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Regulators target 401(k) plan fees

Regulators target 401(k) plan fees

Sponsors of 401(k) plans can expect additional disclosure and reporting requirements for plan-related charges as a result of close scrutiny the issue is receiving from regulators, lawmakers and plaintiff attorneys.

The latest development in the area came last week, when the U.S. Department of Labor's Employee Benefits Security Administration began seeking input about how to improve information provided to 401(k) participants about the administrative fees and expenses assessed on their accounts.

There are pre-emptive steps employers can take to avoid liability in this area, including determining the fees charged, communicating fees clearly to plan participants and periodically reviewing the fee structure of their plans, say observers.

Investment and record-keeping charges account for most 401(k) plan fees, said Barbara D. Bovbjerg, director, education, workforce, and income security issues at the Government Accountability Office, during testimony last month before the House Education and Labor Committee.

Whether and how participants or plan sponsors pay the fees vary by the type of fee and the size of the plan, said Ms. Bovbjerg's in her prepared testimony. In November, the GAO recommended that additional fee disclosure be required.

In her testimony, Ms. Bovbjerg noted that charging just one additional percentage point in fees could reduce a participant's 401(k) plan balance by about 17% over a 20-year period (see chart).

If a high-cost fund generates a 10% return while a low-cost fund returns 6%, plan participants will be glad to pay the higher fee, but the concern is that plan fiduciaries "haven't been sufficiently minding the store to keep track of where the expenses are" and participants have not been sufficiently informed, said Brian Snarr, a benefits attorney with Morris & Cohen L.L.P. in New York.

The American Benefits Council, whose members include major corporations, supports enhanced disclosure, said Jan Jacobson, its director of retirement policy in Washington.

"Currently a lot of the information is available to participants, but in various places like the prospectus," and many participants "aren't likely to pull all this information together," she said.

Aside from the GAO and Labor Department, the issue has attracted the attention of the Securities and Exchange Commission, Congress and the plaintiffs' bar.

The Labor Department last week published a "request for information" in the Federal Register seeking input on how to improve information provided to 401(k) participants about the administrative fees and expenses charged to their plans.

The RFI asks respondents to address what administrative expense and fee information they want, how it should be provided and who should provide it.

The RFI said the responses will be used to help the Labor Department determine the extent to which rules should be developed or modified, "recognizing that in many instances participants may have to bear the cost of disclosing such information."

The Labor Department already has two other initiatives under way.

Last July, the department published proposed changes to the Internal Revenue Service Form 5500 annual report submitted by employers. The revisions are intended to improve transparency of plan-related fees and expenses.

The revised Form 5500 report "in itself will dispel a lot of the concern about fees," said David Wray, president of the Profit Sharing/401(k) Council of America in Chicago. "At that point, a lot of this will go away."

Furthermore, the department plans to seek a regulation that would require service providers to disclose direct and indirect compensation, fee and other financial arrangements to plan fiduciaries.

In addition, Securities and Exchange Commissioner Christopher Cox said in a speech this month that the SEC is examining the adequacy of investor disclosure by mutual funds and other investment vehicles in 401(k) plans.

On the congressional front, Rep. George Miller, D-Calif., has held one hearing on 401(k) fees and is considering holding another hearing, a spokesman said.

"Mr. Miller has indicated that he probably will propose legislation, but I don't think that's going to be done very quickly because I understand he wants to have a couple more hearings," Ms. Jacobson said. "We would really prefer to see what the DOL comes out with on their proposals before going the legislative route," but it is likely both will happen at the same time.

On the litigation front, lawsuits have been filed alleging that major plan sponsors inadequately monitored or allowed excessive 401(k) plan fees. More litigation is expected, say observers (see story).

The issue "deserves more scrutiny, but that doesn't mean there's some scandal here because there's not," Mr. Wray said.

Anne Waidmann, manager at PricewaterhouseCoopers' Human Resource Services in Washington, characterized the issue as a "tempest in a teapot. While plan sponsors want the best for their employees, it does not "make a whole lot of difference to employees."

"You know how much disclosure you get about everything, and does it make a big difference?" Ms. Waidmann asked. "It's a market-based system, so you're going to pay the fees that everyone else is charging for similar things."

She said a concern is that publicity over the fees issue will leave workers less inclined to participate in their companies' 401(k) plans, "which would be unfortunate."

Ultimately, said Alan Vorchheimer, a principal with Buck Consultants L.L.C. in New York, all the scrutiny will result in changes.

"There's going to be a lot more disclosure" that will be voluntary by plan providers and sponsors and mandatory by government agencies, Mr. Vorchheimer said. "We're already seeing changes and I think we're going to be seeing more."