Hidden Fees Are Cutting Into Workers' 401(k) Balances, Experts Tell Education and Labor Committee 

Tuesday, March 6, 2007

WASHINGTON, DC -- Pension experts testified to the House Education and Labor Committee today about hidden fees that can take a significant bite out of workers' retirement savings account balances, often without workers' knowledge.

The testimony at today's hearing offered clear evidence of the need for better disclosure of fees to workers who have 401(k) or similar savings plans and to the companies that sponsor them, said U.S. Rep. George Miller (D-CA), the committee's chairman. He said the issue is particularly important given that increasing numbers of American workers are relying on 401(k)s to help them finance their golden years. Nearly 50 million Americans now have a 401(k)-style plan.

"Excessive fees, just over the past twenty years, have reduced participant account balances by an average of 15 percent," testified Stephen Butler, President of Pension Dynamics Corporation. "On a projected basis, excessive fees charged to participants will have reduced retirement 'nest-eggs' by 20 percent, according to a wide variety of organizations conducting research on the subject."

Matthew Hutcheson, an independent pension consultant, said that even small excessive costs can cost retirees tens of billions of dollars each year. "To put this into perspective, just 1 [percentage point] in excess costs to plan participants having $2.5 trillion in 401(k) assets represents a wealth transfer of $25 billion to others - each and every year," testified Hutcheson.

Barbara Bovbjerg, the Director of Education, Workforce, and Income Security Issues at the Government Accountability Offices, described a hypothetical example to show what these fees could mean for the individual retiree. "[A]n employee who is 45 years of age with 20 years until retirement changes employers and leaves $20,000 in a 401(k) account until retirement. If the average annual net return is 6.5 percent-a 7 percent investment return minus a 0.5 percent charge for fees-the $20,000 will grow to about $70,500 at retirement. However, if fees are instead 1.5 percent annually, the average net return is reduced to 5.5 percent, and the $20,000 will grow to only about $58,400. The additional 1 percent annual charge for fees would reduce the account balance at retirement by about 17 percent."

Miller said that the Education and Labor Committee will examine what steps are necessary to make sure that workers know how much they are paying in fees on their retirement savings plans. "If you use a 401(k) or similar plan to help you save some of that money for retirement, then you ought to have all the information you need to make a well-informed decision about which plans and investment options will give you the best deal," he said.

Miller also said that the committee is committed to improving Americans' retirement security. "Improving 401(k) transparency is just the beginning of our efforts to ensure that all Americans have access to a secure retirement - a key part of our overall goal of strengthening America's middle class," he said. "After a lifetime of hard work, retirees ought to be able to move on to a new phase in their lives, where they are able to focus on family and friends without sacrificing their standard of living."

For Chairman Miller's opening statement from today's hearing, click here.

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