Fee-Disclosure Proposal Scrutinized
Most observers were pleased with the proposed fee-disclosure regulation issued by the DOL, which could take effect for the 2009 plan year. It requires both quarterly and annual disclosures, as well as information on investment performance. Critics say the proposal does not go far enough.
By Robert Stowe England
Reviews were mostly positive as experts and advocates began analyzing the details of a proposed Department of Labor regulation issued July 23 that would require plan sponsors to regularly disclose a range of fees and expenses paid by participants in 401(k) and other participant-directed plans.
The proposed regulation also requires plan sponsors to provide information on the past performance of individual investment options within the plan, along with benchmarks against which participants could compare the performance of the funds in the plan.
DOL is seeking comments on the proposal and expects to finalize the new regulation by the end of the year, with its provisions to take effect in 2009.
According to DOL, there are an estimated 437,000 participant-directed account plans, including 401(k)s. The participants and beneficiaries direct the investment of $2.3 trillion in assets held by the plans.
"We're excited about this regulation because it's going to make, we believe, a significant difference in the way people make retirement decisions and [we are also excited about] how much easier it is for workers to make those retirement decisions," said Bradford Campbell, assistant secretary of labor and head of the Employee Benefits Security Administration, during a press briefing unveiling the proposed rule.
Rep. George Miller, D-Calif., chairman of the House Education and Labor Committee, who has sponsored legislation calling for more detailed fee disclosure to participants than the DOL proposal contains, was modestly upbeat.
"I am pleased that the Department is finally taking preliminary steps to improve the information provided by employers to the 65 million workers counting on their 401(k) plans for their retirement security," he said in a prepared statement.
"While a step in the right direction," Miller continued, [the proposal] would still allow financial firms to hide many fees that they take from 401(k) plan participants' accounts."
The regulation, which ran 31 pages in the Federal Register, sets two different types of fee disclosure requirements: those disclosed quarterly and those disclosed annually (and at others times).
See here for details of the fee-disclosure requirements
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In its calculations about the benefits of the proposal, DOL estimates it will save $6.1 billion over a 10-year period. The estimate is based partly on the hours that participants would otherwise spend obtaining the basic information provided in the plan, representing a gross saving of $6.9 billion.
However, the cost of providing the information by employers and plan administrators was estimated to cost about $800 million over the next 10 years, thereby reducing the overall benefit to $6.1 billion.
The American Benefits Council, a Washington-based lobbying organization that represents mostly Fortune 500 companies with health, retirement and stock-compensation plans, is "pleased" the regulation contains "a simple, straight-forward disclosure regime that will provide useful information to plan participants," says Jan Jacobson, senior counsel of retirement policy for the organization.
Jacobson was also pleased the proposal includes not just information on fees but also investment performance information -- a suggestion made by her organization and others after the DOL issued a request for information on fee-disclosure proposals.
"Participants, in deciding on what they invest in, should not make decisions just on fees," Jacobson says. "They need other information on risk and return."
The Chicago-based Profit Sharing/401(k) Council of America agrees.
If only fees were provided, David Wray, president of the council says, it might lead participants to pick the funds with the lowest fees and ultimately get a lower return because they did not take into consideration the return on any given investment option.
For example, Wray says, investing in company stock has the lowest cost for participants, but there has been considerable criticism of the notion of having employees invest too much of their savings in company stock.
It's also important for participants to understand that the promise of higher returns often comes with higher risk, says Norman Stein, a law professor at the University of Alabama.
"There needs to be a stronger warning [provided by employers to plan participants] about the volatility of investment returns," Stein says. When participants understand this, they can make better choices about how to invest their 401(k) plan assets, he says.
Insufficient Time
Jacobson at ABC says it will be difficult for employers and plan providers to meet the January 2009 implementation date for the new regulation.
DOL is asking for comments until Sept. 8, with the final regulations due by the end of the year.
"Even assuming [the final regulations] come out before the end of the year," Jacobson says, "there is probably insufficient time [for employers to gear up] to provide this kind of disclosure for the 2009 plan year."
Jacobson says her initial review of the regulation suggests the DOL designed the rule to make implementation cost effective for employers and plan providers.
"For instance," she says, "they allow you to use the most recent annual statement and any material updates for any eligible employees.
"If they had not done that," Jacobson says, "every time you had a new employee, you'd have to update" the annual statement. "For big plans, you'd have to update it every day," she adds.
