IMHO: Paper “Trail”

Those familiar with the last proposal (put out by the prior Administration – see EBSA Finishes Regulatory Package with Participant Disclosure Proposal)  will doubtless find this one to be a modest improvement (see EBSA Releases Final 401(k) Fee Disclosure Rule).  Aside from the passage of time, this version incorporates additional input from the retirement plan community, financial services regulators, and even participant focus groups – most of it good, and all of it interesting ⁽¹⁾.   

The rule itself is worth a read, for IMHO it offers valuable insights not only into the suggestions made, but to the Labor Department’s reaction and response to those comments.  As always, the devil lies in the final details, but one senses a strong interest in balancing the desire to give participants more information to make better decisions with the practical realities attendant in providing transparency and consistency of disclosure in an industry whose fee structure has become increasingly obtuse and intertwined.   

That said, and while this is a marked improvement from the current state of affairs, IMHO this regulation will still leave us a long way from producing what I think will actually show participants what they are paying for these retirement accounts.  

Sure, they’ll get more frequent information on their investments, and sure there will be more (and probably better) comparative information about those investments, both fees and performance.  Yes, they will see fees expressed both as a percentage, and as a dollar amount per $1,000 invested, and yes they will get more information on account restrictions, annuity provisions, and revenue-sharing than many have probably ever received previously.  And yet, for all this extra data that will be produced, provided, and distributed, I can’t quite shake the image of a participant’s eyes glazing over as they desperately try to make sense of what they have been given. 

Of course, it’s possible that many won’t bother reading it at all, though a large part of the financial justification for these regulations is how much time the disclosures’ availability will spare participants searching for information about these investments.  In fact, to my eye perhaps one of the most significant revisions from the prior regulations was a reset in the estimation of just how many participants are expected to benefit from these reams of paper.  The prior proposed regulation estimated that 29% of participants in these programs would realize some kind of time-savings – but the Labor Department, responding to a suggestion from a commentator, has upped that – to an eye-popping 70%-76%!⁽²⁾ 

Now, that determination isn’t, IMHO, essential to the importance of this effort.  Personally, the 29% figure is much more in line with my experience, mostly because what I see, time and again, is that the more paper we sling at participants, the less attention they pay.  And, make no mistake, with this new proposal we will be slinging a lot more paper at participants, and more frequently.  Despite the effort to alleviate the complexity of basis points and revenue-sharing, it’s hard to shake the sense that this well-intentioned effort will simply overwhelm participants, while at the same time placing a large and growing burden on the backs of those who must provide, administer, and explain it.   

It’s clear to me that the information is needed, and as you read the proposal, its clear to me that the regulators have made a good-faith effort to strike a balance in providing it.   

That said, I doubt very much that it will make much difference in participant behavior, nor am I optimistic that it will actually enlighten many, certainly not the three of four cited in the Labor Department’s projections.  This is not a shortcoming of the DoL’s attempt here – frankly, in view of the tangled web that has become 401(k) retirement fee calculations, I think they are to be lauded for their vigorous and balanced efforts here.   

However, what participants really want – and IMHO what they need to really understand what is going on here, is to have that single figure on the statement – even if only produced once a year – that tells them what their retirement plan costs.   

This new regulation may hasten that day’s arrival.  But until it comes, I fear we may be doing little more than papering over the real problems. 

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⁽¹⁾ There is another interesting inclusion in this proposal – one that has to do with disclosures, but perhaps not participant fee disclosures, per se.  With this proposal – which merges the 404(c) disclosure regulations with those of non-404(c) plans – the Labor Department added a provision to the 404(c) regulation – stating plainly what those of us in the industry have long understood; that, even where ERISA 404(c) protection applies, it does not shield fiduciaries from the duty to prudently select and monitor investments.  Many of us have long had this understanding, though it was only referenced in the preamble to those regulations, rather than in the body – and thus some courts had seen fit to dismiss its implication in a series of revenue-sharing suit dismissals.  That, of course, is fodder for another column.      

⁽²⁾ the recommendation was based on a finding from the Employee Benefit Research Institute’s (EBRI) 2007 Retirement Confidence Survey, which indicated that 73% (plus or minus 3%) of workers saving for retirement used written materials received at work as a source of information when making retirement savings and investment decisions.  

The regulation is online at http://www.ofr.gov/OFRUpload/OFRData/2010-25725_PI.pdf  

A fact sheet summary is online at http://www.dol.gov/ebsa/newsroom/fsparticipantfeerule.html  

A model of the information chart is online at http://www.dol.gov/ebsa/participantfeerulemodelchart.doc