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November 10, 2004

Summary of Testimony Received by the Working Group on Fee And Related Disclosures to Participants

Summary of Testimony of Louis Campagna

Section 404(c) is the starting point for ERISA fee and related disclosure requirements for defined contribution plans. To come within the protections of 404 (c), participants must have investment control and must have information sufficient to enable them to make informed investment decisions. To accomplish this goal, there are information disclosure requirements. Some are automatic and some are upon request (or the plan sponsor can go ahead and provide some or all of the materials that are available upon request).

Automatic disclosure includes information fundamental to all participants. The requirements are intended to be flexible enough to respond to different plan designs and numbers of participants. The requirements should not be a burden. Automatic disclosure requirements include: with respect to investments, description of investment alternatives and their investment objectives, risk-return characteristics, the nature of assets, identification of fund managers, how to give investment instructions and any limits on those (e.g., transfer restrictions); with respect to fees and related items, fees, commissions, sales loads and deferred sales charges, exchange fees, and redemption fees must be disclosed (generally transaction related fees). The disclosures can be part of a prospectus; they needn’t be in a separate document. The prospectus can be given either immediately before or immediately after the first investment in a plan investment alternative. In September, 2003, the DOL issued an Advisory Opinion ruling that a mutual fund profile prospectus, as defined by the SEC, could be used instead of a prospectus. A profile is a summary of the prospectus – shorter, clearer, simple and easier to understand. He said that the profile prospectus was “designed for participants and it should be helpful in this regard with respect to disclosure information to the participants.” Nonetheless, if the full prospectus was the most recent prospectus available to the plan then that still had to be used to satisfy the requirement.

Plans that charge brokerage fees, or charge for loans or other investment instructions, must provide periodic information regarding these fees.

On request information includes for each investment alternative the latest information on annual operating expenses that reduce the rate of return (e.g., management fees), the average amount, information on past and current performance net of expenses on a reasonable and consistent basis, and the value of shares. Only information and documents the plan already has need to be provided, and the plan can limit the number of times and frequency of such requests.

For non-404(c) plans, only general disclosures are required – SPD, summary annual reports. Communications need not mirror 404(c) communications.

In choosing the funds menu, the plan fiduciary needs to examine the fees, which must be at a reasonable level given the services and their quality. In the 1997 Advisory Opinion (the “Frost Opinion”), it was stated that compensation to a service provider needs to be reasonable taking into account services provided as well as other compensation the service provider receives such as from asset fees.

In 2002, the “Electronic Communication Regulation” addressed getting information to plan participants via electronic means and provides a safe harbor to use electronic media where participants have electronic access at work or beyond. In 2004, the DOL updated its booklet on fees of which to be aware. Also, there is a worksheet on the DOL web site for 401k plans to use for comparison shopping for mutual funds.

During questioning, Mr. Campagna noted the plan fiduciary can make someone else the agent for the delivery of information. Investment fees are not required to be displayed in any particular way to facilitate comparison among investment choices, other than as a percentage of assets. The comparison of fees among potential vendors is part of the plan fiduciary’s role in choosing the investment menu. He also noted that there is no requirement to vary the communication to adapt to the literacy level of participants.

Summary of Testimony of Mercer Bullard

Professor Bullard testified that ERISA was never set up as an investment statute. This committee is in a good position to consider the basis for government intervention in this area and the economics of government intervention. He believes there is a role for government intervention in this area.

Excessive fees are one area where government intervention can be justified. The SEC has the authority to bring cases on excessive fees but never has done so. Nor does Professor Bullard believe the DOL has ever brought such a case.

Another justification for government intervention is that investors are not very efficient at finding and using the information they need. Required fee disclosure would promote competition. The mutual fund industry is a good example of the effectiveness of competition – the fee table is the reason for this. Fees have dropped in recent years and Professor Bullard attributes the drop to disclosure. In the end, this disclosure enhances personal freedom.

Therefore, this working group should ask the following specific questions that neither Congress nor the SEC asks.

  1. How are 401k participants’ investments performing?
  2. Do they pay more in fees than other investors pay?

Professor Bullard speculates that participants do pay higher fees than other investors because fees are less transparent in qualified plans. He also believes that 401k participants’ investments perform better than the investments of individuals outside of 401k plans. He attributes this to the fact that 401k investors trade less often than other investors partially because their objectives are long-term and partially because of inertia.

Mutual funds are required to disclose their fees in a fee table in the prospectus. It is important that fees be disclosed as a percentage of assets.

The mutual fund fee table divides the costs of investing into two categories: shareholder fees and operating expenses. Shareholder fees are based on the shareholder’s particular account. These include distribution fees such as front-end and back-end sales charges, which are paid to the fund’s underwriter and the shareholder’s broker, and redemption fees, which are paid to the fund to compensate the fund primarily for the cost of buying and selling portfolio securities and typically apply only to short-term holdings. There also are other shareholder fees.

