Saturday, October 06, 2007
The Devil in the Details
The testimony presented at last week’s hearing by the House Education and Labor Committee on the issue of 401(k) fees (see 401(k) Fee Disclosure Proposal Draws Industry Criticism at Committee Hearing) was remarkably consistent, IMHO, certainly compared with the last time the Committee took up the issue (see Congressional Committee Hears 401(k) Fee Disclosure Testimony). At a minimum, we seem to have moved past the question of whether more fee disclosure is needed to what kind of disclosures are needed, and how we can make them.
At the risk of over-generalizing the perspectives of the individuals (and individuals on behalf of groups) who shared their experience/expertise with the House Committee, it seems to me that everyone supports the following conclusions:
(1) We need a better understanding of 401(k) fees.
(2) We need more disclosure about what 401(k) fees are.
(3) We should let the Department of Labor finish their regulations on fee disclosure before doing anything legislatively.
(4) Legislation mandating a specific fund option is not a good idea (Congressman Miller’s bill, The 401(k) Fair Disclosure for Retirement Security Act of 2007, would mandate that retirement plans offer at least one lower-cost, balanced index fund in their investment lineup—see “Representative Miller Introduces Fee Disclosure Legislation”).
After the testimony had been presented, Congressman Rob Andrews (D-New Jersey) asked witness Lew Minsky, an attorney testifying on behalf of the ERISA Industry Committee, the U.S. Chamber of Commerce, the Profit Sharing/401(k) Council of America, and other organizations, what would be the problem with a specific fee disclosure to participants—a breakdown of recordkeeping, money management, and “other.” To which Mr. Minsky replied, “I’m not sure that anything is inherently wrong with it. It’s the devil in the details….”
The Right Questions
Details matter in such things, of course—not only in legislation, but also in the reality of what 401(k) plans are paying for what they are getting. Unfortunately, it frequently comes down not just to asking the questions, but to asking the right questions. Jon Chambers, an investment consultant and Principal at Schultz, Collins, Lawson, Chambers, Inc., told the committee about a situation where his firm had been engaged in a mapping study for a large 401(k) plan. In the process, they also conducted a fee reasonableness review for the plan sponsor. “The plan sponsor thought the plan fees must be reasonable, because as they reviewed each investment option, each investment option had reasonable fees,” Chambers recounted.
But the reasonableness review found that the total fees generated by the bundled arrangement currently in place were approximately $1 million higher than “necessary” under an unbundled arrangement, according to Chambers. In that case, what hadn’t been communicated (or inquired about) was the availability of a share class more appropriate for the asset size of the plan.
I hear stories like that from advisers all the time, of course. And while I don’t believe that most plan sponsors are being taken advantage of, I am nonetheless concerned that many are. How could they not be, what with the labyrinth that many must go through to simply discover what the different fee types are, much less how much they are, and who that money flows to for what services (and, IMHO, in too many cases, for WHAT services is the better question)?
There are devils in the details of all this, of course—not the least of which is how we help participants who don’t know the difference between a stock and a bond appreciate the nuances of revenue-sharing—but we are long past the point of debating whether more disclosure is needed. And if the hearing last week established nothing beyond that, it was well worth the effort.
- Nevin E. Adams, JD
You can watch last week’s hearing online HERE