ERISA Council Proposes Changes to Fee Disclosure Rules

November 19, 2004 ( - The Employee Retirement Income Security Act (ERISA) Advisory Council has recommended new rules forcing employers and providers to disclose fees that mutual-fund companies pay to get into retirement offerings.

>The bipartisan council -which consists of 15 members appointed by the Secretary of Labor to represent specified groups and fields that are involved in employee benefits – has submitted a draft regarding the possible rule change, according to Dow Jones. The draft states that plan sponsors often don’t understand the fees paid revenue-sharing arrangements, in which mutual fund companies pay to be part of a 401(k) plan’s investment offerings. These fees, the draft states, artificially raise costs for participants and are usually hidden within the total expenses reported.

“The legal issue at the moment is that you only have to report what’s paid out of plan assets and if the fees are netted from fund’s performance before they become assets, then they don’t have to be reported,” stated David Wray, chairman of the committee, according to Dow Jones. By hiding the fee or paying fees that are artificially inflated, plan sponsors could be at risk of violating ERISA-regulated fiduciary duties.

>To combat this issue, the council has recommended that these fees be openly stated, possibly on a form that is a modification of the current Form 5500, which is used to report retirement plan expenses. This, the council hopes, will increase transparency as well as reveal why some investment options are included in 401(k) plans while others are not.

>The council has also suggested the employees receive a general account of all the fees paid for plan investments each year. They also suggested investment options should be described before, and not after, an employee chooses to adopt them, according to Dow Jones.

>The DoL can accept or reject the recommendations. The department may seek further information before the report is finalized and the proposals are officially considered, according to Dow Jones.   The ERISA Council has also prepared to draft reports, suggesting that the Form 5500 be updated to capture data on health and welfare plans.

>This is not the first time mutual fund fees have come under scrutiny, with the industry being rocked as of late in other areas as well due to market timing and late trading charges. A recent study found that ‘hidden’ fees in US equity funds were causing $17.3 billion in costs per year to investors (See Study: Fund Investors Shoulder $17B in ‘Hidden Fees’ ).