Industry experts are divided on the Labor Department's latest proposed regulations for clarity on fees charged to defined contribution plan sponsors.
But one thing most experts agree on: The July 2011 effective date will have to be extended if DOL makes significant revisions or additions based on public comments that were filed following the issuance of the revised proposal in July.
The July proposals, which the DOL calls interim final regulations, were a response to the howls of protest after the department issued recommendations in late 2007 that required service providers to offer more details and explanations to DC sponsors.
The latest effort to amend Section 408(b)(2) of ERISA was met by DC industry representatives with a mixture of relief that some original proposals had been dropped and disappointment that the revision didn't go far enough.
“This is a huge improvement” over the original proposal, Jennifer Eller, a principal in The Groom Law Group, Washington, said in an interview.
But some of the proposals — such as a debate over requiring summary disclosure documents — still are drawing sharp comments, on both sides of the argument.
The DOL wanted public comments to focus on several issues – such as summaries, the role of electronic distribution and the dollar amount of contracts covered by the rule. However, DOL allowed comments on any of its proposals, and respondents fired at multiple targets including rules affecting brokerage windows and updates about changes in fee schedules.
Still, the latest DOL effort is distinguished by what's out as well as what's in. The two major removals were a requirement of a written contract describing disclosure obligations even though disclosures must still be made in writing and a requirement of what DOL called “specific narrative conflict of interest disclosure provisions,”
Ms. Eller lauded removing the conflict-of-interest language, saying “it would be pretty impossible to do.” she said.
The formal-contract requirement “would have been very time consuming,” said Ann Combs, principal in charge of strategic consulting and government relations for Vanguard Group, Malvern, Pa. “It's a matter of pure administration.”
However, the DOL couldn't please everyone, even those who agreed with some of the changes.
“Half a loaf is better than none at all,” Ed Ferrigno, vice president for Washington affairs at the Profit Sharing/401k Council of America, told the audience last month at the PSCA's annual meeting at Amelia Island, Fla. “Will sponsors get all that they need to meet their fiduciary duties? No.”
In an interview, Mr. Ferrigno said proper fee disclosure would be better addressed through legislation than through amended regulation. “Legislation is much cleaner,” he said. “It doesn't create additional liabilities for sponsors, which is what this rule does.”
Providers disagree. “Legislation isn't necessary in light of the work the DOL has already completed …, since regulators would essentially have to start over in order to interpret new proposals,” Douglas Kant, deputy general counsel of Fidelity Investments, Boston, said in an e-mail response to questions.
Ms. Combs, who served as assistant U.S. Secretary of Labor for the Employee Benefits Security Administration from 2001 to 2006, said the DOL “recognizes the nuances” of fee disclosure. “They need to let the dust settle (with the proposed regulations) to see if further changes are necessary,” she said.
Judging from interviewees' remarks and formal written comments to DOL, many prominent players in the DC world believe the DOL's July 2011 effective date might need to be pushed back another six to 12 months.
“This is not a simple transition, and we don't know what the final rules will be,” David Wray, president of the PSCA, said in an interview, expressing concern if “substantive changes” are made in the proposals. “We need to make sure all of the unintended consequences will be resolved.”
One potential source of delay in implementation is whether service providers should offer a summary disclosure document for plan fiduciaries. This idea isn't part of the proposed rule; the DOL mentioned it in a preamble to publishing the proposed rules in the Federal Register.
“There's no requirement for a summary, and we believe that (the absence of a requirement) was a mistake,” Brian Graff, executive director and CEO of the American Society of Pension Professionals & Actuaries, Arlington, Va., said. “You can't just hand small-business owners a pile of prospectuses and insurance contracts. As an industry, we can do better.”
Revising the DOL rule to require a summary document has split the provider community. The DOL should “require the record-keeping platform provider to consolidate the investment-related fees in a summary form,” wrote R. Gregory Barton, managing director of Vanguard's institutional investor group in an Aug. 30 comment letter.
The DOL also should require bundled service providers and record keepers “to calculate and provide plan sponsors a plan expense ratio reflecting the combined cost of the record-keeping and investment-related fees,” he wrote. That would help plan executives “view all of their plan fees in the right context,” Mr. Barton added.
But John Papadopulos, president of Wells Fargo Retirement, Charlotte, N.C., said in an Aug. 30 comment letter, “Giving a summary disclosure in addition to a full disclosure to the same fiduciary will require service providers to provide duplicative information….Given the importance of evaluating the cost of services, Wells Fargo believes fiduciaries should be reviewing full disclosure instead of relying on summaries.”
Although some sponsors might find a summary useful, a DOL-ordered summary could “greatly complicate and increase the cost of compliance efforts already under way,” Fidelity's Mr. Kant wrote in an Aug. 30 comment letter. If the DOL mandates a summary, it shouldn't require a specific format or wording, and the requirement should take effect one year after being published in the Federal Register, he added.
Another DOL proposal provoking some sharp comments is the requirement that service providers disclose changes in fee information “as soon as practicable,” but generally not later than 60 days after the providers learn of the changes.
This proposal could conflict with Securities and Exchange rules that mutual funds must file updated prospectuses with the agency within 120 days of the close of their fiscal years, wrote Mary Podesta, senior counsel for pension regulation at the Investment Company Institute, Washington. Plus many mutual funds' fiscal years aren't based on calendar years, she added in the ICI's Aug. 30 comment letter.
“It appears that a change of a single basis point could trigger an obligation on the part of a broker to provide an update,” she wrote. “If plan fiduciaries continue to receive notices that one or another designated investment alternatives has updated an expense ratio, fiduciaries may begin to ignore these notices.”
The ICI recommended allowing a record keeper or broker to provide an update at least once a year on all investment alternatives.
The Spark Institute Inc., Washington, warned the 60-day update rule would lead to “a constant flow of relatively insignificant information,” wrote Larry Goldbrum. Spark's general counsel, in an Aug. 30 comment letter to the DOL. And that could cause plan managers “to overlook or miss other more important disclosures.”
He said DOL should allow service providers to send to sponsors a summary notice — rather than a prospectus — about current fees for affected funds.
The DOL's proposal affecting self-directed brokerage windows, which have been gaining popularity among defined-contribution plans, could be confusing, according to some DC experts, including ICI and the American Benefits Council, Washington.
The council noted, in its Aug. 26 comment letter, that brokerage windows are not considered investment options under the DOL proposal. That means a record keeper doesn't have to provide disclosure information “related to investments purchased through the window,” wrote Jan Jacobson, senior counsel for retirement policy.
However, the brokerage-window's broker “is a covered service provider if the broker reasonably expects to receive indirect compensation,” Ms. Jacobson wrote. So, the broker must disclose all direct and indirect compensation related to services purchased through the brokerage window, she added.
Ms. Jacobson recommended “more explicit guidance” on brokerage windows that would offer “meaningful information” without “overburdening plan fiduciaries with voluminous fund disclosures.”