A House committee on April 16 voted to approve legislation requiring increased disclosure of fees for 401(k) plans, despite objections that the bill is burdensome and may be impossible for plans to comply with.
The House Education and Labor Committee approved the legislation, which is known as the 401(k) Fair Disclosure for Retirement Security Act, or H.R. 3185, by a vote of 25 to 19.
“For too long, companies in the financial services industry have maintained a stranglehold on retirement savings that they didn’t earn and that don’t belong to them,” said Rep. George Miller, D-Calif., chairman of the committee. “The purpose of this legislation is to take these hard-earned savings away from the special interests and return them to their rightful place-the retirement accounts of American workers. Workers are entitled to clear and complete information about their own savings.”
If enacted, the legislation would require 401(k) service providers and plan administrators to provide disclosure of all fees involved, broken down into 4 categories: administrative fees, investment management fees, transaction fees, and other fees. Other provisions in the bill would require service providers to disclose any financial relationships to avoid conflicts of interest, and plans would be required to offer at least one low-cost index fund to participants.
The desirability of disclosure was acknowledged by the committee’s ranking minority member, Rep. Howard McKeon, R-Calif., but he said the legislation as drafted raised concerns regarding the disclosure requirements, particularly those for “bundled” services. The bill, McKeon noted, would require service providers to disclose the fees related to any single service provided as part of a “bundled” service contract, even if that fee is not available on an individual basis.
“”Providers are, in essence, being asked to fabricate information for the sake of disclosure even when that disclosure has no meaningful purpose,” he said. Later he compared the concept to asking an auto dealer to give pricing for the various components of a car. “You don’t get a price for the engine, the brakes or the gearshift because they are not for sale outside of the car,” he argued.
McKeon’s concerns were echoed in a letter sent by several trade groups, including the American Council of Life Insurers, the Financial Services Roundtable and the Investment Adviser Association, to members of the committee.
“Congress should not require providers to develop artificial numbers, as they are not useful to plan fiduciaries,” the groups argued. “As long as plan fiduciaries can compare the services and total costs of the different options that are available to the plan, they can fulfill their ERISA duties to enter into reasonable service arrangements.” Other groups who signed on to the letter include the Financial Services Forum, the Investment Company Institute and the Securities Industry and Financial Markets Association.
McKeon also expressed concern about the requirement for plans to offer an index fund, saying it could lead to the perception that the federal government has given a “rubber stamp” endorsement to the product among plan participants.
In their letter, the trade groups also noted that no need exists for the proposed index fund mandate.
Federal law “places the obligation to determine plan investments on plan fiduciaries and holds them to strict standards in exercising their judgment,” they said. “There is no evidence that plan fiduciaries are not exercising their obligations properly. As a matter of policy, Congress should not substitute its views for fiduciary judgments.”
Miller argued that he saw the mandate as a means of providing all workers with a benefit already enjoyed by a majority of them, pointing to a 2006 study that found 72% of 401(k) plans already include an index fund option. “Clearly there’s no reason why we can’t make index funds available to all workers, who should be able to choose for themselves whether or not to invest in them,” he said.