The DOL has posted on its website the “Report of the Working Group on Fee and Related Disclosures to Participants.” The consensus of the working group (which was appointed by the Advisory Council on Employee Welfare and Pension Benefit Plans to study “fee and related disclosures to participants in defined contribution plans”) is for “additional disclosure of fees in defined contribution plans that seek the protections of ERISA section 404(c).” (The Advisory Council was created by ERISA to provide advice to the Secretary of Labor). Brief summary of the recommendations:
(1) “The profile prospectus of each investment option should be delivered to each employee upon eligibility to participate.”
(2) “Participants must be given materials (like a glossary) that explain the meaning of the terms used in the profile prospectus (or other like document) coincident with the delivery of the profile prospectus.” (In other words, a document explaining a document.)
(3) “To the extent that an annual statement is provided by the recordkeeper, the statement must provide the expenses of each investment option expressed as a ratio along with other information provided about the investment options. There must also be an identification of the investment expenses that are paid entirely or in part by the plan sponsor.”
(4) “The DOL should provide a sample model disclosure format that is available on its web site.”
Excerpts from testimony to the working group:
Louis Campagna, Chief, Division of Fiduciary Interpretations, Office of Regulations and Interpretations, US Department of Labor, Washington D.C.:
In choosing the funds menu, the plan fiduciary needs to examine the fees, which must be at a reasonable level given the services and their quality. In the 1997 Advisory Opinion (the “Frost Opinion”), it was stated that compensation to a service provider needs to be reasonable taking into account services provided as well as other compensation the service provider receives such as from asset fees.
Mercer Bullard, President and Founder Fund Democracy, Inc. and Assistant Professor of Law, University of Mississippi:
Professor Bullard speculates that participants do pay higher fees than other investors because fees are less transparent in qualified plans. He also believes that 401(k) participants’ investments perform better than the investments of individuals outside of 401(k) plans. He attributes this to the fact that 401(k) investors trade less often than other investors partially because their objectives are long-term and partially because of inertia.
Bruce Ashton, President, ASPA and partner of Reish, Luftman, Reicher & Cohen:
The current rules relating to the disclosure of plan related fees and expenses only go so far in disclosing to the plan participant what he or she is really paying out. ASPA believes that plan participants should receive full and complete disclosure of all fees and expenses paid out of plan assets that can be reasonably identified. Further, this disclosure should be provided in a meaningful and understandable format. To minimize administrative burdens, the disclosure could be distributed in conjunction with the plan participants regular year-end statement. Although specific disclosure of the amount actually charged to a participant’s account may be preferable, the burden of providing this individualized information is significant, and providing such information could have a chilling effect on the creation and maintenance of such plans.
Norman P. Stein, Professor of Law, University of Alabama:
Clear and understandable disclosure of fees is still important. Uniformity of presentation is necessary so that participants have the same information about all investment options. The disclosure must also provide examples of how fees affect the rate of return and of how fees can make it more expensive to move in and out of investment options. He also points out the DOL does not have expertise in the area of investments. The SEC does, however, have expertise in this area. Therefore, the DOL should consult with the SEC when designing rules for these kinds of disclosures. Nevertheless, the DOL has more expertise in designing the format of such a disclosure than the SEC, so the DOL should prescribe the format.
Regarding the types of disclosure favored by the working group, here is what they had to say:
[T]he working group saw examples of investment statements showing the expense of each investment option expressed as a ratio for each fund in which a participant was invested as of the date of the statement. The working group believes that this is pertinent information that is helpful in making the investment decision. This information can also be presented in an understandable format.One example was in materials distributed in connection with Russell Ivinjack’s testimony. It consisted of a table having the following information going across the page: fund name, fund type, objective/strategy, risk level and expense ratio. Another example was in materials distributed by Dennis Simmons and Stephen Utkus who were from the Vanguard Group. The sample all-in fee report and the sample fund fact sheet are attached as exhibits to this report. The sample all-in fee report is substantially similar to the DOL Fee Disclosure Form.