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401k Fee Transparency Push Could Increase Fees, Confusion

WASHINGTON - Many investment industry leaders are worried that the proposed 401(k) fee disclosure regulations currently being pushed through Congress will actually increase the fees investors pay and increase their confusion.

"Regulators feel they need to add nuances to 401(k) fee disclosure, but what's it going to cost the industry to comply?" asked Fred Teufel, a principal of institutional retirement plan services at The Vanguard Group, during the Society of Professional Asset-Managers and Record Keepers' conference titled "Retirement Plans at a Crossroad" held here last week at the Mandarin Oriental Hotel.

"We spend an increasing amount of our budget on regulatory compliance," said Barbara March, executive vice president of workplace investing for defined contribution plan services at Fidelity

Investments. "This reminds me of redemption fees. The cost of complying with the rules was more than anyone would have been hurt by the fees."

Any increase in fee disclosure will be expensive, and those costs will be passed along to investors, she said.

Mutual funds charge fees to pay for administrative costs, investment management fees, transaction costs and other charges, but this fee disclosure is inconsistent, and some information can be difficult for investors to find on their statements without doing some serious digging or having to go through the process of requesting a prospectus, in which the fee table is buried.

Last Wednesday, a House of Representatives subcommittee approved House Resolution 1984, requiring service providers to break down the fees into those four categories, as well as mandate quarterly statements to participants that list contributions, earnings, account balances and all the fees taken out of their accounts. The resolution also includes a provision that requires defined contribution plans to include at least one index fund in their lineup.

The subcommittee also approved separate legislation allowing independent financial advisers to provide investment advice to workers in company retirement plans. Both bills were passed on a 13-8 vote, with all Democrats voting for and all Republicans against.

In general, industry leaders are supportive of fee disclosure, up to a point.

"Investors need clear, concise, actionable disclosure that helps them make choices," said John "Jamie" Kalamarides, senior vice president of retirement solutions at Prudential Retirement. "But where does fee disclosure stop being meaningful and start being a burden and create additional costs? When we start to disclose the cost of fee disclosure?"

401(k) retirement plans and their fees have come under attack in recent months after millions of investors lost a good part of their retirement savings as the global economy plunged into a recession. Investors are angry and are looking for a scapegoat, but industry leaders say this anger is misplaced.

401(k) plans are meant to provide a retirement savings outlet through tax-deferred market diversification, and to that end, they have succeeded. The damage from the global recession was so widespread, however, that diversification didn't work. Everything went down.

The drop in markets and fee transparency are two important issues, but they are not related, said Steve Saxon, a principal at the Washington-based Groom Law Group. The juxtaposition of the two issues in some media reports, such as CBS' "60 Minutes" April 19 story that portrayed 401(k) administrators as greedy, offering subpar choices and hiding fees, can lead uneducated investors to connect the two issues, he said.

"The '60 Minutes' reporter interviewed people with tears coming down their face, and the impression was that if we had just lowered these fees, investors never would have lost that money," Saxon said. "The fact that funds failed to disclose fees has nothing to do with the fact that they lost money."

Representatives George Miller (D-Calif.) and Robert Andrews (D-N.J.) are the co-sponsors of the bills currently working their way through the House, and the men have said the lack of transparency in the 401(k) system is unacceptable.

Republican opponents say the legislation does not improve retirement savings options for workers and instead makes the plans more complicated and limits options to seek investment advice.

Unintended Outcomes

Industry leaders say increased fee transparency is likely to have many unintended outcomes, such as more complicated 401(k) statements, an increase in mutual fund litigation, and a shakeup of investment relationships as fund companies, plan sponsors and participants struggle to understand what they are paying for.

"What action will participants make when they become aware of fees?" March asked. "How will it change their behavior?"

"I think participants will be placed in an information-overload situation," Saxon said. "Participants shouldn't allocate their account balances solely based on fees."

Sometimes the lowest-cost option in a plan isn't the best option, he said, such as investing in company stock. Investors who put 100% of their assets in the company stock are putting themselves and their life savings at risk if something should happen to their company.

Fiduciaries have the responsibility to find out what their fees are paying for, and whether or not they are using the services for which they are being charged. The more expensive plans typically have more features, and plan sponsors that switch providers to save a few bucks may find that they're not getting all the services they need, Kalamarides said.

"We need to create a dialog with plan sponsors about their needs," he said.

Fund companies will need to educate plan sponsors and explain the value of the services they provide, and unbundled fees could help some larger plans eliminate inefficiency and redundancy.

"Hopefully, plan sponsors will come to realize what it costs to service a plan," Teufel said.

Saxon said big class-action law firms have been looking for new cases, and separating fees at the participant level will make it easier for them to sue mutual funds for breach of fiduciary duty.

"Their legal strategy is to throw spaghetti at the ceiling and see if it sticks," Saxon said.

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