Last week, the Department of Labor’s Employee Benefits Security Administration (EBSA) released its much-anticipated proposal regarding participant fee disclosures (see "EBSA Finishes Regulatory Package with Participant Disclosure Proposal".
The industry’s response, by and large, has been positive (a notable exception: Congressman George Miller, author and sponsor of the 401(k) Fair Disclosure for Retirement Security Act of 2007—see “Miller Fee Bill Cruises through House Committee”), though one got a sense that there would be a LOT of comments forthcoming on the proposal, not the least of which was timing. After all, the DoL is soliciting comments through September 8 (so much for vacation), and says it plans to have the new rules in place by January 1.
My first thoughts on opening the proposal doubtless mirrored many of yours—“Holy cow, 103 pages!” And then, also perhaps like many of you, I set it aside for a time when my brain could handle 103 pages of proposed government regulation (I realize some of you are still waiting for that time). Now, as it turns out, something like two-thirds of the document is spent analyzing the costs/benefits of the proposal. In fact, most of it is spent outlining the costs and the assumptions associated with complying with the new proposals.
Despite those initial concerns, the proposal itself seems relatively straightforward: It purports to require disclosure of certain plan- and investment-related information (including fees and expenses, of course) to participant-directed account participants. It identifies three categories of annual disclosures (to be furnished on or before their eligibility date, and at least annually thereafter), and further requires a quarterly disclosure of specific dollar amounts charged to the participant’s account for specified administrative expenses.
In the case of the latter, the DoL says the information should be “sufficiently specific to inform the participants or beneficiaries of the actual charge(s) to their accounts and enable them to distinguish the administrative services from other charges and services that may be assessed against their accounts.” On the other hand, the DoL’s proposal calls only for the charges to be shown in total, noting that it “does not believe that it is necessary, or particularly useful, for participants to have administrative charges broken out and listed on a service-by-service basis.” (For more details on the disclosures, see “EBSA Finishes Regulatory Package with Participant Disclosure Proposal”.)
The proposal’s import notwithstanding, the DoL tossed in some extra “nuggets” worth mentioning.
First, it took the “opportunity to reiterate its long held position that the relief afforded by section 404(c)….does not extend to a fiduciary’s duty to prudently select and monitor designated investment managers and designated investment alternatives under the plan,” and that a “fiduciary breach or an investment loss in connection with the plan’s selection of a designated investment alternative is not afforded relief under section 404(c) because it is not the result of a participant’s or beneficiary’s exercise of control”—a comment that struck me as a shot across the bow of federal courts that have, in a number of the recent revenue-sharing cases, been a bit “generous” in their application of 404(c)’s protections.
The DoL also tossed in its belief, “as an interpretive matter, that ERISA section 404(a)(1)(A) and (B) impose on fiduciaries of all participant-directed individual account plans a duty to furnish participants and beneficiaries information necessary to carry out their account management and investment responsibilities in an informed manner.” Now, in my experience, plan fiduciaries have long attempted to provide participants with a host of materials designed to help them make good investment choices—and doing so is perhaps just a practical application of common-sense principles. However, I found it interesting that the DoL slipped in to the proposal a duty to do so.
The DoL also said that the lack of fee disclosure means that participants may underestimate the impact that fees and expenses can have on their account balances—and thus may undervalue the importance of the disclosures. Further, that if employees undervalue disclosure, plan sponsors might “under provide” it—a position that the DoL found support for in the “wide dispersion of fees paid in 401(k) plans” (though it acknowledges that some of the variation could be explained by the varying amounts of assets in plans and their accompanying economies of scale, as well as the fact that some plans might offer “more, or more expensive, plan features”).
Finally, despite the obvious increase in reporting effort and costs, the DoL thinks that “small plans will benefit from the proposal, because it will clarify what information must be disclosed to plan participants.”
Personally, I think that most plan participants will, as they always have, choose investments based on net returns, not fees specifically. And, though the DoL references the importance of evaluating more than fees in its proposal, it also states unequivocally that it expects the disclosures will result in the payment of lower fees for many participants—assuming that participants will more consistently pick the lower-cost comparable investment alternatives under their plans. However, they also estimate that (only) about a quarter (29%) of plan participants are “likely to benefit from reduced search time and corresponding reduced costs” in reviewing this information. It’s possible that even that modest assessment is optimistic since, IMHO, the fee disclosures illustrated in the DoL’s model comparison chart) are no more (and perhaps in the DoL’s defense, no less) useful than those currently found in most mutual fund prospectuses.
A more likely consequence, IMHO, is the DoL’s notion that the requirements may lead plan fiduciaries to give additional scrutiny to fees, and “consequently to select less expensive comparable investment alternatives.” The fact of the matter is, plan sponsors have a duty to know what these fees are, and, IMHO, participants have a right to know how much they are paying.
- Nevin E. Adams, JD
Comments on the proposed regulation should be directed to the U.S. Department of Labor, Employee Benefits Security Administration, Room N-5655, 200 Constitution Ave. N.W., Washington, D.C. 20210, Attention: Participant Fee Disclosure Project; electronically to e-ORI@dol.gov or via www.regulations.gov.