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WASHINGTON, DC -- Congress should examine the laws governing 401(k) retirement savings plans to ensure that plan participants are fully aware of fees that could be cutting deeply into their savings, government auditors concluded in a new report released today by U.S. Rep. George Miller (D-CA). The report concluded that such fees, in many cases unbeknownst to workers, often do make a significant dent in retirement savings accounts.
Even small differences in fees for such purposes as administering 401(k) plans and managing their investment assets can have substantial effects on retirees’ account balances. For example, a 401(k) account with a balance of $20,000 will grow to about $70,500 in 20 years if it has a net return of 6.5 percent each year. But with a net annual return of 5.5 percent – a difference of just one percentage point in fees – that $20,000 balance would grow to just $58,400 after 20 years, a 17 percent difference, according to the report.
Because such seemingly small differences can so greatly reduce a retiree’s total savings, it is critical that 401(k) plan participants be made fully aware of all the fees they are paying. But today’s report, prepared by the Government Accountability Office at Miller’s request, found that legal requirements for disclosing such fees are weak, and often are not enforced. As a result, it is often difficult or impossible for plan participants to compare fees from one plan or investment to the next.
“More and more Americans are relying on 401(k) plans to help them pay for their golden years,” said Miller, the senior Democrat on the House Education and the Workforce Committee. “That’s why it’s critical that workers’ hard-earned savings not be wasted on excessive fees. Workers need complete, accurate, and clear information about the total cost of different investment options so they can choose the ones that are best for them. They need to know exactly what fees they are paying so they can get the best deal.”
The GAO report also discusses conflicts of interest that arise when pension consultants recommend investment options – like mutual funds – to employers that sponsor 401(k) plans without disclosing that they are paid by the mutual fund companies to make such referrals. The report recommends that Congress consider requiring service providers to disclose these financial relationships.
Forty-seven million American workers now rely on 401(k)-style plans to help pay for their retirement. Yet the GAO report cited research showing that 80 percent of plan participants are not aware of how much they are paying in fees. In fact, mutual fund companies – which manage a large share of the investments in 401(k) plans – are not even required by the U.S. Department of Labor to disclose their fees. The Labor Department has responsibility for enforcing worker benefits laws.
Miller said the House Education and the Workforce Committee should hold hearings next year to examine the issues raised in the GAO report.
To see a PDF copy of the GAO report, click here.
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