Legislators Introduce 401(k) Fee Disclosure Bill, Hear Testimony

An announcement on the Education and Labor Committee’s Web site says the 401(k) Fair Disclosure for Retirement Security Act of 2009 (H.R. 1984) will help workers shop around for the best retirement options by requiring simple fee disclosure on the investment options contained in their employer’s 401(k) plan.

Specifically, according to the announcement, the 401(k) Fair Disclosure for Retirement Security Act of 2009 would:

• Ensure that workers receive basic investment information, including information on risk, return, complete fees, and investment objectives before signing up for a plan;
• Require that all fees – in one number – that are charged against a workers account to be included in the account holder’s quarterly statement;
• Require service firms to tell employers the fees workers are charged on all investment options in four categories: administrative fees, investment management fees, transaction fees, and other fees;
• Require plan administrators to offer at least one low-cost index fund to plan participants in order to receive protection against liability for participants’ investment losses;
• Require service providers to disclose financial relationships so companies that sponsor 401(k) plans can make sure there are no conflicts of interest; and
• Give the U.S. Department of Labor the authority to enforce new disclosure rules and fine service providers who violate them.

A similar bill (H.R. 3185) was approved by the committee in April 2008 (see Miller Fee Bill Cruises through House Committee ). Legislation on fee disclosure was also introduced in the Senate in February (see DC Plan Fee Disclosure Bill Introduced in U.S. Senate ).

Alison Borland, retirement outsourcing strategy leader at Hewitt Associates in her testimony Wednesday said Hewitt believes the bill addresses the issue of fee disclosure well.

Hewitt said it can provide real-world examples demonstrating situations where greater fee transparency increased plan fiduciaries' understanding and their negotiating power, ultimately leading to lower fees and higher retirement benefits for participants.

Hewitt's testimony addressed the need for full disclosure of potential conflicts of interest by service providers; the advantages of providing mandatory fee disclosure to plan participants; and the need for unbiased investment advice and financial education to help participants adequately prepare for retirement.

Borland's testimony is here .

While industry groups are on board with providing better fee disclosure to defined contribution plan participants, several groups expressed concern that legislation introduced in the U.S. House does not address every issue and could encourage an increase in litigation against plan sponsors and fiduciaries.

Larry Goldbrum, General Counsel of The SPARK Institute, said the bill's requirement for detailed disclosures about plan fees and expenses in pre-determined categories is a "one-size-fits-all" approach that is inappropriate. "Not all fees fit neatly into the categories and no single form or methodology can adequately address the diversity of products and service structures without favoring one segment of the industry over others," he said.

Goldbrum also contended that the debate over disclosure of fees in bundled vs. unbundled service structures is a distraction from the real issue, which is providing relevant disclosures that enable sponsors to make sound fiduciary decisions. He claimed it would result in artificial price information because bundled providers generally do not provide component services on a stand-alone basis.

Goldbrum's testimony also addressed The SPARK Institute's concern about the bill's requirement for an index fund, with Goldbrum noting that mandating any specific investment alternative in an Employee Retirement Income Security Act (ERISA) plan is unprecedented.  

The organization also urges legislators to seek a flexible framework for participant fee disclosure instead of the omnibus notice and fee chart proposed in the bill.   "Categorizing fees by the way they are charged, which may have nothing to do with what they are for, may not increase participants' understanding.   Participants should instead be provided with total investment fee information such as expense ratios.   Many participants may not find the extra underlying detail to be useful in making better decisions," Goldbrum said.         

Goldbrum's testimony is here .

Robert G. Chambers, past chair of the American Benefits Council Board of Directors, also noted in his testimony that any legislation should consider the difference between what participants need and what fiduciaries need. "Participants value clear, simple, short disclosures that effectively communicate the key points that they need to know to decide whether to participate and, if so, how to invest. Plan fiduciaries need more detailed information since it is their duty to understand fully the options available and to make prudent choices on behalf of all of plan participants," he said.

Chambers' testimony is here .

The American Benefits Council, as well as the ERISA Industry Committee (ERIC), expressed concern that the Act would encourage new opportunities for trial lawyers to sue plan sponsors.  ERIC said in a statement that it envisions participant suits disputing whether plan sponsors knew or should have known that the information provided by service providers was inaccurate as well as disputes over whether component fees or revenue sharing were unreasonable. 

"Too much of this litigation is made up of  strike suits that are engineered to force plan sponsors into expensive settlements rather than undergo the rigors of years of litigation.  Increased litigation is a disincentive to create or continue plan sponsorship.  Recent studies indicate a significant increase in litigation against plan sponsors," said ERIC President Mark Ugoretz. "Any bill that provides new opportunities for litigation should be of concern to anyone supporting increased retirement plan coverage."

The ERIC testimony is here .