More On Legal & Compliancefrom The Advisor's Professional Library
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
- Best Practices for Working with Senior Investors Securities examiners deal harshly with RIAs that do not fulfill their fiduciary obligations toward senior investors, as the SEC and state securities regulators view older investors as particularly vulnerable and in need of protection.
The Department of Labor’s Employee Benefits Security Administration (EBSA) released Thursday its long-anticipated and groundbreaking final rule on fee disclosures for 401(k) plans.
Phyllis Borzi, Assistant Secretary of Labor for EBSA, said on a conference call with reporters that with the final rule’s release, “participants will be able to understand the dramatic effect that fees play in their overall returns.” Just a 1% difference in fees, she said, can have a dramatic impact on participants’ returns, and therefore their retirement security. This rule gives participants tools so they can comparison shop among investments, she added.
Retirement planning officials were a bit surprised by the early release of the final rules. Borzi anticipated in September that the final rule wouldn’t be out until early next year. Putnam Investments announced Wednesday its plans to offer transparent and comprehensive disclosure of fees and expenses to participants in the 401(k) plans it administered. Borzi noted that while Congress “has the final say” on 401(k) fee disclosure rules, EBSA was “hopeful our friends on the Hill will be happy with these regs.”
She mentioned specifically Sen. Tom Harkin, D-Iowa, chairman of the Health, Education, Labor, and Pensions (HELP) Committee, and Rep. George Miller, D-Calif., chairman of the House Education and Labor Committee, who’ve been “champions” of fee disclosure. Miller’s fee disclosure legislation was part of H.R. 4213, the American Jobs and Closing Tax Loopholes Act, that passed the House on May 28 but stalled in the Senate.
Secretary of Labor Hilda Solis added on the same call that the final rule is a “major break through” that gives workers “better transparency about their retirement investments.” The rule, Solis added, “will help American workers better manage the money they contribute” to their 401(k)s. While workers are responsible for making their own investment decisions in 401(k)s, Solis said, “the law prior to this rule did not guarantee all workers received sufficient information, especially with respect to fees and expenses.”
Solis noted that approximately 72 million workers invest their money in a 401(k)-type retirement plan, and that 401(k)s currently hold nearly $3 trillion in assets. The final rule will become effective on Dec. 19, 2010, and is applicable to all covered plans for plan years beginning on or after November 1, 2011.
In a nutshell, Borzi said, the regulation required the plan administrator “to take steps to make sure that participants and beneficiaries, on a regular and periodic basis, understand their rights and responsibilities with respect to the investment of the assets in their 401(k) accounts.” To do this, she said, participants “have to be provided with sufficient information about the plan itself and the plan’s investment options,” including information about fees and
expenses so they can make informed decisions. Two types of information will be required: information related to the plan itself and information related to the investments in the plan, Borzi said.
Three types of information will be required to be given to participants regarding their employer’s 401(k) plan.
First will be general information—for instance, the structure of the plan, a list of investment options, as well as a description of any “brokerage window.” A brokerage window, Borzi explained, was a mechanism allowing participants to choose investments outside of their plan’s designated options.
Second, participants must be given information about the plan’s administrative expenses—legal and accounting and recordkeeping fees, for instance.
Third, individual expenses information must be provided. “This is an explanation of the fees and expenses that can be charged to, or deducted from, your account as a result of the decision you make,” Borzi said. This information must be given on or before the day a participant makes their investment decision and every year thereafter, she said.
Participants, Borzi continued, must also receive statements quarterly “showing the dollar amount of the plan related fees and expenses, regardless of whether they are administrative or individual fees, as well as a description of the services these fees are associated with.”
As to investment-related information that must be given to participants under the rule, participants must be given performance data (information about how the investments in the plans have performed historically).
Also, “benchmark” information must be given over a one, five, and ten-year period. Next, fees and expenses must be disclosed, including operating expenses. “Not only do participants have to be given a statement about the total operating expenses expressed as a percentage of the assets in the plan, but also as a dollar amount for each $1,000 invested, and any other type of shareholder fees, etc.,” Borzi said. Finally, we will require each one of these disclosures to contain a glossary of terms to define complicated investing terms.