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SVIA Responds to Department of Labor Request for Information on 401(k) Investment Information and Fees

On July 20th, the SVIA provided comments to the Department of Labor's April 25 request for information in the Federal Register on disclosure of information relating to defined contribution plan investment options and fees. SVIA's comments focused first on all investments generally and then, more narrowly, on stable value assets.

SVIA believes that disclosures both to plan participants and plan sponsors should be provided with succinct, understandable information regarding their investment options and associated fees. However, plan participants and plan sponsors are best served through specific types of disclosure.

For plan participants, SVIA believes that the following information should be provided for all investments. Illustrations provided are specifically for stable value funds.

Investment objective of the fund. For example, a stable value fund seeks to preserve principal value and provide current income consistent with bonds of a short-to-intermediate maturity.

Description of the fund's investment strategy. For example, a stable value fund invests in a high-quality diversified portfolio of fixed income securities, with wraps or financial assurances from banks and insurance companies that enable participants to transact at contract value.

A description of who should invest. For example, investors seeking capital preservation and a competitive yield should invest in stable value. Investors with a short-term investment horizon (less than five years) may also find stable value appropriate, as well as long-term investors seeking to balance the risks of a portfolio containing equities.

Fund performance. The annual average returns should be provided for the latest period, along with historical returns on a one-, three-, five-, and ten- year basis, if available. SVIA believes that plan participants should be provided returns net of all fees so that participants clearly see what the investment has earned after fees. For a stable value fund, returns net of all fees would be provided by giving the stable value fund's net crediting rate or its current yield net of fees.

Fees. Stable value funds should disclose to plan participants any fees that subtract from reported gross performance. Examples of these fees would be stable value fund management fees and plan administrative expenses.

Additionally, SVIA believes that plan sponsors should be provided with additional information regarding fees that are commonly considered investment expenses and are therefore subtracted before gross performance is struck. Two such expenses include the cost of the stable value assurances as well as sub-advisory arrangements with respect to management of the underlying assets within a stable value fund. In order to promote the adoption of best practices throughout the industry, the SVIA has created a fee disclosure template that provides for the specific identification of such costs. This fee template is available at www.stablevalue.org/library/feetempl.asp. An illustration using the template is provided.

Based on a 2005 SVIA survey, stable value management fees averaged 0.22 percent for portfolios with assets up to $100 million, 0.14 percent for portfolios with assets between $200 to $499 million, and 0.11 percent for portfolios with assets $500 million and above. These fees can be charged explicitly in the form of a wrap fee or implicitly in the case of a guaranteed investment contract or a general account-based stable value fund. The cost of the assurances required to construct a stable value fund generally range from 0.06 percent to 0.15 percent. Trust and custody expenses generally range from 0.01 percent to 0.03 percent.

Looking just at fees or expense ratios, stable value compares favorably to other 401(k) investments as the chart shows. Notably, as the General Accountability Office reports, a 0.10 percent or 1 percentage point difference in fees can reduce retirement benefits by nearly 20 percent. That is just another reason why 401(k) investors choose stable value as a core asset for their defined contribution portfolios.

Include in text box with article: "While contributions and earnings increase retirement savings in 401(k) and other participant-directed plans, fees and expenses charged to participants accounts' can substantially reduce that growth. For this reason, it is important that plan participants, particularly those responsible for making their own investment decisions, consider what and how fees and expenses are charged to their individual accounts."

Source: Federal Register, Vol. 72, No.79, Wednesday, April 25, 2007, Proposed Rules, Fee and Expense Disclosures to Participants in Individual Account Plans, page 20457.

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