fees? The answer is that we understand dollar amounts better than percentages. We appreciate the fact that a $10,000 difference in our balance when we begin retirement will have a significant impact on our standard of living. Yes, fees do matter, and they matter enough to highlight for plan beneficiaries. Then, shouldn't they be disclosed in the same way that virtually all commentators use to illustrate the importance of fees? Perhaps fee-savvy investors understand that a .4 percent difference in fees will have a substantial impact on their balances, but we are here today because the Committee recognizes that many 401(k) beneficiaries are not fee-savvy. We regulate fee disclosure precisely to communicate with investors who are not fee-sensitive, not with those investors who are fee-savvy. So my first point is 401(k) fee disclosure should provide investors with a close estimate of the dollar amount of fees that they actually pay. My second point is the fee comparisons are crucial to effective fee disclosure. The reason this chart is effective is not just that it discloses fees in dollar amounts. It is also effective because it shows you the results that you would have achieved under different scenarios. Information has no meaning without context, and investors who are not sensitive to fees in the first place are unlikely to have the context in which to understand stand-alone expense ratios or even stand-alone dollar amounts. The third point that this chart illustrates is that it is effective because most of the people in this room have actually looked at it, at least those of you who can see it. I had this chart created precisely to get my audience's attention. The chart is fairly effective because, in a context where I own 5 minutes of your time, I can make it something that you think about. The same principle applies with respect to fees. Fee disclosure is most effective when the delivery vehicle is one that investors are likely to use. Mr. Campbell has discussed the excellent educational tools and materials on fees his office has made available to the public. But the investor who seeks out those materials is not the investor who is least sensitive to fees. A short form summary of each investment option has been bandied about is a crucial document for investors, but it is unlikely that beneficiaries who are insensitive to fees will use it. Investors who are insensitive to fees are likely, however, to review their quarterly statements. Most people like to see how much money they have invested, the value of their accounts, how much they have earned in good times, and even how much they have lost in bad times. The quarterly statement is like the chart over there because it is a delivery vehicle that works. When I see an unexplained $10 charge on my bank account statement, I find out what it is for. Imagine the effect if the investor in the 401(k) Index Fund with a 1.2 percent expense ratio sees on his quarterly statement that he paid $225 in fees last quarter and that, right next to that number, shows that he would have paid on $37 in fees if he had been invested in an Index Fund in the plan that charge only .2 percent, $225 versus $37. I hope that you will agree that that is effective fee disclosure. Thank you again for the opportunity to appear before the Committee. I hope I can help you with any questions you may have. [The prepared statement of Mr. Bullard follows:] [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] The Chairman. We thank you, Mr. Bullard. We are going to recess the hearing now. We will be back as soon as we can. We ask for your forbearance and your indulgence. Senator Smith. We apologize. I have always complained that the leadership never checks with the aging Committee when they schedule votes. The Chairman. There are two votes, so we are not sure how they will fall. But we will be back just as soon as we can be here. Thank you.[Recess] We will reconvene now, and we have our third witness. Mr. Kiley from Wisconsin, we will take your testimony. Mr. Kiley. STATEMENT OF MICHAEL KILEY, PRESIDENT, PLAN ADMINISTRATORS, INC., DE PERE, WI Mr. Kiley. Good morning. My name is Michael Kiley. I am the founder and CEO of Plan Administrators, Inc., based in De Pere, WI. My firm is a two-time winner of the U.S. Chamber Blue Ribbon Small Business award, is a national provider of retirement plan services to thousands of small businesses throughout the country and their employees. I am here today on behalf of the Council of Independent 401(k) Record Keepers, which is an organization of independent retirement plan service providers. The members of CIKR provide services for over 70,000 retirement plans covering three million participants with approximately $130 billion in retirement assets. CIKR is a subsidiary of the American Society of Pension Professionals and Actuaries, which has thousands of individual members nationwide. I would like to thank Chairman Kohl, Senator Smith and the other members of this Committee for examining the important issue of 401(k) plan fee disclosure. As an independent service provider, my firm fully supports and actively practices full fee disclosure. The 401(k) plan industry delivers investments and services to plan sponsors and their participants using two primary business models, commonly known as bundled and unbundled. Generally, bundled providers are large financial services companies whose primary business is manufacturing and selling investments. They