The proposal requires employers to provide links to additional information -- much of it available on the Internet -- about performance and fees relating to the options within the plan, such as the portfolio composition of a fund, the fund's investment strategy, and the risk characteristics of the fund.
This information does not lend itself to a simple presentation in a comparative chart or disclosure form and is better accessed separately, according to the DOL.
DOL officials disagree with claims by some critics that information on fees and performance are "hidden" in the new disclosure forms and regulatory regime. The aim of the regulation is to ensure that the most basic information is provided up front, according to DOL, with the idea of encouraging employees and investors to look at the more detailed information, which can be found elsewhere.
There was concern the disclosure forms might overwhelm participants with too much information, according to DOL.
DOL officials recognized that focus-group comments on the form would have been helpful, but ultimately decided that comments filed pursuant to the proposed regulation will provide some indication as to whether or not the form is easily understandable and useful for participants.
A House staff member, who asked not to be identified, says she spent 10 minutes reading the chart and found it quite understandable.
The real question, the staffer adds, is whether the typical employee who is not knowledgeable about retirement can understand the chart, suggesting that the DOL test the chart-disclosure form with employees.
Regulatory Concept
The regulatory concept behind the 401(k) disclosure requirements has been to adapt existing disclosure securities law requirements for mutual funds by the Securities and Exchange Commission to a new role in 401(k) plans, according to DOL.
The expense ratio, for example, required in the DOL comparative chart is the same as the expense ratio provided in disclosure by mutual funds. As proposed, it would require a similar disclosure to investment products from banks and insurance companies, according to DOL.
As with mutual funds, the total annual operating expense ratio for the new DOL comparative chart will include some administrative expenses.
The Investment Company Institute, a trade association for the mutual fund industry, was enthusiastic about DOL's proposed disclosure rule.
"We ... applaud the department for coordinating its approach with the recent [SEC] disclosure proposals ... and for harnessing the power of the Internet to improve disclosure," stated ICI president and CEO Paul Schott Stevens in a prepared statement.
Insufficient Fee Disclosure?
A staff member from the House of Representatives says the amount of disclosure on fees and expenses falls short of what participants really need to know.
The Congressional source is pleased with the requirements on the quarterly benefits disclosure. If there are any separate charges for administrative expense, legal fees, trustee fees, nondiscrimination testing fees, that would have to separately disclosed, the staff member says.
The problem is that the administrative fees disclosed on the quarterly benefits statement are probably only 20 percent or less of overall fees and expenses charged to participants, the staffer says. For example, the investment management expense is not separately disclosed to participants.
The fact that some administrative fees are bundled into the expense ratio, or not reported at all, may mislead participants to think that the fees and expenses reported quarterly are the only administrative fees they are charged, according to the House staff member.
On the initial reading, some observers also worried that the existing mix of required fee and expense disclosures might unintentionally create an incentive for employers to have plan providers bundle some administrative expenses into the total annual-operating-expense ratios for the investment options in the plan rather than charge them separately.
If an employer does not want participants to see administrative charges each quarter, there are two ways to deal with it, explains the House staff member.
First, the employer can pay the charges, which most probably will not do, the Congressional source contends. Or, the employer can go to providers who will bundle all the fees so that administrative fees are hidden.
While the Pension Rights Center, which is a Washington-based advocate for participants and retirees, is pleased with the increased disclosure requirement, Nancy Hwa, a PRC spokeswoman sees a number of areas where the rules could be strengthened.
For one thing, the disclosure should apply to all defined-contribution plans and not just participant-directed plans, she says.
"People have a right to know if the fund has high fees," Hwa says, even when they cannot choose the investment.
Benefits of Fee Disclosure
About one-third of the $6.9 billion gross savings anticipated from the disclosure will result from lower fees that providers will charge in response to disclosure of the fees, according to Campbell.
"We believe millions more people will be able to evaluate information and take advantage of disclosure" than do now, he said.
The savings in fees will ultimately benefit workers, according to Campbell. "We think it will make a big difference in the retirement savings of millions of Americans."
"It will definitely save a lot of time," says Jacobson at ABC, who says she has not yet done a cost-benefit analysis. "Whether it will reduce actual fees is speculative at this point."
July 25, 2008 Copyright 2008© LRP Publications
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