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Chairman Miller's 401(k) Fee and Disclosure Bill Garners Disapproval from Retirement Provider and Plan Sponsor Groups

A funny thing happened when Congress went into recess. Plan sponsor groups moved away from polite, diplomatic comments on Congressman George Miller's (D-CA) legislation, The Fair Disclosure for Retirement Security Act of 2007 (H.R.3185), to call for a regulatory fix by the Department of Labor.

For example, the Profit Sharing Council of America's (PSCA) Vice President of Governmental Affairs Ed Ferrigno, initially said that, "PSCA agrees with the spirit of the bill, there is a need to increase fee transparency at the plan sponsor and participant levels," (and adding that PSCA does have serious concerns about specific provisions of the bill). By the August recess Ferrigno was quoted as saying, "PSCA believes that any Congressional action is premature until the Department of Labor completes its structured and disciplined promulgation of fee disclosure regulations...H.R.3185 violates the principles PSCA enumerated in its comment letter (The Department of Labor issued a request for information on 401(k) investment information and fees in April) to the Department-simplicity, cost sensitivity, and flexibility."

In August, even the Investment Company Institute's President, Paul Schott Stevens, felt compelled to caution, "We urge the House Education and Labor Committee to proceed carefully as it considers specific changes to the 401(k) disclosure regime." The ERISA Industry Council's (ERIC) President, Mark Ugoretz says, "While Congressman Miller's bill as introduced responded to a number of ERIC's concerns, ERIC believes that the Department's project on fee disclosure will lead to a regulation that will provide relevant information and better address the issue than a legislative body." Further the SPARK Institute released a statement calling Miller's bill, "counterproductive." That's blunt talk for Washington, especially on the Miller bill since Congressman Miller chairs the Committee on Education and the Workforce, which has jurisdiction on all retirement issues.

What seems to have these retirement policy groups trusting in the Department of Labor is more than a Republican Administration that tends to be receptive to business concerns. It is also two bothersome provisions in the bill that would require plan administrators to:

• Individually list every service fee assessed against a participant's account, and
• Offer at least one lower-cost, balanced index fund as an investment option.

Plan sponsor groups have expressed serious concerns about listing every fee charged to a 401(k) participant's account. ERIC's Ugoretz says that the focus should be on fees that affect investment returns. The American Benefits Council's (ABC) Legal Counsel for Retirement Policy, Jan Jacobson says that ABC is concerned that some participants may focus solely on price tags rather than broader criteria such as the risk level of the investment, historical returns, and the types of investments being purchased, such as active investing, which may carry a higher price tag than passive investing. She also urges flexibility in the way that fee information is given to participants to allow plan sponsors to provide fee information in ways that participants will understand, which could mean various formats such as a representative calculation or simply by reporting fees through paper reports or on the Internet. Yet other groups such as the American Society of Pension Professionals and Actuaries (ASPPA) calls for uniformity in reporting fee and expense information.

Strong objections have been raised to the Miller bill's mandate of at "least one lower cost, balanced index fund" as the preferable camel's nose under the tent. One of the hallmarks of ERISA legislation and regulation has been the bias against investment mandates. If direction is needed, legislation and regulation should merely provide general principles or broad investment characteristics. Now, however, the Department of Labor may have opened the door to such mandates when it deviated from the 'principles' approach in the proposed regulations for qualified default investment alternatives by specifying three types of investment for the safe harbor: balanced funds, target-date or lifecycle funds, and managed accounts.

The bill would also require:

• Plan administrators to clearly identify the name, risk level, and investment objective of each available investment option; identify historical returns and fees on each investment option; and specify where plan participants can obtain additional plan and investment information.
• Service providers to disclose to plan sponsors all fees that 401(k) participants will be charged and outline any conflict of interests that service providers may have.
• The Department of Labor to annually review compliance with these disclosure requirements and refer violations of the law to the Securities and Exchange Commission and other enforcement agencies.

With nearly 50 million Americans invested in 401(k) plans, it is no wonder that the potential impact that fees can have on 401(k) balances is a priority for both Congress and the Department of Labor. The General Accountability Office recently reported that a one percentage point difference in fees can reduce retirement benefits by nearly 20 percent. Congressman Miller has been joined by the Chairman of the House Committee on Ways and Means, Congressman Charles Rangel (D-NY), in promising hearings on 401(k) fees this fall. Labor Assistant Secretary Bradford Campbell, who heads the Employee Benefits Security Administration, says fee disclosure is a top priority for the Department and that "We are currently working on several regulatory initiatives focused on improving the transparency of fee and expense information for participants and plan fiduciaries."

Because of the impact on retirement savings and wealth creation, one thing is certain: 401(k) fees and their related disclosure will continue to be a major issue for plan sponsors, Congress, and the Department of Labor.

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