Retirement Plan Fee Debate Likely to Continue Past 2008 Elections

That was the conclusion of attorney Jamey Delaplane, a specialist in the Employee Retirement Income Security Act (ERISA), with the Washington, D.C., law firm Davis & Harman who appeared in a Webinar hosted by PLANSPONSOR’s Women’s Pension Exchange, an organization directed at female plan sponsors.

Retirement Plan Fees

A key theme sure to continue driving much of the upcoming activity at the U.S. Department of Labor (DoL), at the Securities and Exchange Commission (SEC), and among Congressional lawmakers is an effort to reform the way retirement plan fees are charged and disclosed to plan sponsors and participants, Delaplane said.

He explained that a good deal of the Washington emphasis on plan fees centers around the DoL’s three-part regulatory project on which the agency is “marching forward,” which includes:

• Significant changes to Schedule C of the Form 5500 disclosing a detailed summary of fees- including still controversial revenue sharing arrangements- that are expected to be effective with the 2009 plan year, something Delaplane noted gave all in the industry a good deal of time to get prepared.
• Enhanced provider disclosure to fiduciaries as part of the DoL’s 408(b)(2) effort, “Providers are the ones in possession of the (fee data) and that’s where the bulk of the legal responsibility will fall,” the attorney said, noting that The Department wants to ensure that plan fiduciaries are provide with all the information they need to make informed decisions about their retirement plans.
• Fee disclosures to participants – a component Delaplane said is likely to be completed during the first quarter of 2008. The Department has received more than 100 comments during its comment period on its proposal, he said.

A prominent subtext to the proposed disclosure debate, according to Delaplane, is how detailed the new rules should be on disclosing individual fees for particular plan services – particularly if those services are sold on a bundled basis. He said the DoL is not likely to require disclosing information on each piece of a service bundle, but instead is likely to concentrate on: “What does a fiduciary really need to know?”

“It’s clearly one of the biggest challenges the DoL is facing on the fee disclosure issue,” Delaplane added (See DoL Requests Suggestions for 401(k) Fee Disclosures).

For its part, Delaplane commented the SEC is preparing a rule requiring simplified mutual fund disclosure, including information contained in a prospectus, which he said the DoL is likely to use as a regulatory template for other required participant disclosures (See Cox Says 12b-1 Fees a “Sales Load in Drag”).

House Bills

Delaplane acknowledged that Representative George Miller (D-California) has become a prime legislative mover in the retirement services area with his own proposed disclosure bill that has drawn a good deal of industry opposition as being overly radical (See Fee Disclosure Proposal Draws Industry Criticism at House Committee Hearing). One concern about Miller’s bill by critics is over the cost of the bill. The irony is that it might be so expensive that, in trying to bring down the fees of a plan, Delpane said, plan costs might increase. Another concern is about the mandated index fund component of the bill, something that most in the industry think is a bad idea, he noted.

Even if he is unable to get his bill out of the House – despite political alliances with House Speaker Nancy Pelosi (D-California) – Miller will still “help to shape the debate,” Delaplane noted.

“Miller is not the only game in town,’ however, commented Delaplane. Representative Richard Neal (D-Massachusetts) has an alternative fee disclosure bill to Miller’s, which Delaplane said is considered less radical (See Legislation Targets Employers Without Retirement Plans). Neal’s bill tries to strike a more balanced approach, he said; it focuses more generally on what the major categories of fees are.

The attorney said Miller and other lawmakers may be reacting to a sense of frustration that the Bush Labor Department has moved too slowly in the retirement plan reform area, and that Congress needs to help goose the process.

Outlook of Fee Discussion

There has also been activity on the Senate side with a bill expected from Senators Tom Harkin (D-Iowa) and Herb Kohl (D-Wisconsin) (See Kohl to Unveil Senate Version of 401(k) Fee Disclosure Legislation). Delaplane noted that the Senate bill is expected to be somewhere “in between’ the standards of the two House bills.

Delaplane predicted a fee bill could move out of the House in 2008, but that getting a Senate companion through the system could be significantly more difficult; there is a decent change that the Senate won’t even take the issue up, Delaplane predicted.

One of the subtexts of the whole retirement plan fee debate will be to examine what the marketplace effects might be, Delaplane noted. The trend of looking outside the mutual fund arena, to include collective trusts or separately managed accounts in a retirement plan might become accelerated, he predicted. Delaplane said he was sure that plan fiduciaries will have a legal responsibility to understand the revenue sharing arrangements in their plan.

Ultimately, however, Delaplane said he predicts that change will come from the regulation side of Washington; “I put my money on the regulators and not the legislators,’ he said.