Uncovering Fee Disclosure

By Debra Davis

The impetus for greater fee disclosure in 401(k) plans is significant. The U.S. Department of Labor (DOL) recently issued a Request for Information on the disclosure of fees to participants (the "RFI on Fees") and legislation has been recently proposed that would require additional fee information to be provided to participants.

Given the amount of attention participant fee disclosure has received, most people would agree that guidance or legislation on this issue is inevitable. Thus, the debate has been about how much disclosure and in what format, rather than whether there should be disclosure at all. My experience in serving as the Chair of ASPPA's Participant Fee Disclosure Task Force and as a co-author of Reish Luftman Reicher & Cohen's comment letter to the RFI on Fees [http://www.reish.com/publications/pdf/discl2partjuly07.pdf] have exposed me to a variety of opinions about the form participant fee disclosure should take. Based on these experiences, I believe it is likely the debate about participant fee disclosures will revolve around the following key issues:

• Level of Detail. Many practitioners and policymakers agree that the persons responsible for retirement plans-that is, the fiduciaries-need detailed information about the fees being charged to the plan and the services received in return. However, there is considerable debate regarding the extent to which participants need this information. Most commentators agree that participants need information sufficient to enable them to make informed decisions regarding the plan, such as whether to participate and which investments to select. However, not everyone agrees on the amount of information that needs to be provided to satisfy this objective.

• Plan vs. Participant Level Information. Considerable debate surround the issue of whether participants should be provided with (i) reasonable estimates of projected expenses that could be charged to the plan (referred to as plan-level information), or (ii) the exact amount of expenses that reduce the value of their accounts (known as participant-level information). Supporters of plan-level disclosures indicate that the cost of providing participant-level disclosures outweighs any benefits derived from disclosing actual expenses. Additionally, the costs would be borne by all of the participants, even though only a small percentage of participants are interested in the disclosures. Advocates of participant-level disclosures argue that participants can more easily understand actual dollar amounts and that the cost of providing that information is not that significant.

• Uniform Disclosure. There has also been considerable debate regarding whether one form should be used for all types of fee disclosure. That is, the same form would be used regardless of the types of investments or services used by the plan. Fee disclosure is particularly challenging due to the numerous direct and indirect fees that are paid and the manner in which fees are calculated. The types of fees and calculation of those fees may vary based on the types of investment used. However, supporters indicate that uniform fee disclosure would help participants to understand the types of fees being charged to the plan.

Many advisers are resistant to government-mandated participant fee disclosures as they anticipate that it will cause some participants to overlook the value offered by the plan and generate many questions by participants who do not understand the disclosures. Furthermore, many advisers currently provide their own types of fee disclosures and oppose deviations from their methods. However, given the significant amount of government attention in this area, it seems inevitable that Congress or the DOL will act. As a result, advisers and providers should be prepared to revise their disclosures when guidance is issued and to clarify their disclosures to reduce participant confusion and questions.

© 2007 Reish Luftman Reicher & Cohen. All rights reserved. The ADVISER REPORT is published as a general informational source. Articles are general in nature and are not intended to constitute legal advice in any particular matter. Transmission of this report does not create an attorney-client relationship. Reish Luftman Reicher & Cohen does not warrant and is not responsible for errors or omissions in the content of this report.

Learn more about R&R related practice areas:
Employee Benefits