bundle their proprietary investment products with affiliate-provided plan services into a package that is sold to plan sponsors. By contrast, unbundled, or independent providers, are primarily in the business of offering retirement plan services. They will couple such services with a universe of unaffiliated, nonproprietary investment alternatives. Whether a firm is a bundled investment firm or an unbundled independent, the full scope of services offered to plans and their participants is relatively the same. In other words, the only real difference to the plan sponsor is whether the services are provided by just one firm or more than one firm. When a business owner wants to provide a retirement plan for their workers, they need to find someone to operate the plan and someone to provide the investments. Under ERISA, the business owner must follow prudent practices and procedures when choosing the providers for each of these services. This prudent evaluation should include an apples-to-apples comparison of services provided and the costs for those services. The only way to determine if a fee for a service is reasonable is to compare it to the fees charged by other service providers. The retirement security of employees is completely dependent on the business owner's choice of retirement plan service providers. If the business owner chooses a plan with unreasonably high fees, the workers' retirement income will be severely impacted. It is imperative that the business owner have the best information to make the best choice. The Department of Labor has proposed rules that would require enhanced disclosures on unbundled or independent service providers while exempting the bundled providers from doing the same thing. While we appreciate DOL's interest in addressing fee disclosure, we do not believe that any exemption for a specific business model type is in the best interest of plan sponsors or their participants. Without uniform disclosure, plan sponsors will have to choose between a single price model and a fully disclosed business model that will not permit them to appropriately compare other provider services and fees. Knowing only the total cost will not permit plan sponsors, particularly less sophisticated small business owners, to evaluate whether certain plan services are sensible and reasonably priced. In addition, if a breakdown of fees is not disclosed, plan sponsors will not be able to evaluate the reasonableness of fees as participant account balances grow. Take for example a $1 million plan serviced by a bundled provider that is only required to disclose a total fee of 125 basis points, or $12,500. If that plan grows to $2 million--we hope it does--the fee doubles to $25,000 although the level of plan services and the cost of providing such services have generally remained the same. The bundled providers want an exemption while demanding that unbundled providers be forced to adhere to disclosure rules and regulations. Simply put, they want to be able to say that they can offer retirement plan services for free while we are required to disclose the fees for the same services. Of course, there is no free lunch, and there is no such thing as a free 401(k) plan. In reality, the costs of these free plan services are being shifted to participants without their knowledge. The uniform disclosure of fees is the only way that plan sponsors can effectively evaluate the retirement plan services they offer to their workers. To show it can be done, attached to my written testimony is a sample of how a uniform plan fiduciary disclosure could look by breaking plan fees into only three simple categories-- investment management, record keeping and administration, and selling cost and advisory fees, we believe plan sponsors will have the information they need to satisfy their ERISA duties and their duties to their workers. The private retirement system in our country is the best in the world. Competition has forced innovations in investments and service delivery. However, important changes are still needed to ensure that the retirement system in America remains robust and effective into the future. By enabling competition and supporting plan sponsors, the uniform disclosure of fees and services, American workers will have a better chance at building retirement assets and living the American dream. Thank you. [The prepared statement of Mr. Kiley follows:] [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] The Chairman. Thank you, Mr. Kiley. Mr. Chambers. STATEMENT OF ROBERT CHAMBERS, CHAIRMAN, AMERICAN BENEFITS COUNCIL, CHARLOTTE, NC Mr. Chambers. Thank you, Chairman Kohl. My name is Robert Chambers. As indicated previously, I am in the Charlotte, North Carolina-based law firm of Helms Mulliss & Wicker. I am also the Chairman of the Board of the American Benefits Council this year, which is one of the organizations on whose behalf I am testifying today. The others are the American Council of Life Insurers and the Investment Company Institute. All three organizations very much appreciate the opportunity to present testimony with respect to 401(k) plan fees. Our goal, like yours, is that the 401(k) system remain fair and equitable, that it function in a transparent manner, and that it provide meaningful benefits at a fair price. Our members have been successful in obtaining fee information and using it to sponsor less expensive and more efficient 401(k) programs. Yet, at the same time we think there is room