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Money managers may have to give retirement plan members more information about recordkeeping fees, compliance costs and other plan costs.

Experts familiar with 401(k) plans and other retirement savings and profit-sharing plans talked about the need for tougher cost disclosure rules at a meeting of the Employee Retirement Income Security Act Advisory Council.

The council gives the Secretary of Labor advice about how to apply ERISA, the federal law that governs many private, single-company U.S. retirement plans.

Bruce Ashton, a Los Angeles actuary who represented the American Society of Pension Actuaries, Arlington, Va., stressed the importance of giving plan sponsors and participants comprehensive information about plan costs.

“Every dollar that goes toward expenses and not into a plans investment options potentially represents thousands of dollars in lost retirement benefits,” Ashton said, according to a written version of his remarks. “Over a 25-year period, a participant account that bears expenses of 0.5% would accumulate 28% more in retirement income than a similar plan bearing 1.5%.”

ASPA is recommending that plan administrators give participants a list each year of any fees directly related to the investment options chosen, Ashton said.

ASPA also is recommending that the retirement plan participant statement disclose any indirect costs, such as wrap fees, compliance costs or administration fees.

If a participant statement cannot give account-specific cost figures, it should provide aggregate figures for the entire plan, Ashton said.

ERISA Section 404(c) and the regulations that implement the section already require retirement plans to disclose some cost information in their summary annual reports and summary plan descriptions, but participants ought to get a fuller accounting of the plans costs that they pay out of their own pockets, Ashton argued.

One of the biggest money managers, The Vanguard Group, Valley Forge, Pa., submitted written comments arguing that the Labor Department should take an even tougher approach to plan cost reporting requirements.

Dennis Simmons, a Vanguard lawyer, and Stephen Utkus, head of Vanguards retirement research center, are calling for plan statements to use an “all-in fee expense ratio” that includes all direct and indirect plan costs, including service fees as well as asset-based charges.

To help plan sponsors interpret the ratios, money managers also should give plan sponsors reports comparing plans investment-related fees with typical industry figures for other investments in similar asset classes, the executives write.

Like ASPA, Vanguard is calling for the Labor Department to amend the ERISA Section 404(c) regulation to require disclosure of plan cost information to all participants. Today, the section merely requires plans to make the information available on request.

The Labor Department “should require that such disclosure be provided to participants on an annual basis after initial investment,” Simmons and Utkus write.

Simmons and Utkus include rebates, subsidies and revenue-sharing paid to third parties as examples of indirect plan costs that ought to be included in “all-in fee” calculations.

Edward Ferrigno, vice president of the Profit Sharing/401k Council of America, Chicago, agreed on the importance of disclosure of cost information to plan sponsors and participants. He pointed out that one way to improve disclosure would be to improve Form 5500, the benefit plan tax form. But he recommended letting market pressure take care of expanding disclosures to plan participants.

Disclosures to plan sponsors are more important because “ERISA reduces the risk of improper fees being inflicted on plan participants by imposing a fiduciary requirement on plan sponsors to ensure that any fees paid with plan assets are reasonable,” Ferrigno said, according to an advance version of his testimony. “This oversight requirement is in addition to the regulation of fees by other agencies, such as the Securities and Exchange Commission. As a result, employer plan participants have less need for detailed fee disclosure than other investors.”

Many plan sponsors voluntarily offer more fee disclosure than the statutes require, Ferrigno said.

Ferrignos group wants to improve the information included in a mutual fund prospectus by requiring that additional expenses now reported in a funds Statement of Additional Information be included in the prospectus. Today, mutual fund brokerage fees are normally not included in the expense ratio, but they are reported in the SAI, which is available upon request but not provided automatically.

Mandatory fee disclosure to plan participants can produce unintended consequences, Ferrigno said. In some cases, higher fees for stocks could lead investors who should own stock to shy away from stocks, he added.

Ashton argued that requiring plans to give each participant an accounting of the actual dollar value of the fees paid by each participant would be expensive and burdensome enough to scare some businesses away from offering retirement plans.

In related news, Ashton talked about what he says is a weakness in group annuity communications: Reporting of the net performance of the separate accounts within group retirement annuity contracts. “We would encourage rules promoting consistency in reporting the net performance of the separate accounts,” Ashton said. “In our experience, there is currently disparity in how investment returns within separate accounts are communicated to participants.”


Reproduced from National Underwriter Edition, September 23, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.