401(k) costs to be made clear in U.S. plan

Savings of $6.1 billion in 10 years predicted

Associated Press

July 23, 2008

WASHINGTON - Millions of participants in 401(k)-style retirement plans would receive more information about the costs of those programs, a move that could help boost savings, under a rule proposed by the Labor Department yesterday.

The additional information will make it easier for employees to invest in lower-cost mutual funds and other investments, said Bradford Campbell, an assistant secretary at the Labor Department.

The department estimates the disclosures would save participants $6.1 billion over 10 years, including $2.3 billion from lower fees as investment providers compete more on cost. The rest will come from the time participants save tracking down the fees, which are currently found in a range of separate documents.

The proposal comes as 401(k)-style plans have become central to many Americans' retirement savings.

The plans, also known as defined contribution plans, allow employees to save a portion of their income in tax-deferred retirement accounts. Individuals also choose where to invest the savings, whether in a mutual fund, annuity or other type of investment.

In the past 20 years, 401(k) plans have overtaken traditional pensions, which generally pay a fixed benefit to retirees based on years of service or other criteria. Roughly two-thirds of workers with retirement benefits have 401(k)-style plans, while the rest have traditional pensions.

The proposed regulation would require employers to disclose to workers the fees and expenses charged by the mutual funds and other investments in a chart or similar format.

Companies also would have to disclose the dollar amount each participant pays every quarter for their plan's administrative costs. Such costs are separate from investment costs.

On average, the fees equal about 1 percent of the amount a worker invests, according to a report last year by the Center for American Progress, a liberal think tank.

While that may not seem large, fees can vary widely, with mutual funds that track market indexes charging as little as 0.2 percent while other funds charge as high as 2 percent or more.

Such differences can have a huge impact during an employee's career. A 1 percentage-point difference in annual fees can reduce a worker's retirement savings by 17 percent over 20 years, the Government Accountability Office has estimated.

The Labor Department rule also would require employers to provide average annual returns for each investment option and compare those returns to a benchmark, such as the S&P 500 index.

Employees have placed about $2.5 trillion in defined contribution plans, and a study last month by the consulting firm McKinsey & Co. estimates that figure could grow to $8.5 trillion by 2015.

Despite the widespread use of 401(k) plans, most workers still don't know the fees they pay or their impact on savings. Roughly 80 percent of participants don't know how much they pay in fees, according to the GAO, the investigative arm of Congress.

Christian Weller, a senior fellow at the Center for American Progress, said the Labor Department's rule should require additional information to give employees more context about fees.

Employers should compare the fees charged by investment providers to an average for each type of investment, and should be required to provide model calculations of what an investment would cost over the long term, Weller said.

"Most consumers have very little way of assessing the overall impact" of fees on their long-term savings, he said.

But the Securities Industry and Financial Markets Association, an industry trade group, praised the department's proposal as "an excellent starting point" that provides investors useful information "without overwhelming them."

SIFMA's members include Merrill Lynch & Co. Inc., Bank of America Corp.'s securities division, and T. Rowe Price Group Inc.