Fee disclosure timetable met with some skepticism

WASHINGTON — The Department of Labor's announcement that it is planning to implement new fee-disclosure regulations for participant-directed defined contribution plans beginning on or after Jan. 1, 2009, was met with skepticism by pension industry consultants and lobbyists — even though the proposed rule itself generally received favorable reviews.

“The effective date is obviously problematic,” said Ed Ferrigno, vice president of Washington affairs for the Profit Sharing/ 401(k) Council of America, Chicago.

“I don't think it is realistic,” added Alec Dike, a senior consultant for Watson Wyatt Worldwide Inc., Arlington, Va.

The DOL's proposed rule, published in the Federal Register July 23, is intended to ensure that participants in 401(k) plans and other participant-directed DC plans receive uniform and useful fee and expense information about their investment options.

Key information that plan fiduciaries would have to provide about plan investment options under the proposed rule would include fees and expenses, past performance data, a comparable benchmark return and a website address for participants seeking more detailed information about the investment option than required by the rule.

The information, which is supposed to be presented in a format that makes it easy for plan participants to compare investment options, would have to be given to participants annually and to new participants when they first become eligible to participate in a plan.

In addition, the proposed rule would require plan fiduciaries to disclose to participants quarterly the dollar amounts charged to the participants' accounts during the preceding quarter for plan-level administrative expenses.

“It keeps it simple and limits it to fees actually paid by the participant,” said Mr. Ferrigno.

But pension industry lobbyists said it unlikely that the DOL will be able to publish its final rules before the end of the year, because the comment period doesn't end until Sept. 8.

Under the DOL's standard operating procedures, comments on proposed regulations must be reviewed before a final rule can be published. This review process can take months, sometimes stretching into more than a year. In addition, any rule the DOL creates after its review process has to be vetted for economic impact by the White House's Office of Management and Budget — a process that can take several additional months.

Even if the DOL meets its self-imposed deadline and publishes a final rule before Dec. 31, plans will have little advance notice to meet the new regulations.

“There's not a whole lot of time for transitioning,” said Jack Dolan, spokesman for the American Council of Life Insurers, Washington.

“That would be very difficult for plans to comply with because systems will need to be changed to accumulate the necessary information,” added Jan Jacobson, retirement policy legal counsel for the American Benefits Council, a Washington group that represents plan sponsors and service providers.

As proposed, plans that offer mutual funds as investment options could have the least trouble with the new DOL rule because — under Securities and Exchange Commission prospectus rules — mutual funds already collect and report much of the same information.

Complying with the DOL's proposed regulation could be a greater burden for bank collective trusts and other non-SEC-registered investment funds because they're not now required to provide the type of fee information the DOL seeks.

In addition, the DOL's proposed rule would require plan fiduciaries to provide plan participants with a benchmark comparison along with the fee information about plan investment returns.

“I'm not sure what would be an appropriate benchmark for a bank collective fund,” said Lisa Bleier, senior counsel for the Center for Securities, Trusts & Investments at the American Bankers Association, Washington.

“This (the DOL's proposed rule) could potentially be a fairly large size burden on banks, depending on how hard it is to pull together all the necessary information,” Ms. Bleier said.

Also uncertain is whether the DOL's proposed rule will go far enough to derail momentum for federal legislation that would mandate more extensive fee disclosure to plan participants.

Rep. George Miller, D-Calif., who has been promoting legislation to enhance fee disclosures for 401(k) plans on Capitol Hill, said the DOL's proposed rule doesn't go far enough. “While a step in the right direction, the Department of Labor's proposal would still allow financial firms to hide many fees that they take from 401(k) plan participants' accounts.”

Among Mr. Miller's specific concerns, according to spokesman Aaron Albright, is that the DOL's proposed rule does not require disclosure of investment management charges or trading commission charges “in the most important document that workers see — their quarterly benefit statement.”

“In other words, fees that could actually be the largest charge against a participant's account could still be hidden,” Mr. Albright said in an e-mail response. “Administrative charges can also be hidden if they are bundled as part of the management fee.”

Some pension industry lobbyists speculated that the Department of Labor put the proposal on the fast track to get final regulations in place before a new administration takes office in January. The new administration that will be calling the shots at the DOL next year, whether Democratic or Republican, could simply scrap or dramatically revise a proposed rule, the lobbyists said.

Said a DOL spokesman, who asked not to be identified by name: “We anticipate being able to meet that timeline. We also anticipate receiving comments on the breadth of the regulation, including the implementation date, and those comments will be considered.”

Said Mr. Ferrigno: “I expect the department to be reasonable (about the implementation deadline), as they have always been in the past."

Contact Doug Halonen at [email protected]