Testifiers Debate Merits of Fee Disclosure

The hearing came a day after legislation about full fee disclosure was introduced in the U.S. House (see “Legislators Introduce 401(k) Fee Disclosure Bill’).

Importance of Fee Disclosure

Alison Borland, retirement outsourcing strategy leader at Hewitt Associates, said in her testimony that Hewitt believes the bill addresses the issue of fee disclosure well.

Hewitt said it can provide real-world examples demonstrating situations where greater fee transparency increased plan fiduciaries’ understanding and their negotiating power, ultimately leading to lower fees and higher retirement benefits for participants.

Hewitt’s testimony addressed the need for full disclosure of potential conflicts of interest by service providers; the advantages of providing mandatory fee disclosure to plan participants; and the need for unbiased investment advice and financial education to help participants adequately prepare for retirement.

Borland’s testimony is available here.

Concerns about Fee Disclosure Legislation

While industry groups are on board with providing better fee disclosure to defined contribution plan participants, several groups expressed concern that legislation introduced in the U.S. House does not address every issue and could encourage increased litigation against plan sponsors and fiduciaries.

Larry Goldbrum, general counsel of The SPARK Institute, said the bill’s requirement for detailed disclosures about plan fees and expenses in pre-determined categories is a “one-size-fits-all” approach that is inappropriate. “Not all fees fit neatly into the categories and no single form or methodology can adequately address the diversity of products and service structures without favoring one segment of the industry over others,” he said.

Goldbrum also contended that the debate over disclosure of fees in bundled verse unbundled service structures is a distraction from the real issue, which is providing relevant disclosures that enable sponsors to make sound fiduciary decisions. He claimed it would result in artificial price information because bundled providers generally do not provide component services on a standalone basis.

Goldbrum’s testimony also addressed The SPARK Institute’s concern about the bill’s requirement for an index fund, with Goldbrum noting that mandating any specific investment alternative in an Employee Retirement Income Security Act (ERISA) plan is unprecedented.

The organization also urges legislators to seek a flexible framework for participant fee disclosure instead of the omnibus notice and fee chart proposed in the bill. “Categorizing fees by the way they are charged, which may have nothing to do with what they are for, may not increase participants’ understanding. Participants should instead be provided with total investment fee information such as expense ratios. Many participants may not find the extra underlying detail to be useful in making better decisions,’ Goldbrum said.

Goldbrum’s testimony is available here.

Robert Chambers, past chair of the American Benefits Council Board of Directors, also noted in his testimony that legislation should consider the difference between what participants need and what fiduciaries need. “Participants value clear, simple, short disclosures that effectively communicate the key points that they need to know to decide whether to participate and, if so, how to invest. Plan fiduciaries need more detailed information since it is their duty to understand fully the options available and to make prudent choices on behalf of all of plan participants,’ he said.

Chambers’ testimony is available here.

The American Benefits Council, as well as the ERISA Industry Committee (ERIC), expressed concern that the Act would encourage new opportunities for trial lawyers to sue plan sponsors. ERIC said in a statement that it envisions participant suits disputing whether plan sponsors knew or should have known that the information provided by service providers was inaccurate, as well as disputes over whether component fees or revenue sharing were unreasonable.

“Too much of this litigation is made up of strike suits that are engineered to force plan sponsors into expensive settlements rather than undergo the rigors of years of litigation. Increased litigation is a disincentive to create or continue plan sponsorship. Recent studies indicate a significant increase in litigation against plan sponsors,’ said ERIC President Mark Ugoretz. “Any bill that provides new opportunities for litigation should be of concern to anyone supporting increased retirement plan coverage.’

The ERIC testimony is available here.