for improvement through more universal disclosure of fee and other information to both fiduciaries and to plan participants. There are three pieces of the fee disclosure puzzle that we have been discussing today. One is disclosure by service providers to employers and to other fiduciaries. The other is disclosure by fiduciaries to plan participants. Finally, disclosure by fiduciaries to the government. This comports, as we heard, with the GAO's recommendations in their 2006 report, and with the three-part project that the Department of Labor is currently pursuing, and about which we heard in the last panel. Admittedly, we as these three organizations on whose behalf I am testifying today may have some concerns with some of the details in the department's proposals when they are issued. Frankly, we usually do, but we absolutely agree with their general approach. Now, I would like to use the remaining portion of my time to raise five points that the Council, ACLI and ICI think that require your attention. First, the 401(k) system in the United States is voluntary. It depends on the willingness of employers to you--to offer plans and the willingness of employees to use them. Fee disclosure reform does not--must not undermine these basic building blocks. If a new regiment is overly complicated or overly costly, or if it may lead to increased employer liability, some employers are going to drop their plans. Others are going to comply, but they may pass the costs on to participants in the form of plan expenses or reduced employer contributions. Further, and most important, many employees will be confused by the over-emphasis on fees when compared to equally valuable investment considerations, such as diversification, investment objectives, actual investment performance and risk and return factors, and they will make either unbalanced investment decisions or, even worse, a decision not to participate at all. Investment education is based on balance, and neither Congress, the Department of Labor nor plan fiduciaries should counteract this concept through a disproportionate focus on plan fees. Second, every new feature that is added to a 401(k) plan adds new cost. Some of these enhancements are mandatory, such as the new benefit statement rules, and others, such as automatic enrollment, are permissive. But all of them are enhancements. They have all been adopted by Congress, and they all cost money to administer. Additional fee disclosure will result in additional cost. The legislature and regulatory agencies must coordinate their efforts when improving fee disclosure rules. Gearing up to comply with one new set of disclosure rules is going to be expensive, but shifting to another set of rules shortly thereafter will be enormously expensive and confusing to both plan fiduciaries and participants. Remember, these costs will need to be absorbed by participants and plan sponsors. Many sponsors could accommodate these increased costs by reducing plan contributions, as I previously noted, resulting in smaller benefits for participants. Therefore, we must measure carefully the value of what may be gained against the cost of annual disclosure. It will be particularly poor stewardship if our collective efforts to reduce costs in the end actually reduce savings. Third, in our system of commerce, it is quality and features of a product or a service that permit one manufacturer or service provider to charge more than a competitor. Some cars cost more than others, as do computers and wine. Similarly, 401(k) plan fees should not be evaluated independently from the product or service that is provided. If asked, every participant would be willing to pay higher fees if the total net return on the investment is increased. Enhanced disclosure will enable participants to determine whether the quality of the product or the provider warrants its costs. The two are inextricably tied to each other. Fourth, we acknowledge that fee levels differ among different plans, just like cable TV service. Some people want only basic service. Some employers provide only a basic 401(k) plan. But other viewers want hundreds of channels, providing they expect an even more expansive spectrum of entertainment. Many employers want to provide a similarly broad span of retirement plan features for their participants. I know I have just a few seconds left. May I beg your indulgence just for one more point after this? Thank you. Many employers want to provide a similarly broad span of retirement plan features for their participants. More features, more costs. Enhanced disclosure will help employers to decide which choices to make available and will help participants to make decisions among the choices presented. It is also true that many smaller employers pay comparatively higher 401(k) fees. This is usually attributable to fewer lives over which to amortize fixed costs. We believe that increased disclosure will exert downward pressure on fee levels in the marketplace. While it may not increase the negotiating power of smaller employers, it is going to provide them with a better shopping opportunity. Finally, fee information should be disclosed in the manner in which fees are charged, and this is where I think there is some disagreement on the panel. As you know, some services are bundled together and some are sold separately. Certainly, service providers must disclose the services that they provide and the costs of those services. But they should