DOL Releases Disclosure Materials for 401(k) Fees
On July 15th, Secretary of Labor Alexis M. Herman released new 401(k) fee disclosure tools to help employers, especially small employers, understand the investment and administrative fees and expenses which are charged to their 401(k) plans.
The newly released materials include: a news release, a worksheet entitled “401(k) Plan Fee Disclosure Form,” and a pamphlet, “A Look at 401(k) Fees for Employers.” Copies of these materials are available on the ASPA web site or directly from the DOL Pension and Welfare Benefits Administration (PWBA) website.
The pamphlet highlights the obligations employers must fulfill in operating a 401(k) plan by describing their fiduciary duties under ERISA. The pamphlet also lists 10 basic questions employers should answer in considering fees and expenses paid for investment, sales, administrative and compliance services.
For example, the pamphlet states in part:
“A participant-directed retirement savings plan, such as a 401(k) plan, is an important tool to help your employees achieve a secure retirement. As part of offering this type of program, you or someone you choose must select the investment options from which your employees will choose, select the service providers for the plan, and monitor the performance of the investments and the provision of services. All of these duties require you to consider the costs of the plan… “Understanding fees and expenses is important in providing for the services necessary for your plan’s operation. This responsibility is ongoing. After careful evaluation during the initial selection, the plan’s fees and expenses should be monitored to determine whether they continue to be reasonable..."
The pamphlet makes a number of recommendations to employers, including: “Consider the specific services you would like provided. For example, the types and frequency of reports to employer, communications to participants, educational materials, and meetings for participants and the availability and frequency of participant investment transfers, the level of responsibility you want the prospective service provider to assume, what services must be included, and what are possible extras or customized services, and optional features such as loans, Internet trading and telephone transfers... “Fees are just one of several factors you need to consider in your decision making.
“All services have costs. Compare all services to be provided with the total cost for each prospective provider...
“Cheaper is not necessarily better.
“Ask each prospective provider to be specific about which services are covered for the estimated fees and which are not. To help in gathering this information and in making equivalent comparisons, you may want to use the same format for each prospective provider.”
The fee disclosure worksheet, while released by the DOL, actually reflects the combined efforts of the Investment Company Institute (ICI), the American Council of Life Insurance (ACLI), and the American Bankers Association (ABA). Thus, all of the major “packagers” of 401(k) investment products have collaborated in the development of the worksheet. Accordingly, we anticipate that the worksheet will become an industry standard for evaluating 401(k) fees and expenses and the services those fees purchase. In fact, we see an opportunity for many of ASPA’s members to assist employers in obtaining this information from competing investment providers and in evaluating the results. Since the new worksheet should be commonly accepted by 401(k) investment providers, they should soon become accustomed to presenting fee and expense information in that format.
Further, since these materials will inevitably lead to a greater awareness of 401(k) plan costs by employers and their advisors, they should ultimately drive down the costs of 401(k) investment packages -- and particularly of those costs which have not been clearly identified in the past.
While the fee disclosure form is a significant step towards full disclosure, it is not perfect.
- The worksheet should give greater emphasis to the services being provided.
The worksheet is drafted to focus the employer on costs much more than on services. The worksheet does not adequately segregate out services; for example, voice response systems and Internet capacities are listed as a single service. Further, there is no description of the services provided through either of those vehicles. Also, the form does not require that the provider indicate if a service is not provided. - The worksheet does not require reporting of commissions.
While the form asks for “charges”, such as front-loaded mutual funds and 12b-1 fees, it does not require disclosure of commissions paid to sales people. Thus, while all of the “charges” that affect the net value of plan assets must be disclosed, the plan sponsor is not provided with sufficient information to evaluate the services being performed in return for the remuneration received; or to fully evaluate the reasons for the recommendation of particular investment products over others. However, we anticipate that, at some point in the future, full disclosure of both charges and payments will be required. (See, for example, the question on the draft 1999 Schedule A requiring reporting of payments to “brokers, agents and other persons.”) - Some of the categories are inappropriate, confusing and/or overlapping.
For example, the worksheet calls for the disclosure of contract termination charges and back-end loads as a lump sum dollar amount. But, the form gives no guidance on how to calculate that charge where -- as is often the case -- the percentage charged reduces each year and ultimately disappears. - The worksheets should include a plan specifications and data form to be completed by plan sponsors.
It will be difficult for service providers to give standardized responses without standardized input. Conclusion
Despite its “blemishes,” the DOL’s efforts should result in a greater awareness of fees by plan sponsors and their advisors. That, in turn, should lower the fees charged to plan participants and thereby increase their benefits. And, for many of ASPA’s members, it should result in an additional, and valuable, service for employers.
© 1999
by the American Society of Pension Actuaries. Article originally appeared in the ASPA ASAP, No. 99-19, July 21, 1999.
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