[9412]
November 13, 1997
TO: BOARD OF GOVERNORS No. 60-97
PENSION MEMBERS No. 53-97
RE: INSTITUTE TESTIFIES BEFORE DEPARTMENT OF LABOR REGARDING
401(k) PLAN EXPENSES
______________________________________________________________________________
The Institute testified at a November 12 Department of Labor hearing regarding 401(k)
plan expense disclosure. The Department called this hearing to obtain public comment on the
following concerns: (1) the extent to which employers and employees are obtaining adequate
information regarding 401(k) plan fees and expenses; (2) whether employers are shifting plan
administrative expenses to plan participants, either directly via annual or quarterly charges
against individual accounts or indirectly through investment management fees paid by
participating employees, including whether such fees are adequately disclosed to employees;
and (3) the reasonableness of the fees charged for 401(k) plan services and investment products.
Copies of the statements of Secretary of Labor Alexis Herman and Assistant Secretary
Olena Berg, the Institute’s written testimony and a list of the individuals that testified at the
hearing are attached.
In oral testimony, the Institute emphasized the importance of disclosure and explained
that the fee table in a mutual fund prospectus provides standardized disclosure of all fees and
expenses associated with a mutual fund. Under ERISA section 404(c) regulations, employers
are required to provide prospectuses to plan participants. The testimony made the following
three points:
(1) The growth of defined contribution plans generally, and 401(k) plans in particular, is a
positive development providing employees with an easy-to-understand benefit, the
advantages of tax-deferred salary reduction, investment control and benefit portability.
(2) Employers, in their role as plan fiduciaries, are responsible for prudently selecting and
monitoring both investment options and service providers and ascertaining which best
fits the needs of their plans and employees at a reasonable price. In determining
reasonableness of price, employers must consider all expenses, including expenses
associated with particular investment products and expenses incurred in connection
with plan administration. Fierce competition, ongoing monitoring of price and quality
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by employers, and the ability of employers to change providers moderates prices and
increases the level of and quality of services.
(3) Most importantly, employees should be provided information about all fees and
expenses related to the investment options in their plans and all plan administration
fees that affect their account balances. In the case of mutual funds, the fee table in the
prospectus provides detailed fee information, including annual operating expenses of
the mutual fund. In the case of non-mutual fund investment vehicles that are not
required to produce a prospectus, however, current regulations require disclosure of
annual operating expenses only upon participant request. The lack of an affirmative
disclosure requirement for non-mutual fund products leaves many participants without
appropriate expense information, as mutual funds constitute only about 39 percent of
the 401(k) market. Additionally, the Institute stated that no provision of ERISA
explicitly requires full disclosure of all plan administration fees that are charged against
participant accounts.
The Institute recommended that the Department of Labor require employers to deliver
annual operating expense information of all investment alternatives to employees and also
disclose to them all plan-level fees that affect participant accounts, at least in the case of plans
that fall within ERISA section 404(c).
Matthew P. Fink
President
Attachment (in .pdf format)
Note: Not all recipients of this memo will receive an attachment. If you wish to obtain a copy
of the attachment referred to in this memo, please call the Institute’s Library Services Division
at (202)326-8304, and ask for this memo’s attachment number: 9412.