also be permitted to distinguish between those services that are bundled together and those services that the plan fiduciary may purchase separately. This is particularly important when ascribing fees to those services. Specifically, a service provider should not be required to ascribe separate fees to services that are not sold separately. For example, if a plan record-keeper has a captive trust company, how the fees are split internally is of no significance to, and may actually confuse a plan fiduciary where the fiduciary is not able to purchase those services separately at that price. Further, the split may be proprietary information, and may not accurately reflect other aspects of the relationship between the group of the bundled service providers. So, in conclusion, we are very supportive of enhanced disclosure of plan fees, but fee disclosure must be addressed in a way that does not over-emphasize fees relative to other factors in the investment decisionmaking process, or undermine confidence in the retirement system or create new costs, which could result in decreased retirement benefits. Thank you. [The prepared statement of Mr. Chambers follows:] [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] The Chairman. Thank you. Mr. Chambers, you warn in your testimony, you just said that participants could be confused by an overly complicated disclosure of fees. My bill, along with Senator Harkin, would give one number to participants on their quarterly statement, with the option for them to request further information. Do you think that giving participants a single fee number quarterly and allowing those that want to get further information is too complicated? Mr. Chambers. I think, Senator, the complication may be in coming up with one number for each participant. Clearly, from their perspective, if you give them one number, that is fine. It may be misleading for those people. It is not going to be comparative, as some of the other folks on this panel have suggested. I would be concerned that it would be giving them information in a vacuum. Admittedly, clean, crisp, simple, but I am not sure that it is the information that they would need. The Chairman. Mr. Bullard, do you think giving participants a single number to represent their fees on their quarterly statement with the option for more information would be overly confusing, or would you recommend that? Mr. Bullard. I would recommend it strongly, and I have heard arguments before that it might be misleading, which is always the argument that industry makes when, after having argued that we can't provide them with too much information because it will be too complex, once we winnow it down to some essential, simple information, it becomes misleading. There is going to be a tradeoff, as Senator Smith suggested, and that tradeoff is going to be between comprehensive information and clear, simple information. A dollar disclosure, what they actually paid in fees, or very close estimate of that amount, will only have the effect, even if it is not a perfect representation of what they paid, of making them think harder about their fees. It begins to get the ball rolling. One thing I think I agree with Mr. Chambers about. Is that more price transparency puts downward pressure on fees. I am a firm believer that that particular disclosure would do more to reduce the costs of investing in 401(k) plans than any other proposal that this Committee might adopt. The Chairman. Do you think that Mr. Chambers is representing interests that wanted to have higher fees? Mr. Bullard. I think Mr. Chambers is representing an industry that has already expended large sums on compliance. Unfortunately, the debate is always about new regulations rather than looking at old ones in which the people he has represented have already invested a fair amount of capital. I think the DOL should always be looking at how to reduce costs and eliminating old rules that are no longer important at the same time they are thinking about coming up with new rules. But as far as the costs of quarterly statements goes, in the past the industry has argued, and I think I quoted in my testimony that the mutual fund industry said that it would be ``breathtakingly high.'' Within a year, MFS Investment Management announced that it was going to be providing the same quarterly statement disclosure that the industry insisted was completely unaffordable. So here is one provider that not only finds it affordable, but apparently believes it is profitable. I think that we need to move on and think about the behavioral effect it would have on people, if you could give them what I described as the $225 versus $37 disclosure. I have no doubt that, even for the least sophisticated investor, that would put enormous downward pressure on fees. The Chairman. To all the members of the panel, would you agree that it is really important that people enrolled in 401(k) plans know what the fee is? How we get there, whether it is difficult or easy, but it is very, very important that they know their fee? Anybody disagree with that? Mr. Chambers. I agree with that statement. The Chairman. Bullard. Mr. Love. Mr. Love. Certainly. Certainly agree with that. Mr. Kiley. I guess I would probably say the test is whether they can name the expense ratio, their investment option charges--probably not. But I think what we are getting at here is that they are conscious of their fees and the impact that it has on their bottom