GAO: Employers Don’t Understand All the Fees in the 401(k) Plans they Sponsor

May 23, 2012 Issues: Labor, Retirement and Pensions

WASHINGTON – A new report from the Government Accountability Office (GAO) released today by Rep. George Miller (D-Calif.) shows that many employers GAO surveyed do not understand or were unable to identify the 401(k) fees that they and their employees pay. Without the ability to determine the fees charged to both employers that sponsor 401(k) plans and the workers who participate in them, employers and employees may be paying much higher costs than they are aware of, resulting in reduced retirement savings.

“Middle class families who rely on a 401(k) do not have a fighting chance if employers don’t understand how their own plan works,” said Rep. Miller, the senior Democratic member of the House Education and the Workforce Committee. “For too long, confusing business arrangements and hidden fees have skimmed money from workers’ hard-earned savings without full disclosure. Through these practices, neither workers nor their employers know how much they are being charged or why. Financial service firms need to be more up front about the fees they take from workers’ accounts. While I’m hopeful that efforts by the Obama administration to require greater fee disclosure will shine a much needed light on these practices, it is clear that Congress, the Department of Labor and employers need to be doing more to protect working families and their retirement savings.”

The GAO report underscores the need for all fees to be disclosed to employers by 401(k) service providers in a clear and easy-to-understand format. For example, nearly six in ten sponsors said they are “completely” or “very confident” that service providers fully disclose all fees to the plan and its participants. Yet, at the same time, half of employers admitted they did not know if they or their workers pay investment management fees or mistakenly believed that such fees were waived. GAO noted that investment management fees account for the majority of all 401(k) fees. 

In addition, 48 percent of employers did not know whether their plan provider engaged in revenue sharing arrangements whereby service providers compensate another provider for administrative or other charges.  For example, one employer with a large 401(k) was unaware of a revenue sharing agreement that underestimated the amount the employer was charged by a service provider for recordkeeping by 16 times. Another employer with a small plan reported paying nothing at all to service providers for recordkeeping when in fact the employer paid $10,700 in 2010. Nearly half of that recordkeeping fee ($4,800) was taken from employees’ assets.

“If sponsors do not understand these arrangements, it could result in the plan sponsor and participants paying more for services as assets grow, although the level of service provided tends to remain the same,” GAO wrote.

Watch a short video from GAO explaining revenue sharing.

In other words, many workers and businesses are paying higher fees than they may be aware. As previously uncovered by GAO, many fees in 401(k) plans are hidden and even a small difference in fees could make a big difference in the retirement savings for workers. The Department of Labor estimated that a one-percentage point difference could reduce a worker’s retirement savings by 28 percent at the end of his or her career.

GAO’s survey of plan sponsors found a wide divergence in fees charged to sponsors and participants:

·         Employers reported they paid between 0.00 percent and 1.17 percent in investment management fees. At the same time, employers reported that their 401(k) plan participants paid anywhere between 0.01 percent and 3.24 percent in investment management fees.

·         For recordkeeping and administrative services, employers reported that their 401(k) plan participants paid anywhere between 0.02 percent and 1.59 percent. Employers reported that they were charged anywhere between 0.01 percent and 37.26 percent for recordkeeping, for an average of 1.13 percent. The 37.26 percent recordkeeping fee was reported by one small plan with very few assets.

·         Transaction or trading fees varied widely depending on investment options and were difficult for employers to understand. Half of employers said they did not know whether they or their 401(k) participants paid this fee. A later GAO review of plans’ documents found that the average transaction or trading cost was 0.45 percent, with one fee as high as 2.72 percent. One employer with a very large plan told GAO that its plan did not pay any trading or transaction costs, but a GAO review of this plan’s documents showed that the plan was actually charged more than $310,000 in transaction costs.

·         Eighty-five percent of plans hired a plan consultant or advisor and 77 percent passed the consulting fee onto plan participants, which added an additional 0.01 percent to 1.40 percent in costs to workers.

GAO also highlighted employers who contracted with insurance companies – a growing group of 401(k) service providers that address an increasing interest in annuities – as paying higher than average recordkeeping fees and investment management fees, on top of wrap fees for the annuities. 

“Fees associated with certain 401(k) insurance products – where participants pay for some benefits but which otherwise appear similar to noninsurance 401(k) products – can be difficult for sponsors to identify and therefore evaluate,” GAO said. For example, “fees associated with group annuities can add significant costs to a plan.”

GAO’s survey also highlighted the significant difference in fees charged between smaller and larger 401(k) plans:

·         Employers with smaller plans with fewer than 50 employees paid nearly 90 percent more on average in recordkeeping fees than employers with larger plans with more than 500 employees (1.33 percent versus 0.15 percent). The average across all firms was 1.13 percent of assets.

·         Workers at small firms also paid nearly twice as much on average for recordkeeping as workers at large companies (0.43 percent versus 0.22 percent).  

·         For consulting services, 401(k) plan participants at small companies paid almost 80 percent more on average (0.29 percent versus 0.07 percent).

Other results of interest from the GAO survey:

·         66 percent of employers have not negotiated over fees in the last five years.

·         56 percent of employers used bundled services.

·         70 percent of respondents thought that it would be helpful to participants if fees charged against accounts (including commissions, sales loads and account fees) were disclosed to participants.

·         68 percent of respondents thought it would be helpful to participants if the actual dollar amount in fees and expenses charged against participants’ accounts was disclosed in their quarterly statement.

·         Among plans that paid more than 1 percent in investment management fees, half said fund performance was more important than low-fee investment options when considering the options to offer participants.

·         75 percent of 401(k) plans did not make any changes (reduce or eliminate matching contributions) to their plans during the financial crisis

·         17 percent of employers used auto-enrollment.

Rep. Miller has worked for years to expose hidden fees and how they can cut into workers’ retirement savings, requesting an initial report on the issue in 2007.  He is the author of 401(k) fee disclosure legislation that was approved by the House of Representatives in 2010 and appeared on CBS’s 60 Minutes to discuss how hidden fees can eat into Americans’ retirement savings. For his efforts in advocating for workers’ retirement security, Miller was named a retirement “Legend” in 2011 by Plan Adviser Magazine, a leading publication for advisors and consultants for retirement plans. Rep. Miller also received the Robert M. Ball – Lisle C. Carter Superhero Award “for outstanding contributions for retirement security” from the Pension Rights Center in 2011.

Read the GAO report.