Hewitt Supports Legislative Action to Improve Fee Transparency
LINCOLNSHIRE, IL, March 15, 2010 -- Despite the U.S. stock market's recovery, Americans are still struggling to make up for the historic losses sustained in their 401k plans over the past two years. One main obstacle employees face as they struggle to save is hidden, high 401k plan fees, which can deprive them of thousands of hard-earned dollars over the course of their career and negatively impact the timing and quality of their retirement. Even with increased legislative and legal scrutiny of plan fees over the past few years, Hewitt Associates, a global human resources consulting and outsourcing company, believes federal action is needed to help plan sponsors and individuals receive better information from investment managers and other service providers on these fees. Such transparency will enable employers to better protect and enhance employees' retirement savings by providing a better climate for negotiating lower fees and offering competitively priced, best in class investments in their 401k plans.
Closely monitoring 401k fees is a critical component in helping Americans reach their retirement goals. Even a small reduction in 401k plan fees can increase a 401k participant's overall retirement earnings without requiring any additional action on their behalf. For example, a 30-year-old employee making $50,000 per year, with a plan balance of $50,000(1) and a typical matching and savings rate, would have $115,000 more in savings at retirement simply because his or her 401k plan had fees of 0.6 percent versus 0.9 percent. This difference, over time, could help fill the gap caused by the recent market downturn.
Millions of employees who participate in 401k plans may currently be paying unnecessarily high fees because of how their company's service provider charges administrative fees. In many cases, service providers set these fees based on the amount of money (assets) in the plan, rather than through a fee-for-service model, where they charge fees on a per participant basis. These asset-based fees increase as plan assets increase with stock market growth and contributions, even though the underlying costs these fees cover do not. Because administrative fees are usually paid for by the employee, this model can end up significantly eroding their retirement savings over time as their plan balances grow. For example, a 401k plan might pay $50 per year for the administration of an employee's $50,000 401k plan balance. If that employee's balance increases to $150,000 in five years, the plan will now be paying $150 per year in fees, even though no additional work or services have been provided for that employee. Often, plan sponsors and employees are not aware of the magnitude of these fees because service providers do not adequately disclose these costs.
Requiring complete fee transparency and uniform disclosure of service provider fees to 401k plans will help employers more accurately compare and contrast fees across providers and add to their negotiating leverage. Legislation moving in the U.S. House of Representatives would achieve the improved disclosure, as would pending legislation in the Senate on which no Senate action has yet been taken.
"Plan fees are eating up thousands of dollars of employees' retirement savings without them even knowing it," said Alison Borland, Retirement Strategy Leader at Hewitt Associates. "As concern over employees' retirement income adequacy levels continues to grow, it's more important than ever for Congress to enact legislation that will provide employers and employees with an apples-to-apples comparison of the fees in their 401k plan. This will enable them to better understand the financial impact of these costs and, if necessary, take steps to reduce them."
About Hewitt Associates
Hewitt Associates provides leading organizations around the world with expert human resources consulting and outsourcing solutions to help them anticipate and solve their most complex benefits, talent, and related financial challenges. Hewitt works with companies to design, implement, communicate, and administer a wide range of human resources, retirement, investment management, health care, compensation, and talent management strategies. With a history of exceptional client service since 1940, Hewitt has offices in more than 30 countries and employs approximately 23,000 associates who are helping make the world a better place to work. For more information, please visit www.hewitt.com.
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