line. The Chairman. Right. Mr. Bullard. In fact, the expense ratio does not convey that. If you asked your average person, particularly one that is not that sensitive to fees, when they get into the checkout line, instead of them saying, ``That will be $12.50,'' they say, ``That will be .2 percent of what you have got in your wallet.'' They will have no idea what you are talking about. What we want people to understand is, it is a dollar number, so they can see they are getting these heavy hits on their balance quarter in and quarter out. It should represent a meaningful decision on the part of the plan to pay that amount of expense. Mr. Chambers is absolutely right. Sometimes that $225 versus $37 will be explained by the fact it is a small plan, few participants, low balances, and a desire to have high-cost active funds. But the fact is that having those numbers will drive that inquiry and put a lot of pressure in places where the market is not efficient. The Chairman. Mr. Love, why is it that so few people do know what their fee is? Mr. Love. I am afraid it is probably a matter of not having the information available to them. The larger issue of financial literacy is a problem in this country. People need to know more about how they invest, how they save for retirement. If it were clearer to them, if there were charts, if there were single numbers, if there were dollar amounts, they would be much more likely to understand the consequences of the fees for their retirement. Right now it is not clear. It is not that they are being hidden. They are simply not clear. The Chairman. Well, being as the fee differential can eventually mean so much in terms of the return on their 401(k), why is it that those people who administer the 401(k) plans don't make it more clear what the fee is? Mr. Love. I am not sure of the answer to that. We are being--they can simply call for that. I mean, the actual plan participant who is asked, is this important to your consideration of your plan, always says yes. They would like to know what fees are when making decisions about investments. I am not sure why they are not clearer on the statements. The Chairman. You think that most people don't have an awareness of what the differential can mean in terms of return on their investment if the fee is 2 percent, versus 1 percent, 1.5 percent? They don't really understand that. Mr. Chambers. They really don't understand that. If you ask someone clearly a comparative math problem, is 1.5 percent more than .5 percent, most people can tell you yes, that is the case. But in our survey, a lot of people could not. But on the other hand, if you say to a participant, ``Here is a fund which charges 50 basis points a year, and here is a fund that charges 75 basis points a year,'' I think that most participants are going to understand one is more expensive than the other. But that is not the final analysis. The final analysis is, historically, how has this fund, charging fewer basis points, done compared to that fund which charges more? But to go back to Mr. Love's point about financial education, I think that that is the crux. I think that what we are dealing with here in connection with plan fees is, if you will pardon the expression, the ``low-hanging fruit'' of the equation. I think that the bigger issue facing this country and, frankly, in my view, facing Congress, because this is where you really join the foray here, is to try to figure out ways to help the Department of Labor to help employers to focus on how they can provide better financial education to their participants. Frankly, throwing more pieces of paper or more e-mails at different folks with a lot more information isn't going to get us over that hump. What is going to get us over that hump is more work similar to what the Department of Labor has done in the past, perhaps some tax opportunities for employees to get better financial information, which will then enable them to take the information that we are talking about today and put it to better use. Mr. Bullard. If I could just respond to two points, I would observe that using percentages, as Mr. Chambers just used, will simply not communicate the same information to those who are used to thinking about dollars. Second, no one has suggested that it is the final answer. The idea is to give an impetus for the market to work where we think it is not working efficiently. Third, the ultimate question is not really performance, when you get right down to it. Virtually every study has shown that there is minimal, if any, repetition, that is, persistence of performance among investment options. If you think about what Congress's concern should be, it should be looking at Americans as a whole. The fact is if you look at all Americans investing in all stock funds, the return of that group is going to be the market's return. No matter how you cut it, if there is one fund that is doing better by buying good stocks that another fund shouldn't be selling, they are buying the stocks from a fund. It is going to do worse than the market. So the bottom line is, America's going to get the market return, regardless of all the emphasis that some would like to put on performance. The only question I think for this Committee is how much of that market return is going to be given up to service providers and Wall Street. Mr. Kiley. Mr. Kohl, if I may, a couple of direct concerns that I would have. Within the industry, I would offer that, practically