Focus on fees will likely lead to new laws and regs in 2007

May 29, 2007

A new focus on what plan sponsors charge in fees, and how they are disclosed to investors, will likely lead to what could be significant legislative and regulatory change before the end of 2007.

The pressure for change has come on several fronts, including several prominent lawsuits seeking disclosure of sponsor fees; U.S. Securities and Exchange Commission and Dept. of Labor efforts to boost disclosure requirements; and from a Congressional hearing, with another likely in June, into fees and fee disclosure.

Fees and disclosure are also ripe for change as existing legal requirements in this area are uneven and differ depending on the type of particular individual account plan and the specific investment option chosen by a participant. Despite the uncertainty of change, many plan fiduciaries would welcome additional clarity surrounding fee information.

Among the changes being seriously considered are:

• Requirements for standard and more easily comparable information about asset-based expenses, especially those related to plan options. More disclosure would allow investors to compare the long-term costs of investing in one plan option over another.
• Disclosure of per-account or per-participant charges beyond core investment charges.
• Advance notice of transaction fees that participants may have to pay.
• Information on the existence and purpose of any revenue-sharing.
• Disclosure of both participant and sponsor fees so investors can compare what they are paying to sponsor costs, and what other sponsors may charge.

Rep. George Miller (D-CA), Chairman of the House Education and Labor Committee, which has jurisdiction over ERISA, is spearheading Congressional hearings on fee disclosure. Using a Government Accountability Office (GAO) report that called for more disclosure, Miller held hearings in March on the matter and is likely to hold another round of hearings in June. Legislation affecting disclosure requirements is all but certain following the hearings.

At the same time, the SEC is proposing, among other changes, a two-page plain-language alternative to the traditional prospectus that discloses a fund’s investment objectives, risks, strategies and costs. SEC would seek to apply the disclosure to all 401(k) investment options.

DOL, meanwhile, is focusing on disclosure of how much plan service providers receive in compensation, and again on disclosure to participants of what fees they are paying.

The outlook for reform is good if the challenge of creating uniform and consistent rules is met. Should that be the case, new participant-level fee disclosure rules could assist plan sponsors in meeting their fiduciary responsibilities.