DOL fee-disclosure guide upsetting DC record keepers

Members of the defined contribution industry have had three months to try to digest a Department of Labor proposed rule on fee disclosure, and many of them are choking on it.

The object of their distress is a recommendation that service providers create a fee-disclosure guide for DC plan clients. The guide would identify the pages and/or sections in plan documents “that enables the responsible plan fiduciary to quickly and easily find the specified information,” a summary of the DOL proposal said.

Some critics say this is a one-size-fits-all proposal that will mean extra cost and administrative work — but not extra value. Others criticize the Labor Department's rule-making process, arguing the DOL lacks sufficient data to justify the proposed regulation, which amends fee-disclosure rules that took effect in mid-2012 under Section 408(b)(2) of the Employee Retirement Security Act.

“We are concerned that the proposal is premature,” said Michael Hadley, a Washington-based partner at law firm Davis & Harman LLP, who represents the SPARK Institute, a trade group whose members include record keepers, mutual fund companies, brokerage firms and consultants.

SPARK wants the DOL to withdraw its proposal, maintaining the department has underestimated the proposed rule's cost to service providers and, ultimately, DC plans. SPARK says the guide would yield less information than the fee-disclosure summaries now offered by many providers. “The department needs to take another look to see if this is necessary,” said Mr. Hadley, whose organization argues that the proposed guide would discourage service providers from offering summaries. “We believe the cost outweighs the benefits.”

The Plan Sponsor Council of America did a quick survey of its members, getting 50 responses that were “all over the board as to whether this (proposed rule) is necessary,” said Rosemary Becchi, a Washington-based partner at law firm McGuireWoods LLP, which represents the PSCA.

Acknowledging that the sample size is small, Ms. Becchi said the diversity of responses shows “there is no clear consensus as to what is needed, if anything.”

Existing rules allow some flexibility in presenting information, but the DOL proposal will reduce flexibility without improving simplicity, said Roberta Ufford, a principal at Washington-based Groom Law Group. “A lot of clients put this information into their service agreements,” Ms. Ufford said. “Why wouldn't this be sufficient?”

One theme among critics is that the Labor Department is essentially proceeding backward in its rule-making process. They point out that the department conducted focus groups among small DC plans — those with fewer than 100 participants — concurrently with its seeking public comment about the proposed rule.

Because the 90-day public comment period ended June 10, trade groups say they haven't seen the results of the focus groups — the DOL hasn't made them public — so they lacked some information to prepare their comments.

“The department should do an RFI (request for information) to see if a guide is needed, and how it should be structured,” said Jan Jacobson, senior counsel for retirement policy at the American Benefits Council, Washington, which represents large corporations and other organizations. “Our large plan sponsors seem to like what they're getting now” in terms of fee disclosure information.

Ms. Jacobson said the DOL should include large employers in the focus groups. “The department should first conduct the focus groups before proposing the regulation,” said Ms. Jacobson, adding that her members believe the proposal will raise costs.

The ERISA Industry Committee, Washington, takes the big plan-small plan issue one step further by recommending that “very large plans” — those with 5,000 or more participants or at least $100 million in assets — should be exempt from the proposal.

“Very large plans should be treated differently from small and midsized plans for purposes of any guide requirement,” said a public comment document filed June 10 by the trade group.

“ERIC agrees that small- and medium-sized plans, unlike very large plans, are likely to benefit from the guide,” said the document, written by Kathryn Ricard, senior vice president of retirement policy. “ERIC urges the DOL to recognize that it can treat very large plans differently in the context of the proposed amendment as it has for other purposes.”

However, having fee-disclosure guide rules for different sized plans “would be troublesome,” said Craig Hoffman, general counsel for the American Society of Pension Professionals & Actuaries and the Council of Independent 401(k) Recordkeepers, both based in Arlington, Va.

Mr. Hoffman joined the chorus of critics objecting to the DOL's conducting focus groups but not having the results available for DC-industry review. “If the focus groups say there's no problem, why have a regulation? The results of what they're finding would be helpful to us.”

Attorney Bradford Campbell said the DOL has collected some data on plans' experience with fee disclosure since the regulation took effect in mid-2012. “I'd like to see the department's data on their review of disclosure documents,” said Mr. Campbell, a Washington-based counsel at Drinker Biddle & Reath LLP and a former DOL assistant secretary for the Employee Benefits Security Administration.

The Labor Department's proposal has too many ambiguities, said Mr. Campbell, whose clients include DC plans and record keepers. The DOL, he added, should review the public comments and then reissue a proposed rule.

Some major record keepers say the DOL proposal would create unnecessary expense and complexity. Although record keepers can create similar plans and documents for small employers, large-plan documents are unique to specific employers, they say. Lacking the ability to create identical guides for multiple clients, record keepers would have to prepare the DOL-recommended guides manually, critics say.

Vanguard Group Inc., Malvern, Pa., “has significant concerns about the technological feasibility of meeting the requirements of the proposed rule at a reasonable cost,” said a June 10 letter to the DOL from Christopher McIsaac, managing director of the institutional investor group.

Vanguard's research, manual preparation of documents for existing contracts and effort to build a “technology solution” for new-client contracts would cost about $4.75 million. “This effort would require thousands of hours from multiple internal teams to complete,” Mr. McIsaac wrote.

Great-West Retirement Services, Greenwood Village, Colo., also is worried about the cost, President Charles Nelson said in a June 10 letter to the DOL. “Based on our initial assessment, the cost to implement the guide proposal would be similar to the cost we incurred to implement the initial 408(b)(2) disclosure rule” in 2012, Mr. Nelson wrote.

For record keepers like Great-West with a diverse group of clients, creating the guide as suggested by the DOL “would be an extraordinarily daunting task,” Mr. Nelson wrote. Given the “size, complexity and customization” of Great-West's many DC clients, “there is no readily discernible way to build a guide for all these different types of plans that would satisfy the guide requirements,” he added.