New legislation is being written as congressional interest in 401(k) fee disclosure rules heats up in advance of a round of hearings set for this week.
New legislation is being written as congressional interest in 401(k) fee disclosure rules heats up in advance of a round of hearings set for this week.
House Education and Labor Committee Chairman George Miller, D-Calif., has scheduled a hearing for Thursday to hear testimony about the controversial fee disclosure bill he introduced in July. That bill would require detailed disclosures of plan fees to participants and to plan sponsors, and it would for the first time mandate that plans include a specific type of investment: low-cost index funds.
Sens. Herbert Kohl, D-Wis., chairman of the Special Committee on Aging, and Tom Harkin, D-Iowa, are also planning to introduce a fee disclosure bill this month, when their committee will hold a hearing on the issue. That bill is likely to propose fewer specific fee disclosures than Mr. Miller's bill, and may propose requiring only that a feasibility study be done with regard to whether inclusion of index funds be mandated for 401(k) plans.
Rep. Richard Neal, D-Mass., chairman of the House Ways and Means subcommittee on select -revenue measures, at press time was preparing his own bill, which reportedly would require fee disclosures to participants of investment fees, administrative fees and transaction fees. His legislation wouldn't include the index fund requirement, according to people who are following the legislation.
In addition, Ways and Means Chairman Charles Rangel, D-N.Y., plans to start hearings on 401(k) fees and other worker retirement issues over the next couple of months.
But as members of Congress move forward with legislation on fee disclosure, there are signs that many who follow the issue think they should proceed with caution.
“I'm not convinced that dictating the specific content of 401(k) plans is the best approach, well intended as it may be,” said Barbara Roper, Pueblo, Colo.-based director of investor protection for the Consumer Federation of America in Washington. “If the desire is to ensure that investors have access to low-cost funds in their 401(k) plans — a goal we certainly share — requiring them to have one or two index funds does not seem like the best way to accomplish that goal.”
Providing employers and employees with clear, comparative fee information is a more effective approach, Ms. Roper said.
Industry officials said that Mr. Miller's bill, the Retirement Security Act of 2007, would be difficult to implement. The bill would require that participants receive dollar estimates of various fees in 401(k) investments, as well as information about potential conflicts of interest that those receiving the fees may have.
“None of the information necessary to do the calculation [of the dollar amount of fees] is on the record-keeping system,” said Larry Goldbrum, general counsel of the SPARK Institute Inc. of Simsbury, Conn., which represents the retirement services industry.
“It's all embedded in the mutual fund,” he said. “There's no way to retrieve that information.”
In addition, the complexity of the disclosures required for both participants and plan sponsors are too onerous and need to be simplified, Mr. Goldbrum said. Otherwise, participants could be overwhelmed with too much information, and information that would have to be posted on websites could force plan administrators to disclose proprietary information about their suppliers.
There is also concern about the precedent that would be set by Congress' mandating inclusion of particular investments, Mr. Goldbrum said. The bill would require that any index funds included in plans be chosen to meet retirement income needs of participants, which would add liability for employers, he added.
“It is hard to believe that the sophisticated multitrillion-dollar financial services industry doesn't know the cost of the services it provides,” House Education and Labor Committee spokesman Aaron Albright wrote in an e-mail. In addition, he wrote, Mr. Miller's bill would allow firms to estimate the charges of their costs if they aren't known.
Further, Mr. Albright wrote, “workers planning for their retirement should have a wide variety of investment options available to them,” and some workers have expressed concerns that their plans contain only high-cost, low-return funds. Studies have shown that index funds outperform an overwhelming majority of more expensive actively managed funds, he wrote.
But industry officials fear that Congress may take aim at fee-based compensation paid to 401(k) plan providers. Mr. Miller, in a hearing he held in March on 401(k) fees, questioned whether only index funds should be included in the plans.
“Getting rid of asset-based compensation in 401(k)s — that's the ultimate risk of all this activity,” said Steve Saxon, a principal with Groom Law Group in Washington, who represents companies that sponsor the plans, as well as investment and plan managers.
He and others say that lawsuits, filed against plan sponsors, that allege high fees that aren't adequately disclosed could have an effect on what happens in Congress, as well as on the Department of Labor's plans to issue a proposal this year for what disclosures should be made to 401(k) participants.
“It's a perfect storm,” said Thomas Schendt, a partner in the Washington office of Atlanta law firm Alston & Bird LLP, who also represents companies and 401(k) providers. Litigation against companies is increasing, the Department of Labor is working on new regulations, “and now we're seeing a buildup of the third area of turmoil: legislative,” he said.
“This deals with things that directly impact participants,” Mr. Schendt said.
“It doesn't go away,” he said. “Whatever one end does, it affects the others.”
Sara Hansard can be reached at shansard@crain.com.
