Labor Department proposal on 401(k) plans provokes debate

A Department of Labor proposal released last week seeking to provide the country's 65 million 401(k) participants with additional information about fund charges is stirring debate among different advocacy groups as to whether more data would be helpful or damaging. The additional information would increase the threat of litigation, according to attorneys who represent employers and 401(k) service providers. Plaintiffs already are suing employers, charging that fees in 401(k) plans are too high and that employers are violating their fiduciary duties. "This plays right into the hands of the plaintiff's bar," said Steve Saxon, a partner with the Washington-based Groom Law Group, Chartered, which represents employers and service providers on 401(k) issues. "They will love this." With the increased amount of fee disclosure, "it will be much easier for [plaintiff's attorneys] to get hold of this information. This does their work for them," Mr. Saxon said. "If they think the fees are too high, which they absolutely will, we're going to have a lot more litigation," he said. On the other hand, the American Benefits Council in Washington, an association representing large companies that sponsor retirement and health care plans, approves of the proposal. "The DOL proposal appears to provide simple yet meaningful disclosure to plan participants," James Klein, the council's president, said in a statement. Investors had $3 trillion in 401(k) plans last year, according to the Investment Company Institute in Washington.

ONUS ON EMPLOYERS

Under the proposal, which the Labor Department hopes to finalize this fall, "the onus is on the employers to provide not just ... more-specific disclosure but broader disclosure," said Tom Schendt, a partner in the Washington office of Atlanta law firm Alston & Bird LLP. He also represents companies that offer 401(k) plans and financial services companies that provide the investments, as well as service providers to the plans. "It contemplates a whole new notice regime," Mr. Schendt said. "It's not just taking what we have and [adding] to it but rather [creating a new disclosure] from whole cloth." House Education and Labor Committee chairman George Miller, D-Calif., issued a statement charging that the proposal doesn't go far enough. It "would still allow financial firms to hide many fees that they take from 401(k) plan participants' accounts," he said. Mr. Miller's committee in April approved his more sweeping 401(k) disclosure legislation, but he has said that Congress won't act on his bill this year. "For too long, the financial services industry has maintained a stranglehold on retirement savings that they didn't earn and that don't belong to them," he said in the statement. Mr. Miller pledged to "continue to press the [Labor Department] to improve these proposed rules to ensure that workers have access to complete and understandable information about the fees they are paying." The Securities Industry and Financial Markets Association of New York and Washington also said in a statement that under the proposal, "plan participants will benefit both from standardizing how the relevant information is presented across investments," as well as from information on web services that would have to be available. And the ICI said in a statement that the proposal strikes a balance in terms of providing other information that investors need on performance, investment objectives and risks. The proposal "provides clear data on fees," the ICI said. The Labor Department proposal is the third set of 401(k) regulations that it has issued during the past two years. Its earlier regulations dealt with disclosures that must be filed with the government by employers who offer the plans, as well as disclosures made by companies that underwrite and service the plans for employers.

PROPOSAL DETAILS

Information about 401(k) investments, including their fees and expenses, surrender charges, historical performance and benchmarks for comparing returns to similar investments, would be compiled in a chart under the proposal. Fees wouldn't have to be disclosed separately for brokerage accounts that are offered in 401(k) plans. One part of the disclosure would provide total operating expenses of plans, including investment management fees and administrative expenses, according to Bradford Campbell, assistant secretary for the Labor Department's Employee Benefits Security Administration, who announced the proposal in a telephone press conference last Tuesday. A second part would provide cost information on what individual participants are paying for their particular investments, including a dollar amount, he said. The information would be reported to employees in their quarterly statements. The Labor Department came up with the proposal after taking public comments on what information would be useful to participants and what format would be useful, Mr. Bradford said. "Overwhelmingly, what people want are simple, concise disclosures that aggregate this information in useful ways," he said. It would be difficult to provide more-detailed fee comparisons for 401(k) plans, because the plans include different types of investments, such as mutual funds, bank and insurance products, Mr. Bradford said. The Labor Department hopes to have the plan in place by next year. The Labor Department estimated that while the proposal would cost $800 million for employers and plan providers to implement over the next 10 years, it would save plan participants $6.9 billion over that period, primarily as a result of time saved in being able to find the information in one place rather than having to hunt through prospectuses and other documents. Being able to compare costs will also save plan participants money, the Labor Department said. The net savings would amount to $6.1 billion over the 10 years, the Labor Department said. Comments are due by Sept. 8. E-mail Sara Hansard at shansard@investmentnews.com.