The Labor Department's focus on fees
The fee disclosure problem is being addressed by the Department of Labor, which is working on three regulatory proposals. The first of the Labor Department's initiatives are proposed changes to an ERISA-required form that every plan must file annually with the federal government. It will require additional disclosures about plan fees to the government and is expected to go into effect in January of 2009.
Next they're working on point-of-sale disclosures to plan sponsors (remember: employers) by service providers. These proposed regulations are designed to make fees more transparent to companies. Because plan sponsors are always considered fiduciaries, they have a responsibility to do due diligence as they select a plan for their workers.
But here's the irony: Service providers
have not been required to disclose fees unless
they are fiduciaries (and -- pssst -- many in
the industry try to avoid this fiduciary label
because of its attendant responsibilities). However,
plan sponsors have a fiduciary duty to understand
and monitor plan fees. How can they effectively
do this if they're not supplied with adequate
information by service providers?
The new regulation addresses this conundrum -- it was the main source of buzz at the 401(k) Summit. The biggest concern among attendees was this: How in the world can the complicated fee structures of 401(k) plans be easily conveyed to plan sponsors? During the conference, some of the diagrams displayed on the screens depicting these fee arrangements resembled Rube Goldberg drawings.
|The buzz about 401(k) plans
If the service providers are grappling with how to approach this onerous task, what can this mean about the size of these fees?
By some estimates, upward of a dozen people have their hands in the retirement-plan pie. Any of the following charges may apply: subtransfer agent fees, early redemption fees, custodial fees, wrap fees, investment adviser fees, 12b-1 fees, brokerage commissions, administrative fees, revenue sharing fees and fees for services from attorneys, accountants and actuaries.
Some of these fees are direct and some are indirect. Some are tangled up in so-called "bundled arrangements," which is industry jargon for when more than one service is provided by a service provider (such as record keeping and investments, for example).
How high can fees go?
"We have seen a few cases where expenses are more than 3 percent of assets," says Reish. "But those have been in small plans. I don't think I have ever seen that situation in a large plan."
Whether a 401(k) plan
costs 1 percent in fees versus 3 percent can make
a dramatic impact on one's retirement savings.
For example: Joe puts away $250 a month for 30 years
and earns an 8 percent annualized return net of
fees. His plan assets grow to $372,590. Tim puts
away the same amount but earns 6 percent net of
fees, or 2 percentage points less than Joe. Tim
accumulates $251,129. The result: Joe's nest egg is
nearly 50 percent bigger than Tim's.
The Department of Labor, or DOL, has come up with a fee disclosure form on its Web site that's designed to help service providers and plan sponsors get a handle on fees.
Says Reish: "I think the DOL did a great job in their new proposed regulations. They will bring a lot more disclosure and 'sunshine' into the marketplace. However, I don't think they went far enough. There are still a variety of fees and payments that do not need to be disclosed."
For example, the disclosures do not apply to accountants, actuaries, appraisers, auditors or legal services if they are getting directly compensated from plan assets. Only if they are indirectly compensated by third parties do their fees need to be disclosed. Also, there won't be a need to break down compensation on a per-service basis. And the amount of revenue sharing that exists within some bundled arrangements does not have to be disclosed, as the proposed regulations stand right now.