An Interview with Matthew D. Hutcheson, Recent Congressional Witness on 401k Fees
On March 6th of this year, Mr. Hutcheson appeared before the Committee on Education and Labor, United States House of Representatives, to provide input and insight into fees charged to 401k plans. We decided that it would be helpful to get a better understanding of his viewpoint, so we arranged this exclusive interview.
Matthew Hutcheson, MS, CPC, AIFA®, CRC®, is a published author and internationally recognized authority on retirement plans and their associated fiduciary issues. He is quoted by Bloomberg News, HR Magazine, Investor's Business Daily, American Business Journals, CFO Magazine, and others. He has advised major U.S. corporations and not-for-profit pension plan sponsors. For more than sixteen years, Matt's primary professional focus has been to help pension sponsors fulfill their duties to plan participants. He may be contacted at matt AT erisa-fiduciary DOT com.
Meigs: Matthew, thank you for taking the time to share your thoughts about your Congressional testimony with our readers.
Hutcheson: Thank you. It's my pleasure.
Meigs: Tell us your thoughts on how the Congressional hearings on 401k fees went.
Hutcheson: Sure. I was impressed with the respect members of the Committee seemed to express towards one another. It was a positive experience to see the legislative process play out in an orderly, constructive, and respectful environment. Also, I was impressed with how serious Congress is about protecting the hard-earned retirement dollars of American workers. They are very serious about strengthening the middle class. That came through loud and clear. Chairman Miller's leadership was clearly evident, and any individual who participates in a 401k plan should feel confident that Chairman Miller and the Committee on Education and Labor intend to do everything they can to protect their retirement income.
Meigs: Do you feel these hearings are politically motivated?
Hutcheson: I did not get that sense, no. This is a bi-partisan issue. This is a matter of social importance that knows no political boundaries. The Committee seemed serious about fee disclosure and transparency in 401k plans, which I fully endorse.
Meigs: During the hearing, one of the other witnesses suggested that you embrace old fashioned fiduciary ideals; that you might be out of touch with what participants want. How do you respond to that?
Hutcheson: That suggestion made me chuckle. Fiduciary prudence is timeless. It's not influenced, or shouldn't be influenced, by trend, fad, gimmick, or anything else. My position is firm: Fiduciaries must not be impeded in their ability to discharge their duties. A fiduciary of a qualified retirement plan must be able to make decisions necessary to protect the future benefits of the participants and beneficiaries of the plan, and that requires a business environment that is transparent and open. Such an environment doesn't currently exist for the most part. I do not believe any fiduciary should be "wishy washy" about their fiduciary assignments. To me, being firm and adhering to principle is an absolute "must" for any person serving as a fiduciary.
Meigs: Do you believe that only those who are willing to take on fiduciary responsibility should be permitted to service qualified retirement plans?
Hutcheson: If they receive their compensation from Plan assets, yes. To me, this is such an obvious thing. It's actually obvious to the Government too, which is why some organizations have sought certain exemptions to get around this fundamental principle.
Meigs: So, are you saying that if a professional is paid from the employer, they should not have to be held to a fiduciary standard?
Hutcheson: Not necessarily. It depends on the role and function they are serving, and whether they have discretion and/or "effective discretion," which is such substantial influence over the decisions made within the plan. An Investment Advisor, for example, will be a fiduciary no matter how they are paid. Others who might try to avoid fiduciary responsibility while receiving compensation from the trust should absolutely be held to a fiduciary standard. Professionals who perform compliance and accounting services and are compensated by the plan sponsor for those services shouldn't necessarily be held to a fiduciary standard, in my view. They should be held to a professional standard of care, which is sufficient in most cases. My position is that those who are paid from trust assets should be held to a fiduciary standard of care and loyalty.
Meigs: Do you think members of the Committee understood your point that the hidden fee problem in 401k plans has to do with the non-fiduciary element that has crept into 401k plans?
Hutcheson: Yes, I think most, if not all, understood that is a fundamental part of the problem. I believe as they ponder the written testimony, it will become clearer. In a true fiduciary environment, hidden fees couldn't exist. Fiduciary prudence simply won't tolerate it.
Meigs: You mention "fiduciary prudence" over and over again. Can you elaborate?
Hutcheson: When it comes to retirement plans, prudence does as prudence is. It may be a new way of thinking for some, but "prudence" is a noun. It exists or it doesn't. It either "is" or it "is not." There is no such thing as "partial" prudence. It just doesn't work that way.
Meigs: In simple terms, what does this mean?
