Defined contribution fee
disclosure requirements, which haven't significantly
changed since the 1970s, may be getting a facelift as
federal regulators look to increase plan sponsor and
participant awareness.
Under the
Employee Retirement Income Security Act, plan
fiduciaries have the obligation to choose a fund menu in
which the fees must be at a reasonable level given the
services and their quality. Yet, it's not an issue "on
the radar screen of most plan sponsors," Brent Glading,
managing director of the Glading Group, a consulting
firm that helps employers negotiate prices with 401(k)
providers.
However, fee
disclosure has been on regulators' radar screens.
In
December, the Department of Labor's Advisory Council on
Employee Welfare and Pension Benefit Plans sent four
recommendations to Secretary Elaine Chao outlining ways
to improve disclosure. The recommendations are being
reviewed, and the Labor Department hopes to propose a
new disclosure policy this year, says Ann Combs,
assistant secretary for the Department of Labor's
Employee Benefits Security Administration.
More
transparency, disclosure
For
plan participants, the council recommends that sponsors
provide a "profile prospectus" of each investment option
- an easy-to-understand summary of the full prospectus.
In
addition, participants should receive a document, like a
glossary, that explains all the terms used in the
prospectus to allow for better disclosure, the council
advocates.
For
plan sponsors, council members want recordkeepers to
make available a statement of expenses expressed as a
ratio for each investment option and identify which
expenses are paid entirely or in part by the plan
sponsor. The DOL also should provide a sample model
disclosure format that is available on its Web site for
sponsors.
Although ERISA was never set up as
an investment statute, DOL has a role in intervening in
this area, says Mercer Bullard, president and founder of
investor advocacy group Fund Democracy Inc. and
assistant law professor at theUniversity of Mississippi.
Bullard told
the advisory council that he believes 401(k)
participants do pay higher fees than other investors
because the fees are less transparent, and the existing
ERISA 404(c) requirements are not very effective in
promoting more transparency, he says.
Bullard
complained that the Securities and Exchange Commission
has the authority to bring cases against providers with
excessive fees, but has never done so and neither has
the DOL. The SEC is investigating where providers'
revenue-sharing arrangements and other fees improperly
influence how employers select retirement plans, but no
charges have been filed in the investigation as of press
time.
Out of
sight, out of mind
Retirement
plan costs have a critical influence on retirement
savings for participants, argues Stephen Utkus,
principal of Vanguard's Center for Retirement Research.
The center is part of The Vanguard Group, which
administers more than $215 billion of defined
contribution plan assets for more than 3,200 plan
sponsors.
Simply put,
lower fees lead to higher balances for participants and
give them a better chance for retirement security.
"Understanding fees is critical for the plan sponsors,"
Utkus says.
Costs
incurred by defined contribution retirement plans are
either flat fees for participants' accounts, usually
paid by the employer, or asset-based fees usually
charged against the investment return of individual
participant accounts, Utkus explains. Over the past
decade, there has been a shift from flat fees to all
asset-based fees, which are less visible to both plan
sponsors and plan participants.
"It's the
out-of-sight-out-of-mind mentality," Utkus observes.
"People will scream and shout about a $10 trading fee in
their IRAs, but won't complain over a high expense ratio
in their 401(k) plans."
Employers
are abandoning their fiduciary duties if they are
unaware of all the costs for both the plan sponsor and
participant, Glading maintains. An overall expense ratio
is important, but so is a breakdown of all the fees
charged to the plan. For example, some providers charge
a 90% to 120% profit margin on recordkeeping services,
he says.
To
decode the myriad fees paid by plan participants and
sponsors, Utkus proposes plan sponsors use an "all-in
fee expense ratio." The ratio is a more comprehensive
measure of cost than what is currently disclosed by most
providers and is easily accessible for the plan sponsor.
(See graphic.) If all providers used the all-in fee
expense ratio, plan sponsors would have an
apples-to-apples cost comparison, he says.
The
401(k) market is inefficient because plan sponsors have
limited access to a vendor's cost basis and
revenue-sharing agreements, Glading argues. Getting data
from providers can be difficult, but an employer can
also request proposals from other vendors to get a
benchmark for total plan costs, he says.
Evaluating
whether 401(k) plans need to lower their fees doesn't
have to be a complex process, Utkus notes. "If a
company's plan has doubled in size and it's still paying
the same level of fees, they need to ask for lower fees
from their vendor," he says.
