Democrats squabble over fee disclosure

Prospects for legislation enhancing 401(k) plan fee-disclosure requirements remain murky because House and Senate Democrats — along with service providers — are at loggerheads over the issue.

The crux of the debate is whether House legislation that includes fee-disclosure provisions for service providers should be approved. Mutual fund executives want lawmakers to drop the legislation and let the Department of Labor set the new disclosure rules on its own. Some Senate leaders appear to be siding with the mutual fund industry.

But others argue that the legislation is needed to give teeth to any new disclosure regulations — and to ensure that they apply to providers not now subject to DOL oversight authority.

The controversy is largely focused on how best to ensure that providers disclose to plan sponsors enough information on fees and compensation to ensure that plan sponsors can prudently select service providers.

A final Labor Department regulation on the subject had been scheduled to be published by the end of May. A second DOL rule, laying out what fee information plan sponsors should provide to plan participants, is scheduled for publication in September.

“We are strongly supporting the legislation,” said Alison Borland, retirement strategy leader at Hewitt Associates LLC, Lincolnshire, Ill.

“It's not a slam-dunk at all that the regulatory approach is the way to go,” added Ed Ferrigno, vice president of Washington affairs, Profit Sharing/401(k) Council of America, Chicago. The (fee-disclosure legislation) bill has come a long way, and it's a viable alternative to the regulatory approach.”

Mutual fund executives have been slamming the need for fee-disclosure legislation, partly on grounds that it could derail the Department of Labor's own long-pending efforts to set final fee-disclosure regulations for DC plans (Pensions & Investments, May 31).

The legislative forecast is unclear, because a pending jobs bill, approved by the House May 28, includes fee-disclosure provisions. But the Senate's version of the American Jobs and Closing Tax Loopholes Act of 2010 unveiled on June 8 and expected to be voted on as soon as this week,excludes the fee-disclosure provisions.

At deadline, representatives for Senate Finance Committee Chairman Max Baucus, D-Mont., sponsor of the Senate version of the jobs bill, had not returned telephone calls seeking an explanation on why fee disclosure was excluded.

But House Education and Labor Committee Chairman George Miller, D-Calif., a strong proponent of the legislation, vowed to fight to ensure that fee disclosure is included in the compromise jobs bill.

“It is unacceptable for the Senate (to) eliminate this key consumer protection for 50 million Americans who have 401(k) plans,” said Mr. Miller in an e-mail response to questions. “We are going to continue to fight to put back these key reforms in this bill.”

In a May 21 letter to congressional leaders, the mutual fund industry's Investment Company Institute, Washington, explained its opposition.

“In the light of imminent final regulations, legislation is not necessary,” Paul Schott Stevens, ICI president and CEO, wrote. “In fact, enacting 401(k) fee provisions ... will simply delay implementation of disclosure reform because regulators will need to interpret the new provisions and draft proposals to implement them.”

But in an interview, Hewitt's Ms. Borland said legislation was important in part because it would for the first time require non-ERISA 403(b) and 457 plans offered by non-profit organizations and governments to comply with DOL fee disclosure regulations. An ICI research report said that in 2009, 403(b) plans held $682 billion in assets and 457 plans had $169 billion.

Ms. Borland also said the Labor Department lacked authority to compel service providers to provide fee-disclosure information to plan sponsors, so instead would have to try to make the sponsors responsible for getting fee information from the service providers. “The legislation makes service providers responsible for providing the (fee) information,” she said. “Speaking as a service provider, it should be up to us to provide the information.”

In addition, Ms. Borland said Hewitt, which provides unbundled record-keeping services to plans, supports a legislative provision requiring mutual fund companies that offer bundled service packages to break out costs for the services in their packages. “The unbundled transparency most often leads to lower fees because it gives the plan sponsor more negotiating power,” Ms. Borland said.

Added Mr. Ferrigno: “There have always been questions about the ability of DOL to capture (through regulation) some major players who receive plan fees. There's a strong question whether all investment managers, including mutual fund investment managers, would be included in the scope of the DOL's rule.”

The rifts among Democrats and within the industry are expected to force the lawmakers to try to settle their differences behind closed doors.

“It's hard to handicap (the legislation's prospects),” said Andrew Oringer, an ERISA attorney with Ropes & Gray LLP, New York. “It's so political.”

The Senate version of the jobs and tax bill includes provisions approved by the House that would allow defined benefit plan sponsors to stretch 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.

On a separate front, the Senate bill would ease the House-approved increase in taxes that investment partners would have to pay on carried interest.

Under the version of the tax and jobs bill approved by the House on May 28, investment partners would have had to treat 75% of carried interest that is not due to a return on capital as ordinary income — which is taxed at a rate of up to 35%.

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

The Senate version would require investment partners to treat 65% of carried interest not due to a return on capital as ordinary income. Under an exception to the general rule, only 55% of the carried interest attributable to the sale of assets held for seven or more years would have to be treated as ordinary income, according to a summary of the Senate version released by the Senate Finance Committee.

“At first glance, this proposal is clearly moving in the right direction as it relates to the carried-interest provision and seems to begin to recognize a meaningful differential for long-term investment,” Emily Mendell, a spokeswoman for the National Venture Capital Association, Arlington, Va., wrote in an e-mail response to questions. “It is not clear that this is the final Senate proposal, and we are withholding final comment until we are certain that all options have been presented.”

“We're still continuing to work this issue very hard,” Robert Stewart, a spokesman for the Private Equity Council, Washington, said in an interview.