Too much of a good thing?
How much information is too much? One might ask that question after reading the provisions of the 401(k) Fair Disclosure for Retirement Security Act of 2007, a new bill that is sponsored by George Miller, a Democrat congressman from California.
Last month a hearing on the bill was held at the House education and labour committee, which Miller chairs. All major business groups - including the US Chamber of Commerce, the Profit Sharing/401(k) Council of America and the ERISA Industry Committee, which represents employers on pension issues - braced themselves for a long battle against what they say would be too much disclosure, overwhelming employees with unnecessary detail, raising expenses for plan administrators and not benefiting retirees.
The bill asks 401(k) plan sponsors to get information from their service providers, and give information to participants before they join a plan and more information each year, always focusing on the plan expenses and potential conflicts of interest. In particular, service providers have to disclose - in written statements - any financial or personal relationships that could create a conflict of interest for the plan sponsor, any arrangements connected with free or discounted services or rebates and any differences between the share prices and retail share prices of mutual fund investments due to different share classes.
Plan sponsors have to post the statements on the company's internal website and make copies available to participants on request. They have also to provide investment option information to participants with a "fee menu" or the description of all potential service fees imposed during the plan year, explained according to three categories: fees that vary depending on the selected investment options; fees assessed as a percentage of the total assets in the account, regardless of the investment option selected; and administration and transaction-based fees that are automatically deducted each year or result from certain transactions. The fee menu should include a description of the purpose of each fee: eg, investment management, administration and recordkeeping.
Each year, participants must also receive an annual benefit statement that details the state of their retirement accounts and stresses how much they paid in fees: the total sum and the percentage of assets, with details about which kind of fees were paid:expense ratios, trading costs, load fees, asset-based fees, mortality and expense charges, guaranteed investment contract fees, employer stock fees, directed brokerage charges, plan administration fees and participant transaction fees.
Miller's bill is not only about disclosure. It would require plan sponsors to offer at least one market-based index fund with "a combination of historical returns, risk, and fees that is likely to meet retirement income needs at adequate levels of contribution". And it would create a 12-member Department of Labor (DOL) advisory council, half of whose members represent participants and the other half employers. The council's goal is to present an annual report on retirement trends and issues to Congress and to collect citizens' concerns about retirement plans.
Consumer advocates are in favour of the bill, which affects 401(k)-style plans covering some 50m Americans: more effective disclosure, they argue, would pressure companies to keep fees low. "We want workers to have information that is presented in clear, straightforward and easily understandable terms, thereby allowing them to make sound investment decisions for themselves," explains a spokesman for Miller. The current rules have left 80% of workers unaware of the fees they pay, he adds.
Employers and pension industry lobbyists oppose the bill and hope it will be superseded if, as expected, the DOL issues its own new rules soon.
The DOL is about to change annual reporting by 401(k) plans in order to improve disclosure between plans and their workers and make it easier for regulators to control their fairness. In the new annual report there should be concise, useful fee and expense information to participants. However, the DOL appears to be cautious about requiring too much information. "If we produce disclosures that are voluminous, and ignored, we've perversely increased the fees that participants pay," assistant secretary of labor Bradford Campbell told a hearing last month. Similar feelings were expressed by James Klein, president of the American Benefits Council, which represents employers on benefit issues. Disclosure "is just one piece of the puzzle", he said, and employees would benefit from more literacy on financial matters. The council was concerned that Miller's bill "may unintentionally hurt plan participants by overburdening plan administrators and increasing the costs of plan sponsorship".
A similar bill to Miller's is expected to be introduced into the Senate by fellow Democrats Herb Kohl (Wisconsin) and Tom Harkin (Iowa). But 401(k) fee disclosure has bipartisan support and the current situation will change by either law or by DOL rules.