Aside from ongoing efforts by the Securities and Exchange Commission (SEC) and the Department of Labor (DoL), U.S. Representative George Miller, (D-California), has now embarked on a legislative path to reveal the hidden fees that are “eating into the retirement savings of millions of American workers without them knowing it,” he said in a statement .
The bill would require that: clear and complete information about 401(k) fees be given to participants; that plan service providers disclose all potential conflicts of interest; and that 401(k)-style plans include at least one lower-cost, balanced index fund in their investment lineup, according to a summary of the legislation (See Representative Miller Introduces Fee Disclosure Legislation ).
House Ways and Means Committee Chairman Charles B. Rangel (D-New York) announced in late July that his panel would soon hold hearings on the Miller bill (SeeWays & Means to Hold Hearings on 401(k) Fees: Rangel ).
News of Miller’s 401(k) Fair Disclosure for Retirement Security Act of 2007 sparked concern in the plan sponsor and investment community, where some think a legislative approach might not be the best way to tackle fee disclosure.
Throwing the fee disclosure issue into the legislative arena before seeing how the “DoL regulations play out could cause more harm than good,” because legislators might focus on disclosure without actually addressing what needs to be disclosed, warned Nancy Hammer, manager of tax and benefits at the Society for Human Resource Management (SHRM).
Larry Goldbrum, general counsel at the SPARK Institute, said that he was originally in favor of a “wait and see” approach to legislative action in terms of fee disclosure, but changed his mind to outright opposition when he reviewed the Miller bill – a proposal he said made it clear that regulators should lay the groundwork and the legislators “could fill in the gaps later.” Particularly, Goldbrum is worried that legislators lack the same level of understanding of fees as the DoL.
The issue of excessive and undisclosed 401(k) fees was brought to the forefront with a number of lawsuits that were filed by St. Louis law firm Schlichter, Bogard & Denton last year (SeePD2007: 401(k) Fee Suits: Fending Off The Devil ) and other law firms around the country. Since then, fees have garnered the attention of the Securities and Exchange Commission (SEC) and the Department of Labor (SeeDoL Asks For Advice on 401(k) Fee Disclosures and SEC Turning its Attention to 12b-1, 401(k) Disclosures).
The Government Accountability Office (GAO) has also leaned on Congress to intervene, asking it to consider amending the Employee Retirement Income Security Act (ERISA) to requirecomprehensive disclosure to participants on 401(k) plan fees and business arrangements among service providers.(See GAO Urges Congress to Consider 401(k) Plan Fee Disclosure ).
One of the most common concerns resonating with critics of Miller's proposed legislation is that it might mean plan participants will be flooded with too much information and will be no better equipped to make investment decisions than they were before - or possibly worse off.
The American Benefits Council (ABC) echoed that concern in a recent statement: "At best, too much information can and will simply result in disclosures that get ignored. At worst, too much information can exacerbate the paralysis that often affects plan participation decisions, thereby discouraging employees from voluntarily saving for retirement."
Jan Jacobsen, ABC retirement policy legal counsel, is worried about what cumbersome disclosure requirements will do to small employers' ability to offer retirement plans. "If you start adding requirements, you create more work and more fiduciary responsibility, which will probably discourage plan sponsorship by small employers," says Jacobsen.
There is a big difference between the type of information plan sponsors need to know to make investments for the plan and fulfill their fiduciary responsibilities and what the participants need to know, said Jacobsen, and so far, "the bill doesn't make those distinctions."
Still, some worry that making fee disclosures exhaustive will create a compliance nightmare.
"The proposed rules will also expose plan sponsors and service providers to new types of frivolous and costly lawsuits," says Goldbrum. "Despite imposing extensive reporting requirements on plan sponsors, the proposed rules do not provide any type of safe harbor from fiduciary liability for sponsors that comply. As a result, they will create fertile ground for suits brought by plaintiffs' lawyers primarily seeking settlements from plan sponsors and service providers perceived to have deep pockets."
Some critics of the proposed legislation say forcing detailed disclosures could actually do more to increase plan costs, rather than curb them. These opponents contend the manpower needed to produce such extensive reporting will be costly for plan sponsors and providers, which will in turn trickle down to participants.
In particular, the Miller bill asks that plan participants be supplied with a detailed dollar disclosure of investment fees. This means that plan sponsors not only have to provide participants with expense ratios, but also the underlying costs of each investment in a dollar value, the retirement community observers say.
For instance, this would mean that plan sponsors would have to track participants' investments and, at the end of the year, give them a dollar amount that they spent on fees.
"The problem is that the plan sponsors or the recordkeepers don't have this dollar amount," Goldbrum points out. "These amounts are embedded in the mutual funds and will have to be extracted. This will get expensive."
Jacobsen suggests that just giving participants the formula, or expense ratio, is sufficient, so that if they want to figure out the dollar amount they paid for each investment, they can. Goldbrum suggests that investment providers simply be required to give a one- or two-page fact sheet that details expense ratios.
Finally, Miller's bill would also mandate that plan sponsors include at least one lower-cost, balanced index fund in their investment lineup, which would require amending ERISA. Never before have plan sponsors been forced to put something on their roster of investment options, the retirement community observers say.
"(The index fund mandate) is a departure from tradition in that ERISA has never required that participants have access to a particular type of investment. One concern is that it would require plan sponsors to offer a fund and then meet the fiduciary requirements of that fund," says Jacobsen.
Index funds are inexpensive and appropriate investment vehicles, "but requiring plan sponsors to offer them is not going to change the economics of the plan because the service providers are still going to be paid," Goldbrum argues.
Mandating an index fund could also swing the doors open for future litigation, warns Goldbrum. Index funds are not given the same safe harbor as qualified default investment alternatives (QDIAs) (See DoL Releases Default Investment Option Safe Harbor ). He gives the example of a participant bringing a lawsuit against a plan sponsor for choosing an index fund that was not able to meet his or her retirement income needs.