He's not the most familiar face in Congress, but he may be instrumental in determining if you'll be able to live out your dream retirement.
Rep. George Miller, a California Democrat and chairman of the House Education and Labor Committee wants to reform 401(k) plans. His efforts have taken on increased urgency as many investors have taken hits of 20% to 30% on their 401(k) account balances over the last year.
A key concern is that 401(k) providers do not clearly spell out the fees they charged to manage the investments and administer the accounts. The lack of clear disclosure makes it difficult for your employer to comparison shop to offer you the best plan. It also makes it more difficult for you to chose among the various mutual funds offered in your plan. Without this knowledge, you may be paying too much, costing yourself thousands of dollars.
For the second year in a row, Rep. Miller is trying to get legislation through Congress to force 401(k) providers to reveal their fees in plain English. To further cut costs, the bill also would require plan providers to offer at least one low-cost index fund. Finally, his proposal would give the Department of Labor power to enforce the fee disclosure and fine providers who violate the law.
In a recent interview with The Associated Press, Miller explains his view on fee disclosure and the prospects of getting legislation passed this year.
Q: Why do we need congressional action on 401(k) fees?
A: I don't think we have enough transparency on what the actual fees are that are being charged against individual 401(k) accounts whether they're trading fees, investment fees, advisory fees or stewardship fees. All of these things add up.
What we do know is that they do add up and they can have a substantial impact on the amount of savings that people have for their retirement over their 20- to 30-year working career.
We had witnesses testify at hearings, including Jack Bogle, the founder of Vanguard. He said these fees could eat up 75% of what you would otherwise have in your retirement savings (over a lifetime of investing). There's a churning of these accounts and the internal trading fees can just mount and mount.
Q: What have you learned about the fees from your committee hearings?
A: If you look at the system, basically what you have is working families making the conscious decision every month to try to save some money for retirement. Then along comes people managing those funds for them and they start dipping into those funds for fees that are really not in the best interest of those savers. So, you have elite financial managers getting rich off the back of middle class working people. The last thing they really want is transparency.
Q: Why did the bill fail last year?
A:We passed it out of committee, took it to the floor and it was pretty clear not much was going to happen in the Senate. It was also pretty clear that if we passed it, George Bush would never sign it. So, there wasn't a lot of point in it. But, we also were trying to give visibility to the issue.
Obviously, now there's been substantial conversation across the financial community about the need for the bill or opposition to the bill. But the visibility on this question of fees has risen substantially because of the legislation and we think if are successful in getting this through Congress that this administration would certainly give consideration to signing it.
Q: Besides the change in political environment, what feedback have you received about the bill?
A:Clearly, with the financial scandals, and the financial collapse and what happened to people's 401(k)s over the last year, people are focused on their 401(k) and they're aware of how much they need those retirement savings. So there's even a renewed interest there — what's the real cost to them of how their 401(k) is managed? If 401(k)s remain as part of our retirement system — which they've become almost by accident — we've got to make sure that there's transparency and they're safe and secure. There's enough volatility in the market to scare people, but they should not be losing their savings by fees that cannot be justified and are excessive.
Q: Does the bill regulate fees by placing limits on how much can be charged?
A:No. We just address disclosure at this point.
Q: Disclosure may give people information to make choices, but isn't there a need to regulate fee amounts?
A:I don't know the answer to that question yet.
Q: Do you have a sense for whether the 401(k) is the best retirement savings vehicle for workers?
A:I think it needs to be strengthened. I think it needs to be secure. It needs to provide safer options for individuals. It needs to certainly be safer for people who aren't actively engaged in the management of their funds. People who do manage these have to have a very strong fiduciary relationship to the people whose money they're managing.
Q: The bill includes a few other requirements, including mandating an index fund option. Why is that?
A:We think there also should be a low cost option available to people especially if we're going to have people automatically enrolled. Then their money ought to be in a very low-cost option. And if they decide they want to do something different with their money, then they should be able to do that. I think it's pretty clear that an index fund would be a vehicle to start people out. Then, they can decide.
There have been other alternatives proposed. But when you look at life-cycle funds, for instance, again if you don't have the transparency and disclosure, it's not quite clear what that life cycle fund represents to most people. It may be high risk. We have value funds, they're advertised as stable value funds and they're neither stable or have value in them.
An index fund, if you buy an S&P 500 index or some other index you kind of know the totality of the market that your buying and that's fine. That's a holding pattern and if people want to engage in additional information they can make other decisions. I believe those kinds of changes are necessary.
Q: Where is the bill now in the process?
A:We've had hearings and we hope to schedule a markup on the bill in the near future. As far as when it might come to the House floor, we'll have to discuss that with the leadership.