speaking, the way that small plans are sold and scrutinized, there is generally someone within the mix who has an interest in all of the facts of a plan. So while we cannot get the attention of all 20 employees and get them to invest in the knowledge, those 20 employees in a small employer generally have a high degree of trust of someone in the equation, generally one of their coworkers, who really does scrutinize the vendor material quite closely. So in that regard, by paying attention to that person that they find to be influential, they take an interest in the plan. I would submit that, as an industry, initiating a full, fair, level playing field on disclosure around fees will drive up interest in the area of concern, drive up interest in the fees. It will create downward pressure. In the end, it will take away an argument that we hear time and time again. If we do not disclose fees and if we don't do a good job with it--and the market will fine-tune that as time goes by--there is a tendency on behalf of some people to assume the worst. So they will avoid getting into their 401(k) plan if they don't see what they see to be a very full, fair disclosure process. So by engaging a full, fair disclosure process, over time we will bring ourselves more customers in this industry, which is what we are after. The Chairman. Is there much disagreement on what we are hearing here today? Mr. Chambers, are you in any particular disagreement with the thrust of what the other three have said this morning? Mr. Chambers. I suspect that we agree on more than we disagree on, which is helpful and always surprising on panels of this sort. I think that certainly my focus, and the focus of the folks who I represent--who I would, by the way, point out are many employers, not just service providers, and therefore are not in it to maximize fees. But I think that the focus that we are looking at is, as I mentioned, cost. There is significant additional cost in coming up with specific dollar amounts on a per-participant basis annually, quarterly, whatever the frequency is to be, and whether that cost, along with all the other costs that are associated with this, as I mentioned before, are actually going to wind up resulting in a net loss compared to where we would have been. So we are interested in transparency. We are interested in providing additional information. I agree completely that employees, if provided with information and with education on how to use it, that they will do a better job, and they are more likely to participate to a greater extent. I am not sure that I agree that the only way to do this is on dollars. I am not sure that I agree with some of the other things that we have said. But the positive note is that all four of us I think agree on more than we otherwise disagree on. The Chairman. Any other comments, gentlemen? It has been a good hearing, I think, on an important subject, and the Committee is going to continue to pursue improvements in the information that people who hold 401(k)s get with respect to fees and other charges. So, we appreciate your being here this morning, and you can expect to hear from us. Mr. Love. Thank you. Mr. Chambers. Thank the Chair. Appreciate it. The Chairman. Thank you so much. Thank you all for coming. Senator Smith. Thank you, Chairman. [Whereupon, at 12 p.m., the Committee was adjourned.] A P P E N D I X ---------- Prepared Statement of Senator Robert P. Casey, Jr. I want to thank my colleague, Senator Kohl, for calling this important hearing. We meet today to discuss the issue of retirement security and particularly the role of 401(k) fee disclosure. As life expectancy for Americans is increasing and with the baby boom generation approaches retirement the number of older Americans is increasing. Last year, there were more than 37 million Americans over the age of 65. My own state, Pennsylvania, has the third largest population of older citizens in the country--1.9 million and growing. We have a responsibility to ensure that all Americans have a secure retirement, and this is a particularly vital and acute issue for seniors. Living longer, and living more years in retirement, requires depending more on personal retirement funds to cover expenses. We have a variety of incentives and vehicles that allow people to save for retirement over the course of their lifetime, and we need to improve our efforts in that area, but even those who are able to save over a long period of time are also dependent upon the return on their investment. That is why it is imperative that an individual receive complete information on the fees that will be charged. Many people don't realize it, but these fees can vary widely from plan to plan, and that variation costs people real money. Federal pension law does not currently mandate that plan sponsors provide information on fees, leaving many participants unaware of exactly what they are paying or how it compares with what other plans might charge. We often exhort people to make responsible decisions, but the truth is they can only do that when they have good information. Both employers and employees need to be aware of all fees involved in the 401(k) plan a company offers. According to the AARP Public Policy Institute, over 80 percent of 401(k) participants report being unaware of the fees associated with their plans. This is a precarious situation that could leave many individuals with less money than they envisioned in retirement. If