Introduction Of Fee Disclosure Bill
Floor Speech
Mr. NEAL of Massachusetts. Madam Speaker, I rise today to introduce The Defined Contribution Plan Fee Transparency Act of 2009. During the last Congress, we expected some guidance from the Department of Labor on the issue of fee transparency, but not much was finally implemented. Therefore, I believe that Congressional action is warranted and this bill provides a strong disclosure requirement to benefit both workers and companies in understanding fees.
A few years ago, AARP conducted a survey of 401(k) participants to find out what they knew about the fees paid by their plans. Plan fees can make a huge difference in your account balance. As the Department of Labor has pointed out in a helpful guide on the issue, ``Fees and expenses paid by your plan may substantially reduce the growth in your account.'' Literally, it pays to know what these expenses are. What the AARP found in their survey is instructive: 83 percent of participants acknowledged they do not know how much they pay in fees or expenses. Considering the number of people who have told me they do not dare to even open their 401(k) statement in this devalued market, that percentage may have increased even more!
But fees are a serious issue and one which participants need to understand from the outset. The House Education and Labor Committee has held several hearings to highlight this issue over the past 18 months, and I commend the Committee Chairman, Mr. MILLER, for his leadership and thoughtful ideas about how to address fair disclosure.
The growth in defined contribution plans offers great opportunities for workers, with alternatives and options they did not have before. Many workers, however, are simply overwhelmed with the information distributed and, because of that, may not be able to utilize these opportunities. Certainly, more disclosure is preferred. But, as AARP found out, the need to better understand this information means it must be in an easily digestible format and in plain English.
The legislation I am filing today, which updates the bill I filed last Congress, would provide for disclosure both to the worker and to the employer. Participants, or workers, would get both an enrollment notice up-front and a quarterly notice updating them on their account. At enrollment, the bill requires that for each of the plan's investment alternatives, the employer would have to disclose the alternative's objective and investment manager, its risk and return characteristics and its historic rates of return in comparison to a benchmark. In addition, the employer must indicate whether the alternative is passively managed, as with an index fund, or actively managed, plus the differences between these two investment styles and whether or not the alternative is a single-alternative investment solution, such as a lifecycle or target retirement date fund.
Regarding fees, the bill requires employers to disclose to employees at enrollment the annual operating expenses for each investment alternative (together with a translation of these asset-based fees into illustrative dollar amounts), whether such fees pay for services beyond investment management, such as plan administration, and whether there are additional charges for buying or selling the particular alternative, such as redemption fees. In addition, participants must be provided with information about any separate fees they will be charged for plan administration as well as a notice that certain plan services they may decide to use could have separate charges associated with them, such as investment advice programs, brokerage windows, or plan loans. Accompanying these disclosures would be a statement that participants should not select investments based solely on fees but based on careful consideration of a range of factors including the alternatives' risk level, returns and investment objectives. The bill requires this information about plan investments to be provided to employees annually as well.
In addition to this enrollment notice, each quarter, participants would receive information about the investments they had selected and the fees applicable to their accounts. This quarterly notice would describe which investment alternatives the individual participant was invested in, what percentage of the participant's total account each alternative represented, the risk and return characteristics of each such alternative and whether such alternatives were passively or actively managed. The statement would also summarize for participants what asset classes their account is invested in, with percentage breakdowns. On fees, the quarterly notice must describe the annual operating expenses (with dollar examples) and any sales charges for the alternatives the participant has selected, any separate charges for plan administration and any deductions for participant-initiated services. In addition, to assist employees who may want to make investment changes, the notice must tell participants how to access investment characteristic and fee information for alternatives in which they are not invested.
My bill also requires service providers to disclose to employers various fee and expense information in advance of a contract. This will ensure that employers have the information they need to bargain effectively with plan service providers and to keep costs at reasonable levels for participants.
Providers must give the employer an estimate of total fees, a detailed and itemized list of all the services to be provided under the contract and a schedule of any transaction charges that participants may face. Providers that offer multiple bundled services must separate the fees charged under the contract into fees for investment management and fees for administration and recordkeeping and must also disclose fees paid to intermediaries or other third-parties. Providers must also disclose whether they expect to receive payments from third-parties in connection with providing services to the plan, also referred to as revenue-sharing, and if so, must name those parties and the amount expected to be received from each. This revenue-sharing information is critical so that employers understand how their providers are being paid and whether any such financial relationships give rise to potential conflicts of interest. Providers will likewise have to disclose whether they may benefit from the offering of proprietary investment products or those of third parties and must tell employers if the investment products offered to the plan are available at other price levels. Plan service providers must also provide this detailed disclosure statement to employers every year the contract is in place and prior to any material modification of the contract. In addition, employers must make such statements available to plan participants upon written request so that those employees who want to delve into the details of the plan's financing can do so.
The Department of Labor's guide on 401(k) fees states that fees and expenses generally fall into three categories: plan administration, investment, and individual services fees. By requiring all service providers, whether they just provide recordkeeping or if they perform it all, to disclose fees in broad categories, such as these, companies and employees can better evaluate what they are getting for what price they pay. It is my understanding that some service providers are already disclosing more than what is required. I hope that we can capture those ``best practices'' and implement them across the board so that all workers and employers have the best data available.
Additionally, my bill would apply not only to 401(k) plans, but to all tax-preferred, participant-directed defined contribution plans, including 403(b) plans and governmental 457(b) plans. The amendments contained in the bill are all within the Internal Revenue Code, and therefore, penalties for not complying will be taxes assessed per violation per day, subject to a cap. The bill is forward-thinking, pushing electronic delivery as much as possible. I hope to work with the Chairman of the Ways and Means Committee, Mr. RANGEL, to address this issue within the Committee very soon as I know he shares my concern that the taxpayers' interests be protected.
Despite the fact that 8 in 10 participants do not know what fees are charged, there is some good news out there too. According to a survey released in April by Deloitte, the International Foundation of Employee Benefit Plans, and the International Society of Certified Employee Benefit specialists, the average expense ratio for plan investments was down from the prior survey period. Clearly, the attention to fees is having some impact resulting in lower costs.
It is my hope that this bill will provide much more information about plan fees and expenses in a useful way without overwhelming recipients. I urge my colleagues to join me in this effort.
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