TOWSON, Md. -- Black & Decker Corp. has quietly emerged as a trailblazer in disclosing 401(k) plan fees to participants.
The disclosure issue has received national attention through Labor Department scrutiny -- including hearings last month in Washington -- and a barrage of media coverage. Several industry sources believe the hearings are the first step toward modifying the Employee Retirement Income Security Act to require employers to provide participants easier-to-understand information about the costs of operating a plan.
Most big employers claim they already provide cost information to participants. But they do so mainly through formal plan documents or fund prospectuses that few participants read thoroughly.
What makes Black & Decker's nearly $300 million plan a model, however, is the way it meets the fee issue head-on.
Unlike most 401(k) plans, Black & Decker has incorporated fee disclosure into its investment education and participant communication materials.
Fees are itemized on account balance statements participants receive quarterly, and show how much each participant is being assessed.
A section in a colorful brochure that's part of B&D's initial participant education materials is titled "Who Pays Plan Costs?" and guides participants through the entire cost issue.
The company tells participants their statements (from T. Rowe Price Associates Inc.) will "show exactly how much you are being charged to run this plan."
The Black & Decker materials explain fees for record keeping, communications and legal and regulatory compliance. In addition, the brochure tells participants administrative fees are deducted from account balances based on a percentage of assets. It also provides a sample account showing how the fee is calculated and then how much is charged in fees for a particular account balance.
'Incredibly well done'
B&D's candor is refreshing and amazingly rare, according to Adele Heller, defined contribution consultant at RogersCasey, Darien, Conn.
"It is incredibly well done," she said of the B&D expense commentary. "It is uncommon and terrific. We've not seen that level of disclosure and my guess is that the plan sponsor had a lot to do with it."
Patricia Haverland, pension and investment director at Black & Decker, said the material was prepared in 1996, when the firm switched to T. Rowe Price as its bundled service provider. She said it was Black & Decker executives' idea to include the information in the participant materials.
"We wanted to make it clear what was happening and what fees were involved, since they were going to be shown on account balance statements," she said. "We also discussed the issue in employee meetings and we plan to continue to include it in all future participant materials."
Other larger plan sponsors disclose some fees on participant statements, typically when participants -- rather than employers -- pay the fees.
According to the Access Research division of the Spectrem Group, Windsor, Conn., 24% of all plans charge participants all administrative expenses, a dramatic increase from 10% in 1995. Administrative expenses include record keeping, investment education, accounting and trustee services.
Fees seem hidden
There generally are two sets of fees in 401(k) plans -- administrative and investment management. Administrative costs generally are spelled out in plan documents. If the employer passes administrative fees through to the participant, it usually is shown on the account statement as a separate line item, according to consultants. Information on investment management fees, which generally are paid by participants, is contained in prospectuses.
The problem is that because fee and expense information appears in several places and is not usually presented in layman's terms, it is viewed as inaccessible or hidden.
"The information is generally disclosed," said William A. Schneider, managing director, DiMeo Schneider & Associates, Chicago. "It's there if someone wants to search hard enough for it."
One possible solution to the fee disclosure problem was recommended by Vanguard Group executives at the Department of Labor hearings.
Vanguard's fee disclosure form
William McNabb, managing director-institutional investment group at Vanguard, Valley Forge, Pa., presented during his testimony a sample fee disclosure form that would make reporting of "all-in" 401(k) fees and costs uniform and straightforward.
The disclosure proposed by Mr. McNabb would include all direct and indirect expense information associated with the plan, including administrative and investment management costs.
The disclosure form recommended by Vanguard would pull all investment management and administrative fees together in one place, resulting in a single expense ratio based on the individual plan.
Vanguard already provides "all-in" fee information for its clients, Mr. McNabb said.
But even though the information is available, most plans still provide the information in traditional summary plan documents and prospectuses.
"We feel that this type of plan fee disclosure form is the type of disclosure which plan sponsors should receive on an annual basis in order to accurately assess the reasonableness of fees being charged with respect to the plan," said Mr. McNabb.
One Vanguard client is the $1.6 billion 401(k) plan of Science Applications International Corp., San Diego. Matt Tobriner, senior vice president and retirement plan chairman, said the clear expense disclosure is one reason SAIC uses Vanguard.
"Vanguard makes its reputation on being a low-cost provider and brings effective disclosure to the market," said Mr. Tobriner. Administrative fees for the SAIC plan are "very low," he said, and are disclosed in the summary plan document and investment fees in fund prospectuses.
Mr. Tobriner said he's "all in favor of disclosure .*.*. Additional disclosure is always important.
"You need to know what it costs the average participant and how it affects their investment return. That is the question plan sponsors should automatically be asking when they shop for plan services."
Not a problem, others say
Other plan executives don't see fee disclosure as a problem needing fixing.
Disclosure "is not an issue for IBM," said Don Sauvigne, program director-capital accumulation and retirement programs at IBM Corp., Stamford, Conn. "Is it an event requiring aggressive new rules and correction? I suggest not."
Mr. Sauvigne said IBM's total cost of managing its $14 billion 401(k) plan averages between nine and 11 basis points, including record keeping, investment management and trustee expenses. The industry average is more than 100 basis points. He said plan expenses are disclosed in the firm's summary plan document.
Mr. Sauvigne acknowledged some plan sponsors and service providers might not disclose fees because their expenses are high. "But to allow that to contaminate the 95% who manage funds in an effective and efficient manner would be an injustice to participants and plan sponsors."
He noted one point lost in the fee debate is that "most employers are providing handsome matching amounts to participants. *.*. .If the standard match is 3% of pay, that's 300 basis points for each dollar the participant puts in. Let's not lose sight of the entire forest in presenting the plan by focusing just on the fee issue."
