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Ready for Retirement

Poor 401(k) fee disclosure leaves many seniors behind in retirement savings, but CAP offers solutions for a fairer system.

The basic dignity of the nation’s elderly is at risk. With changes in Social Security and retirement options, too many seniors must struggle financially through their golden years, regardless of how much they saved or how hard they worked before retiring.

That’s why the House Education and Labor Committee is meeting today to discuss H.R. 3185, the 401(k) Fair Disclosure for Retirement Security Act. Americans are increasingly using so-called defined contribution plans, of which 401(k) plans are the most popular variety, to save for retirement. The catch is that employees must pay fees from their annual investment income to the administrators and fund managers of these plans, which over time can cut sharply into their eventual retirement savings.

“Building 401(k) Wealth One Percent at a Time: Fees Chip Away at People’s Retirement Nest Eggs,” a recent report from Center for American Progress Senior Fellow Christian E. Weller, explains that these fees often appear deceptively low, ranging from less than 1 percent of assets under management to more than 2 percent of assets, depending on the size of the defined contribution plan and on the level of services offered to employees.

Needless to say, although these fees as a percentage of assets may appear small, over the course of a full working career, typical fees in 401(k) plans can reduce employee savings by 20 to 30 percent. Calculated another way, employees would need to postpone retirement for up to three years to compensate for the lost investment income to 401(k) fees over the course of a full career.

The U.S. Department of Labor has been reviewing 401(k) fee disclosure, but these actions have not yet translated into more comprehensive and more easily understandable practices, although the Fair Disclosure for Retirement Security Act will surely help if made into law.

What Weller outlines in his report is not how to improve disclosure, since some workers will always face higher fees than others regardless of disclosure, but rather how to create a fairer 401(k) system that would benefit everyone.

A more promising approach, particularly for small employers and their employees, is for the U.S. government to set up a large but very basic 401(k) plan so that these businesses and their workers can take advantage of these economies of scale, too. Our nation’s small business community could then also offer their employees a low-cost option to save for retirement.

How would such a system work? The easiest solution would allow private sector employees to join existing 401(k) programs run by state governments and the federal government for their own employees. The underlying model here is the Thrift Savings Plan, or TSP, which offers federal employees a limited range of investment options and services in exchange for low fees. Of course, employers who want to offer a DC plan with more choices and more service options, such as 24-hour call centers, could still purchase these plans in the private market.

The bottom line: If all Americans are given the opportunity to save for their retirement free of excessive 401(k) fees, everybody—employers and employees—can more effectively do their part to provide for a secure middle-class retirement as a reward for a lifetime of hard work. Achieving this goal should be a shared responsibility. Public policy can do its part to foster the common good of a secure middle-class retirement.

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