The report, "Retirement Savings: Better Information
and Sponsor Guidance Could Improve Oversight and Reduce
Fees for Participants," (see
More Oversight Could Lower Fees for
Retirement Plan Participants
) reflects primarily qualitative information,
rather than quantitative information, obtained in a
series of interviews of a selected group of market
participants (in which this author participated) and
federal and state regulators. As such, it does not
quantify the actual levels of fees charged in different
types of plans, for different types and sizes of
employers, whether paid from participant accounts or
otherwise. Nor does the report attempt to analyze the
reasonability and different types or levels of fees and
corresponding services.
The report provides some very helpful general
information, however, including information about plan
types, investment arrangements (bundled or unbundled,
annuity vs. mutual fund, etc.), and regulatory oversight
applicable to different arrangements.
The report points out that its fee discussion is
unrelated to questions of 403(b) plan compliance with
requirements imposed by recent IRS 403(b) regulations.
This is important, particularly given some very early
market confusion, such as inaccurate claims that the
regulations imposed fiduciary duties - claims refuted
even by IRS representatives - or that the regulations
required employers to select particular investment
arrangements or plan structures. Similar claims of
state-imposed fiduciary duties, potentially applicable to
some plans but inapplicable to many others, have
contributed to still more confusion.
The GAO report provides helpful clarity when it
clearly distinguishes its general discussion of fees from
the topic of plan compliance with federal tax
requirements.
Nature of Fees and Fee Disclosure
The report's fee and fee disclosure discussions
provide helpful general information but also miss some
important points. For example, in its references to the
number of providers in a plan, the report fails to note
that many public 403(b) plan sponsors whose plans offer
multiple providers, and particularly many public schools,
enjoy significant state law protections from liability for
participant selections of investment providers and
products, protections that might not apply if the employer
designated a single provider.
In addition, the report may leave the reader with
the mistaken impression that participants in non-ERISA
plans are not required to receive any fee disclosures,
and that any such disclosures are purely voluntary. Such
is not the case with respect to allocated annuity
accounts, under which the participant receives either an
individual contract or a certificate under a group
allocated contract, and individual custodial accounts
where the participant is the customer of the investment
provider.
As a general matter, plan participants with direct
contractual relationships with the investment provider
are required to receive specific documentation of fees
and other contract provisions, regardless of whether the
plan is subject to Title I of ERISA. The annuity contract
or certificate itself must clearly identify the fees, as
well as the extent to which the fees are either
guaranteed or subject to modification. Moreover, in the
case of a variable annuity or an individual custodial
account, the participant will also receive one or more
prospectuses (at the product level and/or at the
individual fund level) containing detailed fee
information presented in specific standardized formats,
to facilitate the very type of apples-to-apples
comparisons encouraged by the GAO report. Similar rules
extend to other marketing materials for the contracts.
Each of these documents is required to be filed with one
or more regulators or self regulatory
organizations.
As the report discusses, non-ERISA plan investment
arrangements that do not include a direct contractual
relationship between the participant and the investment
provider, such as group unallocated custodial agreements
(often used in single provider 403(b), 457(b), or 401(a)
plans), may well depend much more heavily on voluntary
fee disclosures to participants by the employer or the
service provider. Regardless, for both ERISA and
non-ERISA plans, the amount and quality of fee disclosure
in the marketplace and under individual plans continues
to increase, with or without specific regulations.
Finally, while the report listed many of the types
of fees that might be assessed under an individual plan,
and even provided a limited discussion of bundled and
unbundled fees, it provided only a limited discussion of
how those fees relate to the types of services selected
by the plan sponsor, or to the size and related
demographics of the plan. Many investment and service
arrangements - including annuities and mutual funds -
include different fee levels based upon specific plan
demographics, including number of participants, specific
services desired, amount of assets in the plan, and
availability of other investments under the plan.
These are some of the very same factors that would
be taken into account in determining whether fees under
an ERISA plan were reasonable, and any determination that
failed to consider such relevant factors would
necessarily be incomplete.