"The 401(k) Fair Disclosure for Retirement Security Act" (H.R. 3185), introduced in the House by Rep. George Miller (D-Calif.), would require administrators of 401(k)-type defined contribution plans to notify plan participants of fees for specified types of plan services, and for 401(k) service providers to describe plan fees broken down by cost component (that is, unbundled"), even if these services are packaged under a single price or several broad categories of prices.
But in hearings held Oct. 4, 2007, before the House Education and Labor Committee, groups representing plan sponsors and service providers maintained that the very fees for which greater disclosure would be required will be driven higher should the bill become law, especially for small and mid-size plans, to cover the increased administrative burden and associated costs.
For example, the bill requires a "service disclosure statement" that must minimally include:
The bill's fee disclosure requirements are not only costly, but unlikely to provide meaningful information, argued Lew Minsky, a senior attorney for the Florida Power and Light Co., speaking on behalf of the Society for Human Resource Management, the ERISA Industry Committee, the National Association of Manufacturers, the United States Chamber of Commerce and the Profit Sharing/401k Council of America (his full testimony is here. )
Indeed, the criticism levied against many of ERISA's [the Employee Retirement Income Security Act] current disclosure documents is that they are too long, overwrought with complexity, and therefore rarely, if ever, read, Minsky said.
He added that plan sponsors and service providers are committed to creating new investment options and administrative techniques to improve retirement security, and that automatic enrollment, automatic contribution step-ups, target-date and lifecycle funds, and managed accounts are just some of the numerous innovations that have benefited 401(k) participants and enhanced their retirement security.
But over-regulation could stifle such innovations, Minsky cautioned, and statutory requirements for fee disclosure would freeze disclosure in the present, making enhancements and innovations more difficult in the future.
He advocated, instead, for a simpler fee disclosure statement that participants would not only read but also would readily understand in order to make the choices that are laid before them.
Minsky urged that the Department of Labor (DOL) be given a chance to complete its work on fee disclosure before Congress proceeds with new legislation. We strongly believe that the additional flexibility inherent in the regulatory system makes the Department of Labor initiatives the appropriate vehicle for new disclosure requirements. Any new legislative requirements would likely only delay those efforts, resulting in delayed reforms, he said.
Concluding his testimony, Minsky warned, If the committee proceeds with H.R. 3185, we recommend a comprehensive rewrite that ensures a more streamlined regime. Any other result could jeopardize the future of the defined contribution systemsimilar to what has happened to the over-regulated defined benefit systemat a time when retirement security is critical for American workers."
In his testimony before the committee, Bradford P. Campbell, assistant secretary of labor for employee benefits security, expressed his concern that the disclosures to workers in pending legislation would not provide concise, useful fee information. He discussed DOL regulatory projects to improve fee disclosure to plan participants, to enhance reporting of fees and expenses to the public, and to increase disclosure to plan fiduciaries by service providers, and he urged that legislative action not be taken until these regulatory projects are complete.
Ensuring participants and fiduciaries have the information they need to make informed decisions is a top priority for the Labor Department, Campbell said. We will continue to implement regulations fostering fair, competitive and transparent prices for services and combating excessive or hidden plan fees.
Bundled vs. Unbundled
Written testimony for the record submitted by the American Benefits Council, a trade group, also expressed concern that H.R. 3185 might unintentionally hurt plan participants by overburdening plan administrators and increasing the costs of plan sponsorship. Plan sponsors could react by reducing benefits and possibly even eliminating or failing to adopt plans; plan participants would simply receive smaller benefits, the council warned.
On the contentious issue of bundled pricing, the council argued that plan fiduciaries can reasonably make the decision whether to purchase services on a bundled or unbundled basis. Some fiduciaries believe, for example, that bundling provides economies of scale and facilitates efficient shopping for service providers, especially with respect to plans maintained by small employers. In some circumstances, it may be easier and more efficient to compare service providers that provide bundled services than to construct a full array of plan services from multiple vendors and to try to compare services from such vendors that are significantly different in scope, the council maintained.
Senate's Companion Bill
In the upper chamber, Sen. Herb Kohl (D-Wis.) and Sen. Tom Harkin (D-Iowa) introduced their version of the bill, called "The Defined Contribution Fee Disclosure Act of 2007," following hearings held on Oct. 24 before the U.S. Senate Special Committee on Aging, which Kohl chairs. The legislation's aim, according to its sponsors, is to require complete transparency of 401(k) fees to both employers and participants.
During the hearings, Kohl called for 401(k) fees to be expressed as "a single figure that the average person could understand." But Robert Chambers, testifying on behalf of the American Benefits Council, said a one-number fee would be hard to deliver and would not be a comparative value for plan participants (see the council's position statement , "401(K) Fee Disclosure Can Be Enhanced but Reforms Must Be Measured and Not Deter Plan Sponsorship and Participation").
Stephen Miller is manager of SHRM Online's Compensation & Benefits Focus Area .
Excessive 401(k) Fees Fought, SHRM Online Workplace Law Focus Area, April 24, 2007
GAO Calls for Major Changes in 401(k) Fee Disclosure , SHRM Online Compensation & Benefits Focus Area, December 2006
Disclosing Retirement Plan Fees: Strive for Transparency , SHRM Online Compensation & Benefits Focus Area, November 2006