Execs fear fee-disclosure bill could thwart DOL efforts

Mutual fund executives are slamming new fee-disclosure legislation — approved by the House on May 28 — on grounds that it could derail the Department of Labor's own long-pending efforts to set final fee-disclosure regulations for defined contribution plans.

Mutual fund industry representatives say they don't believe disclosure provisions — included as part of a last-minute addition to the American Jobs and Closing Tax Loopholes Act of 2010 — would be substantially more onerous than the pending DOL regulations. The provisions cover disclosure from service providers to plan sponsors, and from plan sponsors to participants.

But adoption of the bill would delay, for years, final resolution of the industry's DC plan fee-disclosure requirements, they say, an issue that many in the retirement industry would like to put to bed.

“Our concern is that it (the legislation) is just going to further delay comprehensive fee disclosure,” David Abbey, managing counsel and vice president of T. Rowe Price Associates Inc., Baltimore, said in an interview.

“The retirement community was looking forward to the certainty of final legal standards in this area after four or five years of deliberations,” noted James M. Delaplane Jr., an ERISA attorney at Davis & Harman LLP, Washington. “I think folks had hoped we had finished that process and we could move on.”

But others contend legislation is important because it would give the DOL regulations the force of law and would clarify the Labor Department's authority to require service providers to disclose fee information to plan sponsors. It also would — for the first time — require local and state government retirement plans, including non-ERISA 403(b) and participant-directed 457 plans, to comply with the DOL fee-disclosure regulations.

“We think there should be greater transparency here,” said David Certner, AARP legislative policy director, Washington. “Having greater disclosure will help drive fees down.”

A final DOL rule detailing all the fee and compensation information that service providers should be disclosing to plan sponsors had been scheduled to be published by the end of May.

A second rule, laying out what fee information plan sponsors should provide to plan participants, is scheduled for publication in September.

ERISA attorneys believe that DOL officials will put a hold on both rules at least until they see whether the legislation is enacted into law. (The House voted 215-204 to approve the jobs bill May 28. It now goes to the Senate, which returns to work from its Memorial Day recess on June 7.)

Phyllis Borzi, assistant secretary of labor for the Employee Benefits Security Administration, had not returned telephone calls at deadline. Joseph De Wolk, a DOL spokesman, declined comment.

But some pension industry observers said it would have been more efficient for Rep. George Miller, D-Calif., and Rep. Richard Neal, D-Mass. — the two lawmakers promoting the fee-disclosure provisions — to drop their legislation and try to work with the Labor Department.

“Now that you've got a DOL that is led by your own people (Democrats), why wouldn't you work with those regulators to craft rules that strike the right balance, rather than imbedding possibly overbroad rules into the statute?” asked Andrew Oringer, an ERISA attorney with Ropes & Gray LLP, New York.

“If you get it (the legislation) wrong, you're embedding the wrong answers, which will then be extremely difficult to fix,” he said.

In a May 21 letter to congressional leaders, the mutual fund industry's Investment Company Institute, Washington, also disagreed with the need for the legislation.

“While the institute expects the DOL rules to entail significant compliance costs for our industry, we support them and believe ensuring that plan sponsors and participants have the information they need to make informed decisions is critically important,” said the letter, signed by Paul Schott Stevens, ICI president and CEO.

“In light of imminent final regulations, legislation is not necessary,” Mr. Stevens said in his letter. “In fact, enacting 401(k) fee provisions in H.R. 4213 will simply delay implementation of disclosure reform because regulators will need to interpret the new provisions and draft proposals to implement them.”

Said Aaron Albright, a spokesman for Mr. Miller, in an e-mail response to questions: “Sounds like the industry's 'excuse du jour' against letting consumers know how much Wall Street is taking from their retirement savings.”

In a May 28 statement, Mr. Miller, chairman of the House Education and Labor Committee, said: “It's beyond time that Americans have basic, clear and timely information on the costs and choices contained in their 401(k) plans. Guaranteeing complete and simple disclosure of fees will help give Americans a fighting chance to strengthen their retirement and increase our nation's future economic security.”

Other key provisions in the bill would provide funding relief to defined benefit plans and require investment partnerships — including hedge funds, real estate partnerships, private equity and venture capital firms — to pay ordinary income tax on carried interest.

The DB funding relief provisions in the bill would allow defined benefit plans to stretch out amortization periods for investment losses for two of the years between 2008 and 2011, over a period of either 15 years or nine years, at the option of the plan sponsor.

Current law requires plans to amortize their investment losses over seven years.

A key provision also would require employers that extend their amortization periods to make additional contributions to their pension funds if they pay employees in excess of $1 million a year, pay out extraordinary dividends to shareholders or redeem in excess of 10% of the market capitalization of their stock.

Carried interest in investment partnerships is currently taxed as a capital gain at 15%.

The legislation would require partnerships to treat 75% of carried interest not due to a return on capital as ordinary income — which is taxed at a rate of up to 35%.