Fees Are the Word

The Obama Administration and Congress have rolled up their sleeves already when it comes to retirement plan regulations—and they certainly have enough to choose from. First of all, retirement regulations from the Bush Administration are still lingering.

Fee Disclosure

Both fee disclosure rules to plan sponsors and participants were awaiting approval in the Office of Management and Budget when the transition to a new administration took place. The 408(b)(2) regulation, which required providers to disclose fees to plan sponsors, was expected by many to come through, but that was not the case. Now, both regulations essentially have died—yet it is unlikely they will go away. Whether a revival of those regulations or new regulations or legislation, something is still to be said about fee disclosure. Fred Reish, Partner at Reish Luftman Reicher & Cohen, says the industry is waiting to see who the leader is: Congress or the Department of Labor.

Both houses of Congress have proposed fee disclosure legislation. The U.S. Senate Special Committee on Aging introduced the Defined Contribution Fee Disclosure Act of 2009, which would require defined contribution plan sponsors to disclose fees to participants. Last year, a fee disclosure bill was introduced by Congressman George Miller (D-California) in the House, but no action has been taken.

Judy A. Miller, Chief of Actuarial Issues and Director of Retirement Policy at American Society of Pension Professionals & Actuaries (ASPPA), says that current proposed legislation would require both bundled and unbundled providers to lay out fees, which the 408(b)(2) regulations neglected to do. She says that is in the interest of plan sponsors because it makes it easier to negotiate fees.

Larry Goldbrum, General Counsel of The SPARK Institute, says he would rather see regulation—but, if there are gaps, he hopes legislation will fill them. Sometimes legislation at the high end tends to be too politicized, he notes. “We always would rather have regulations from the agencies that are responsible for the substantive areas,” he says. “In terms of retirement plans, we would rather see regulations come from the Department of Labor.”

Form 5500

The only piece of the three-part fee disclosure package that did get finalized was revisions to the Schedule C section of Form 5500 for 2009 (see “Traps for the Unwary“). Plans with 100 or more participants now have to report indirect compensation. However, some plan sponsors are scratching their heads about where to get this information when their service provider is not required to provide it, as the 408(b)(2) regulations would have required. Some providers of integrity have felt compelled to offer the information, Reish says, but it is not required. ASPPA’s Miller agrees it is a burdensome activity for plan sponsors. “We think there’s an awful lot of gray area, a lot of effort that has to go into filling out the form, and we’re not sure that the result is very meaningful,” says Miller. Meanwhile, the Government Accountability Office (GAO), at the request of Congressman Miller, is looking into whether the regulation goes far enough. Reish says there is a good chance that, even if sponsors receive relief from the 2009 Form 5500, they actually might have more requirements imposed on them in the future. “On one hand, we have pressure to increase the amount of reporting on schedule C and, on the other hand, because of the death of 408(b)(2), there is some pressure to give some relief to plan sponsors if they can’t report it all,” Reish says. “So, it’s a mess….There’s no other way to describe it.”

Retirement Security for All

There are several other regulatory issues pertaining to retirement on the laundry list of lobbyists, lawmakers, and industry heads. One issue brought up on Obama’s campaign stump is coverage. At press time, Obama had released a blueprint of his budget, which included a proposal for an automatic individual retirement account (IRA) plan for workers and an expansion of the Saver’s Credit. Under the administration’s proposal, employers who do not currently offer a retirement plan will be required to enroll employees in a direct-deposit IRA account.

Meanwhile, committees in Congress began hearings about the effect of the economic downturn on retirement security. The U.S. Senate Special Committee on Aging examined target-date funds and noted their lack of consistency in goal and makeup. “Despite their growing popularity, there are absolutely no regulations regarding the composition of target-date funds,” says Committee Chairman Senator Herb Kohl (D-Wisconsin) in a statement. “With more and more Americans relying on 401(k)s and other defined contribution plans as their primary source for retirement savings, we need to make sure their savings are well-protected with strong oversight and regulation.”

What the Democratic administration and Congress ultimately will get to in the next few years is not certain, but Reish notes that they will not hesitate to mandate things to employers. The new administration and Congress “will be very comfortable telling businesses that they have to disclose more to their employees, and they will be comfortable telling service providers that they have to disclose more to business to help them do that,” he says.

What about Advisers?

For retirement plan advisers, the tightened regulatory environment could stimulate further an industry trend often discussed: Advisers who dabble in retirement plans as a side project might feel the need to get out, and advisers will continue to move toward more fee-based compensation. Reish says the regulatory environment will favor specialized retirement plan advisers able to spread expense across many clients. “It may lead the marginal players to get out of the business,” Reish says.

In light of all of the increased scrutiny of fees, adviser compensation also is coming under the microscope. The area of 12b-1 regulation appears to have received a reprieve. Andrew J. Donohue, Director of the Division of Investment Management at the Securities and Exchange Commission (SEC), said the change in the market over the past two years necessitates a change in the Commission’s regulatory agenda. Speaking at the Investment Company Institute’s 2009 Mutual Funds and Investment Management Conference, Donohue said the SEC is deferring “wholesale reconsideration of rule 12b-1.”

Saying the Commission still is committed to 12b-1 reform, Donohue noted that “the factors investment company boards must consider when approving or renewing a rule 12b-1 plan are outdated and may detract from effective board oversight.’ He suggested it may be useful to consider exploring other potential means of addressing issues associated with the rule, such as the possibility of providing guidance to fund directors to assist them in this area.

Even though 12b-1 fee regulation might have moved to the back burner, the larger issue might be that the regulatory environment is moving toward making advisers fiduciaries. “The overall direction that Congress is heading is to make all advisers into fiduciaries,” says Louis Harvey, President of Dalbar, Inc, “and, as soon as you make them into fiduciaries, the interest and value of things like 12b-1 fees disappear.” He adds: “If I were starting a new retirement plan practice today, there is no question I would make it fees and not the 12b-1 route.”

Donohue was clear that advisers can expect regulatory changes. Specifically, he said, “Just as you are adjusting to the new market realities, we also need to adjust and reconsider our regulatory priorities to ensure that limited resources are employed where they can provide the greatest impact and benefit to fund investors…. We should address a few fundamental matters that directly affect investor protection concerns. For example, we urgently need to reconcile the diverse regulatory regimes governing investment advisers and broker/dealers, and alleviate the uncertainty in the industry emanating from this unresolved matter.”

Illustration by Michael Klein