Girard Miller is the Public Money columnist for GOVERNING and a senior strategist at the PFM Group.E-mail: firstname.lastname@example.org
The lack of "fee transparency" in 401(k) plans has caught the attention of the U.S. Congress, which may require defined-contribution (DC) plan providers to disclose all service fees. That's because fees in public and private DC plans are seldom presented clearly.
Almost all DC plans start with retail-priced mutual funds, which charge investment advisory fees, distribution (marketing) fees, shareholder recordkeeping fees and other expenses. Insurance companies serving as a record-keeper sometimes also require annuity product fees. For smaller governments in particular, there may be a "plan administration" or "plan recordkeeping" fee built into the cost structure.
When investment plans are hobbled by high fees, the investment returns will fall short. Over a lifetime, it can make the difference between employees retiring in comfort or running out of money.
For most public employees, workplace savings is their single largest financial asset. Unfortunately, 80 percent of participants, according to a General Accounting Office report, are in the dark about what they pay in fees.
Fortunately, there is now a precedent for improved disclosure. The securities regulators at the New York Attorney General's Office, which entered into settlement agreements with numerous mutual fund companies involved in the 2003-04 "market timing" controversy, required those companies to make full disclosure of fees and expenses to their clientele--by individual investor. This information would be illuminating to both the individuals and the oversight committees that make decisions about which investment funds and which plan administrators to use.
In a perfect world, the DC industry--including the National Association of Governmental Defined Contribution Administrators, which represents the governmental plans--would regulate itself.
If it doesn't, Congress has every right to step in.