Writing a Tell-All

“I think plan sponsors are going to struggle with the amount of information they get,” declares adviser C. Todd Lacey, about the proposed fee disclosure regulations from the Department of Labor (DoL). However, he also sees an upside for advisers. “I think it is a good opportunity [for advisers] to work with companies to make sure they understand the information they’re being given.”

Lacey, Managing Partner of The (k)larity Group, says the DoL’s three-part series of disclosure regulations—concluded in mid-July with the release of a proposal regarding fee disclosures to participants (see “Out in the Open“)—has been high on the agenda in conversations his Athens, Georgia-based firm is having with clients.

Likewise, Donald Stone, President and Co-Founder, Plan Sponsor Advisors, LLC, says, “We do not anticipate playing a role in gathering and distributing the information,” but notes that his firm is “beginning to hold meetings with clients to explain the proposed regs.” When finalized, the regulations would be effective for plan years beginning on or after January 1, 2009.

From the moment the DoL’s Employee Benefits Security Administration (EBSA) declared its intention to address the hot topic of plan fee disclosure, one message the regulators said they heard often was: When it comes to plan fee disclosures, one size does not fit all.

That is why EBSA carved up the new regulatory scheme into three pieces governing disclosures from plans to regulators and the public, from providers to plan sponsors and, finally, from plan sponsors to participants.

EBSA notes plan sponsors have a high disclosure responsibility because 401(k)-type plans give so much responsibility to participants to make their own decisions. “With the proliferation of these [participant-directed] plans… participants and beneficiaries are increasingly responsible for making their own retirement savings decisions,” the DoL observes in the regulations. “This increased responsibility has led to a growing concern that participants and beneficiaries may not have access to or, if accessible, may not be considering information critical to making informed decisions about the management of their accounts, particularly information on investment choices, including attendant fees and expenses.”

What the Regulations Say

The most recent proposal requires sponsors of participant-directed plans to supply participants with basic information, including investment returns and expenses, when a participant becomes plan-eligible and every year after that. The disclosure is to be made in a comparative chart format; regulators supplied a sample chart for a fictional retirement plan.

The DoL proposal requires plan fiduciaries to disclose basic information to participants such as: the available investment options; how to give investment instructions; a description of fees and expenses charged to participants and beneficiaries for plan administrative services, such as legal, accounting, and recordkeeping charges, as well as how these charges will be allocated to their individual accounts; a description of fees and expenses charged to a specific participant’s account based on actions taken by that participant, such as charges for processing loans, QDROs, or investment advice; and how to obtain more detailed information.

In addition, plan fiduciaries must disclose to participants, on a quarterly basis, the actual dollar amount charged to the participant’s account during the preceding quarter for specified administrative expenses.

Industry Response

Overall, many retirement services industry representatives pronounced themselves pleasantly surprised with EBSA’s fee disclosure handiwork.

“I think the DoL did a good job of walking the fine line of providing information participants would find useful while not overburdening them,” says Jan Jacobson, Director, Retirement Policy for the American Benefits Council. However, he notes some plan sponsors also are concerned that EBSA looks on the sample chart provided with the proposed rule as a required model rather than a recommended sample.

Stone, whose Chicago-based firm has $5 billion in assets under advisement, seems to disagree with those “pleasantly surprised.” “We do not believe [the disclosures] are very useful—most of this information is already available through fund fact sheets, prospectuses, etc.,” he comments. “[However] putting this on participant statements is useful.”

“Most importantly,’ Stone notes, “none of this information provides a comparison point. It does not address the issue of whether the fee is reasonable or what comparable plans pay.”

One widely expressed hesitation lies in the timing for the rest of regulatory process—particularly the January 1, 2009, effective date. “Their suggested timing is aggressive,” declares Jacobson.

The timing calculations go like this: Industry representatives point out that EBSA agreed to accept public comments until September 8 and that the U.S. Office of Management and Budget (OMB)—which has to approve new federal rules—typically takes 90 days to do its work. Even if the process goes without a hitch that would put the finalized version in plan sponsors’ laps just before the new year.

Industry onlookers also point out that White House officials have instructed federal agencies to have rulemaking wrapped up by November 1—before the presidential election.

“I think they’re going to get a ton of [public] comments on this regulation,” says ERISA attorney Jason K. Bortz of the Washington firm of Davis & Harman LLP. “I can’t imagine the regulation will be finalized by January 1, 2009.”

Edward Ferrigno, Vice President, Washington Affairs, Profit Sharing/401k Council of America, agrees. “The DoL has been reasonable on these things in the past and I have every reason to believe they will continue to be,” he says. “I think they will take January 1 [2009] totally off the table.”

The End of Asset-Based Pricing?

In addition to the opportunities for advisers to add value by helping plan clients negotiate their way through the fee disclosure regulations, Lacey argues that financial advisers now charging for their services via asset-based pricing cannot adequately defend the notion they should be paid more simply because a particular plan has more assets.

Bortz agrees that the new required disclosures, and the continued scrutiny of plan fees the disclosures are sure to produce, may create too strong a disincentive for advisers and other plan consultants to keep asset pricing.

Ultimately, however, the question is whether the rules are what the industry expected and whether they will achieve their desired end with participants. In that regard, the adviser consensus about the proposals might be best explained by Stone: “We aren’t surprised [by the regulations]. These things are always an amalgam of political and bureaucratic process and seldom relate to how plans and participants actually operate,” he explains. “Plan sponsors will deal with it and participants generally will not pay much attention to it.”

Illustration by Wesley Allsbrook