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Get Ready for New DOL Fee-Transparency Rules
Although the new regulations aren't yet available, employers and plan sponsors should prepare now for increased scrutiny and disclosure of fees involved in 401(k) and other defined-contribution plans.
At some point in 2007 (no one is sure exactly when), employers and plan sponsors will face tougher plan-fee disclosure requirements (no one is sure exactly what) for 401(k) and other defined-contribution plans. But DC plan experts and consultants are sure the new guidelines, which will come from the U.S, Department of Labor, will make increased fee disclosure a higher priority. The signs are all there. A congressional hearing by the House Education and Labor Committee resulted in calls for greater fee disclosure, or "fee transparency." The DOL has requested comments on the issue from key players -- plan sponsors, service providers and plan participants. The Securities and Exchange Commission has indicated it will seek to require improved disclosure by mutual funds. And recent high-profile lawsuits have alleged that current fee disclosure is inadequate and participants don't always have sufficient information to make informed investment decisions. Even with the expected new regulations a mystery, experts say it's not too early to get ready for changes. "Given the high profile of this topic, both in the media and in the courtroom, we strongly recommend that DC plan sponsors take a proactive approach," says Bill McClain, a principal at Mercer Human Resource Consulting, a New York-based wholly owned subsidiary of Marsh & McLennan Cos., Inc. "There are a number of steps they can take now to better manage plan fees and expenses and effectively communicate the necessary information to their plan participants." McClain says employers and plan sponsors mostly need to demonstrate that the fees their plans are paying are reasonable. They should start by making sure they fully understand their current fee and revenue-sharing arrangements, including hard-dollar fees, asset-based fees and underlying expenses such as trading costs. In addition, the DOL already recommends that plan sponsors evaluate administrative costs separately from investment costs. "By documenting fees from all sources and then benchmarking those fees against the current marketplace, plan sponsors often find they have a basis for negotiating reduced fees," McClain says. At the same time, McClain says, more plan sponsors are looking at ways they can help employees with retirement planning. "Employers are taking a more holistic view," he says. "And that can mean helping employees become good financial consumers for retirement. Companies are giving employees more and more responsibilities through defined-contribution plans, but employees ... need help. And they especially need to understand the fee issues. Many participants don't understand the impact of fees." Don Atherton, president of Houston-based Integrated Benefits Solutions, says there has been much discussion around changing the rules to require more disclosure, but the fee-disclosure issue has been important for a number of years. Now, however, the pressure is mounting on plan sponsors and employers to make it a higher priority. "I'm not 100 percent clear on the immediacy of the changes and what they will be, but I know why they are happening," he says. "The main issue is that any decision made on a defined-contribution plan regarding fees, or any qualified plan decision for that matter, must be made in the best interest of the participant." Atherton says employers need to be very cognizant of what their plan really costs, and understand what a fair value is for the participants, given that much, if not most, of the money spent on fees is participant dollars. And the plan sponsor needs to understand what its objectives are for running the plan, so it can determine services with an effective end-result in mind, he says. "The government is saying, 'You need to be more proactive,' " he says. "They want more visibility at the participant level." For example, Atherton says, an investment-management fee is exclusively paid by participants and typically represents 75 percent of total plan fees. That information may be clearly spelled out in the vendor's prospectus, but participants have no benchmark to measure the fees to determine if they are good or bad, he says. This is the critical fiduciary challenge given that investment-management fees are used to subsidize record-keeping, education, communication and other critical non-investment management services that may be better served though billed fees paid by the plan sponsor and not the participant, he says. "The most important thing for plan sponsors is to recognize that they are spending someone else's money, and [they should] be diligent in understanding costs and fee expense in relationship to the marketplace," he says. "As this issue gains more importance, then the plans won't have any choice but to respond. The main message needs to be not about fees per se, but about getting the right value in cost management." Patrick Kendall, vice president and national practice leader of defined-benefit and 401(k) markets at Diversified Investment Advisors, a plan sponsor in Purchase N.Y., says his firm's general approach is to look at the spirit of the proposed rules and react accordingly. He adds that there is little doubt that the spirit of complete transparency will be highly encouraged. "There has been some fuzzy math, and documented cases of these revenue-sharing deals that end up as a payoff for the adviser at the expense of plan participants," Kendall says. "The new regulations aren't yet available, when they do get finalized, the spirit of increased transparency will be in there. The world of fee scrutiny will not get smaller."
May 16, 2007 Copyright 2007© LRP Publications |
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