we can ensure that employers and employees are provided this information in a clear and consistent matter we can do two things: we can let people better understand the different choices they face, and we can bring market pressure on these plans to lower fees and save our constituents money that would otherwise go to someone else. The idea of holding down fees on investments is not a new one and investment companies outside of 401(k) plans do compete on cost. In 1975, John Bogle started the Vanguard Corporation which is based in Valley Forge, Pennsylvania. Pioneered the creation of index mutual funds. He created his index funds for a variety of reasons, one of them being the low costs he could pass on to his investors. To most people, it may sound like this hearing is just about a few percentage points difference, and that does not matter. But a few percentage points add up to real money over time. A $10,000 investment that earns 10% per year over the course of 50 years, will compound to $1,170,000. But a difference of just 2%, or an 8% return, will only compound to $470,000. This two percentage point difference can cost someone $700,000. John Bogle and others noticed this a long time ago, but we have failed to ensure that investors can really compare the fees involved in their retirement investments. For many people 401(k)s are their only form of private retirement savings, and we have a responsibility to give them the tools to make it simple and easy to maximize their returns while minimizing their risk. Thank you again, Mr. Chairman, for calling this important hearing. I look forward to examining it further both here in the Aging Committee, and also in the Banking Committee. We need must ensure individuals have complete information so their retirement years can be secure and productive. ------ Prepared Statement of Senator Susan Collins The Chairman and the Ranking Member have performed a genuine public service in organizing this hearing on fee disclosure for 401(k) plan sponsors and participants. As we all know, seemingly small differences in fees can make enormous differences in asset accumulation over the years. For example, the Congressional Research Service calculated this month that a middle-income family investing for three decades in a fund with a four-tenths of one percent cost ratio will have 35 percent more money then if they invested in an otherwise identical fund with a two percent cost ratio. Now it is obviously true that a higher-cost fund can be worth its expense if it delivers top-notch results over the years. But even if a high-cost fund has an excellent net-of- costs return, it is also true--as fund prospectuses and advertisements warn us--that ``Past performance is no guarantee of future results.'' In this context, it is troubling that researchers have found that the great majority of participants in 401(k) savings plan do not understand the impact that fees can have and do not know what fees are being assessed on their employer's plan and on their accounts. All too often, the same can be said of plan sponsors, especially smaller businesses that may not have the staff or the experience to consider cost factors in selecting and monitoring plan administrators. As the new Government Accountability Office report on this issue concludes, ``participants need information about the direct expenses that could be charged to their accounts,'' while ``plan sponsors...need additional information to fulfill their fiduciary responsibilities.'' But perhaps what is even more important is the clarity and quality of the information rather than the quantity of the information. Effective--as compared to voluminous--disclosures are a cornerstone for prudent decision-making by employers and their employees. When we consider that more than 40 percent of private- sector employees participate in 401(k) plans and that government repeatedly stresses the importance of building personal savings to supplement Social Security, the inescapable conclusion is that we must ensure that workers and employers have access to understandable cost information for the funds that will provide for their retirement. Having said that, I must inject a note of caution. In our attempt to provide greater clarity of information for participants and sponsors, we need to be careful not to overwhelm them with new and excessive information that confuses rather than clarifies. From my contacts with constituents and from my former experience as a state business regulation commissioner, I know all too well how often well-intended regulations can have unintended consequences. I believe we would benefit, for example, from further study of the research and rulemaking that is currently underway at the Department of Labor before inadvertently creating unnecessary expense without necessarily improving the quality or clarity of 401(k) cost information. Adjustments and improvements to make the information already provided more useful and understandable could result in the most useful disclosure of all. Mr. Chairman, I am confident that the testimony of today's witnesses will help us find a prudent path toward providing better information to 401(k) sponsors and participants without imposing burdensome requirements or risking information overload. Again, I applaud your and the Ranking Member's initiative in convening this hearing on a matter of great importance to working Americans. [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]