From the September 2008 issue of Investment Advisor • Subscribe!

Disclosure Time

Timeline of DOL's proposed rule on 401(k) plan fee disclosure too aggressive

The Department of Labor's (DOL) recently proposed rule on 401(k) plan fee disclosure is being hailed by industry officials as a step in the right direction because it provides straightforward rules for disclosure of defined contribution plan fee information that participants need to invest their retirement dollars appropriately.

However, industry officials say the rule's proposed effective date--the comment period expires September 8 and the effective date is January 2009--is unrealistic, and will be costly to implement in such a short period of time. "The cost of complying [with the proposed rule] by the beginning of next year is going to be outrageous," says Bruce Ashton, a partner with Reish Luftman Reicher & Cohen in Los Angeles, which specializes in employee benefits and ERISA. Jan Jacobson, senior counsel, retirement policy, for the American Benefits Council (ABC) in Washington, says the ABC plans to write a comment letter to Labor asking to delay the effective date until 2010, "or have some sort of reasonable transition period."

DOL's proposed rule requires "the disclosure of certain plan and investment-related information, including fee and expense information, to participants and beneficiaries in participant-directed individual account plans (e.g., 401(k) plans)." The disclosure efforts, Ashton says, are going to fall on recordkeepers, not plan sponsors. "The sponsor is going to have to make sure it happens," but Ashton points out that it will be the recordkeepers who will need to "capture the data and then reprogram to be able to deliver the data," he says, which "is going to be a significant effort." The three-month turnaround time means "the cost is going to be quite significant, much more significant than the department realizes."

Ashton sees other trouble spots in the proposed rule. "The proposal assumes that plans are using mutual funds as the investment vehicle," he says. For "plans that use alternative investments--such as ETFs or collective trusts or other vehicles--just capturing the data is going to be difficult."

Jacobson adds that the DOL in its proposed rule asks for comments on several of its disclosure proposals that would "apply to investments that, in effect, are not subject to SEC regulation." In other words, "many of [DOL's] proposals talk about being able to use a prospectus in some cases,...but not every investment has a prospectus, like collective funds and insurance products, and others don't have the same type of disclosure regimes as mutual funds," she says. So ABC, which has a membership comprising mainly plan sponsors, plans to "go to our service-provider members who have investments that aren't subject to the same disclosure regime and ask them what would work and make suggestions along those lines."

Ashton says he also sees "a bias" favoring bundled providers--those offering proprietary funds as well as recordkeeping--in terms of how the data has to be disclosed. The bias shows up, he says, "in the way the disclosures are required for administrative costs. Basically what the rule says is you have to disclose administrative costs except to the extent that they are covered in the cost of the investment. If you have a bundled recordkeeper that offers proprietary funds and subsidizes its recordkeeping through those funds, it doesn't have to disclose anything with respect to administrative costs." An unbundled recordkeeper, on the other hand, "may have exactly the same cost for participants but it's going to look different because [the participants] are going to see they're paying the investment cost plus something for the recordkeeping." This will potentially lead to "some confusion for the participant, and the assumption on the participant's part, unless they are fairly sophisticated, is that they are going to be paying more in the unbundled environment than the bundled."

Ashton also wonders why the costs of the investments, which are far and away the most significant costs, have to be disclosed annually whereas the administrative cost, "which tends to be 10%, if that, of the total cost to the participant, has to be disclosed in more detail on a quarterly basis. It seems backwards."


Washington Bureau Chief Melanie Waddell can be reached at mwaddell@investmentadvisor.com.
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