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41–835 PDF 2008

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 

SPECIAL COMMITTEE ON AGING 

HERB KOHL, Wisconsin, Chairman 

RON WYDEN, Oregon 

BLANCHE L. LINCOLN, Arkansas 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

BILL NELSON, Florida 

HILLARY RODHAM CLINTON, New York 

KEN SALAZAR, Colorado 

ROBERT P. CASEY, Jr., Pennsylvania 

CLAIRE McCASKILL, Missouri 

SHELDON WHITEHOUSE, Rhode Island 

GORDON H. SMITH, Oregon 

RICHARD SHELBY, Alabama 

SUSAN COLLINS, Maine 

MEL MARTINEZ, Florida 

LARRY E. CRAIG, Idaho 

ELIZABETH DOLE, North Carolina 

NORM COLEMAN, Minnesota 

DAVID VITTER, Louisiana 

BOB CORKER, Tennessee 

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) 

(1)

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 onequarter 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 

2

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, 

3

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. 

4

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 

5

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:]

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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 

30

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:]

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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. 

43

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 

44

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 

45

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-insix. 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. 

46

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:]

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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 

52

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:]

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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 

88

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. 

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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:]

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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 

101

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 disVerDate 0ct 09 2002 13:46 May 08, 2008 Jkt 000000 PO 00000 Frm 00105 Fmt 6633 Sfmt 6633 H:\DOCS\41835.TXT SAGING1 PsN: JOYCE
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agreement 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:]

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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 

115

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? 

116

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 

117

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. 

118

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.] 

(119)

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. 

120

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.

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