Hutcheson: Where prudence is, services to the plan will be delivered in a manner consistent with the purpose of the plan. Prudence resists distractions and unnecessary services that divert assets from the participants. Where prudence is, service providers can be expected to behave properly, charge appropriate fees, disclose those fees without compulsion, and always act in the best interests of the participants and beneficiaries; in short, operate in a way that will deliver future retirement income as efficiently as possible.
Meigs: In your written testimony, you assert that 401k fees can be both reasonable and excessive at the same time. This seems a bit confusing. Can you explain what you mean?
Hutcheson: Certainly. Imagine two individuals in Washington, DC, both needing to drive to Los Angeles and be there in 5 days. Both go shopping for a car. One purchases a $20,000 Ford, and the other purchases a $200,000 Bentley. Based on the market demand, craftsmanship, electronics, engine performance, materials, and so forth, both are reasonable for their respective prices. Both vehicles are openly priced based upon what the market will bear for each vehicle. However, the Bentley is excessive because it's not necessary to have a Bentley when a Ford will get its driver to California just as well. Remember, the objective is to get to Los Angeles, nothing else. Similarly, the issue of reasonable fees is not an either/or proposition. 401k fees can be reasonable based on what is required to fulfill the expectations of a client, yet excessive at the very same time. Sometimes sponsors pay for services that have nothing to do with getting the participants to their "destination." 401k plans must be focused on proper results, and forsake the culture of providing immediate benefits in various forms that are unrelated to securing future retirement income. The list of such unnecessary services is a long one.
Meigs: Some will disagree that conventional plans are delivering unnecessary services.
Hutcheson: Of course, I would expect that. However, it's hard to argue with the fact that every $1 spent on such services today will decrease a worker's retirement income by $3 twenty-five years from now. We've got to keep our eye on the ball.
Meigs: If you were to sum up your primary concern about the current 401k environment what would it be?
Hutcheson: It would be two things: First, fiduciary indifference; and, Second, economic obfuscation.
Meigs: Obfuscation? Do you mean lack of transparency?
Hutcheson: Yes. Consumers demand full transparency on their cell phone bills, yet fiduciaries passively allow the 401k industry to get away with poor disclosure of a wide range of fees. The disclosure of 401k fees is of far greater importance to society than the itemization of a cell phone bill; hidden and obscure fees are a real threat to the retirement security of millions. Billions of dollars are at stake every year. Up until now, this issue hasn't meant much to fiduciaries, so it's a good example of fiduciary indifference.
Meigs: Do you think Congress will pass laws to force disclosure?
Hutcheson: I can't say what Congress will or won't do. However, I hope the industry will voluntarily make all 401k plans fully transparent, if, for no other reason, because it's the right thing to do. Complete transparency would build tremendous trust and confidence in the system. I believe it would increase participation by employers and workers, which serves everyone's interests. It's not too late to build that trust. "Hiding the ball" from fiduciaries goes against good public policy in my view. It just shouldn't be done.
Meigs: Do you think most fiduciaries are bearing more risk and possible liability than they think they are?
Hutcheson: Oh, probably. Current fiduciary risk is a real thing. However, I think there is a larger, a "macro" risk if you will, that most fiduciaries never contemplate. That is how poor or indifferent fiduciary decisions will impact the broad economy ten, fifteen, twenty years from now. It will really hit home then.
Meigs: What do you mean?
Hutcheson: If fiduciaries don't pay attention to their duties today, there will be less retirement income available for retirees to spend. If retirees cannot participate meaningfully in the economy, everyone will feel it. David Walker, the U.S. Comptroller General has been talking about this very issue for many years now. We need to listen to what he has to say and take our fiduciary responsibilities more seriously.
Meigs: Are you a "critic" of the 401k industry?
Hutcheson: No, that's not a fair characterization. Everyone who knows me -- especially those who participate in the plans where I serve as fiduciary -- know that I'm dedicated and loyal to participants. I am a participant advocate, and I never waiver on this point. My loyalties are to the participants and beneficiaries. If protecting them means confronting errant practices, then that's what I will do. It's fairly simple, I suppose.
Meigs: Do you have anything else you would like to share with our readers?
Hutcheson: I can say that the Congressional hearings are a good thing. They are the starting point for positive change, and I applaud the Committee for its efforts.
Meigs: Thanks for your time.
Hutcheson: Thank you.
You can read Mr. Hutcheson's Congressional testimony by clicking here.
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The opinions expressed in this interview are those of Mr. Hutcheson and do not necessarily reflect the position of 401khelpcenter.com.