The term ‘operating expenses’ is somewhat of a misnomer, as some of these fees are actually used not for operating the fund, but for distributing its shares. As already stated, operating expenses include 12b-1 fees, which are used primarily to compensate the shareholder’s broker for distribution services. Part of the management fee also may be used to compensate brokers for distribution services. Operating expenses are also arguably mislabeled because they do not include portfolio transaction costs.

Professor Bullard believes that ERISA regulation is ahead of the SEC by permitting the fund profile to be the required disclosure document. But, the profile should be required to be provided prior to making the investment decision. Nor are updates of information such as the prospectus required in ERISA as it must be under the securities laws. This means that decisions may be being made on stale information.

Professor Bullard believes there are problems with the fee tables. Those issues include:

  1. Lack of disclosure on how much brokers are being paid. Professor Bullard believes that legislation will be passed that will be important. Outside the qualified plan context, there are efforts by Congress and the SEC to ensure that the complex fee payments will be disclosed – and there are efforts to bring mutual fund disclosures up-to-date to be more equivalent to disclosures in other areas. Note: these are “push” documents. The key is to force disclosure to people who would not otherwise seek this information.
  2. In 2003 the SEC declined to require disclosure on mutual fund quarterly statements. Professor Bullard expects this will be revised and may become a requirement. The primary argument by the industry is that this would be very expensive but one company has decided to do it voluntarily. Professor Bullard believes this disclosure would be very useful because it would reach people who read nothing except their account statements.
  3. The SEC has never supported comparative fee disclosure. Professor Bullard believes this would promote competition.
  4. The expense ratio does not include portfolio transactions costs. Consumer groups would like this statistic to be more comprehensive especially in costs related to the fund’s trading decisions. This is being considered by the SEC and it is likely that there will be some increased disclosure here.

Professor Bullard maintained that the ERISA statute does not require disclosure of information. Instead, there is just the 404(c) “carrot and stick” that requires some disclosure to get fiduciary protection for the plan and its fiduciaries. Professor Bullard believes the existing disclosure requirements under 404(c) are not very effective. And, he believes the exchange of fiduciary protection for disclosure to be very unusual from the perspective of securities regulation. Although he did acknowledge that the reason for this may be that the plan is the actual customer and not the participant.

Making information available on request is a good thing but that is not where it is important to protect investors as consumers. The key is to ensure that people who are less engaged in the process pay less for their retirement investments.

Q: How have you been estimating costs on turnover?

A: Numerous academics have been doing this using a variety of techniques. It is somewhat subjective and that is one of the objections made by the investment community. The primary objection Professor Bullard has to the current reporting is that information on this would change the behavior of a number of funds. There is a separate question as to which regulators should intervene. There is an obligation to determine how the government can efficiently regulate. He believes the DOL has a stronger obligation to look at regulatory intervention because of the tax-favored nature of qualified plans, etc.

Q: On point of sale requirements, who is the buyer? Who should be required to get POS disclosures?

A: In the 401k context, the profile should be provided prior to the investment decision. The problem for plans is different for plans because of the goal of plans to participate. If the disclosure decreases participation, then no disclosure would be preferable. Disclosure should be tested. In this context the “before” and “after” distinction is less important.

Q: We are moving into a more passive situation with 401k plans where employees make fewer investment decisions and stay in plans after employment termination. How should that affect disclosure?

A: In such a situation, there is a good argument for no disclosure at all. There are wonderful ideas for automatic investment in life-cycle funds, etc. but disclosure does not have a role to play. You do have to regulate the plan provider.

Q: How much volatility is there in fees and expenses within a particular fund?

A: Very little. The largest expense is the management fee and changes to the management contract must be approved by the shareholders. Some changes are created by voluntary and temporary fee waivers. Across funds there is a significant range in expense ratios.

Q: Is it fair to say that the information participants need exists and takes a form similar to the fee table?

A: Yes. The information could be improved by providing comparative information but there is a need to consider the costs of disclosure.

Q: But, what if the plan has many options? The fee table might become overwhelming.

A: True but Professor Bullard doesn’t believe that it makes sense to have more than 10 or 20 mutual funds in the plan. It would not be feasible to provide comparative fee information for open platform plans.

Q: So, should options be limited?

A: Yes, at some point increasing the number of investment options becomes counterproductive.

Q: In the example of comparing employer plan costs, since the costs rely primarily on what the employee chooses for investments, is that a helpful comparison?

A: No, that is true. But, a 401k is an investment option and it may make sense to compare the ability to invest in 401k plans with other tax-favored investment vehicles.

Q: The testimony has concentrated on mutual fund disclosures. To what extent would the disclosures apply to other investment products?

A: Yes the disclosure obligations we have discussed could apply to other investment products, but it would require war with the investment community. There is far less disclosure in other investment vehicles and it surprises Professor Bullard that employers would use those vehicles. Optimally employers would require all investment vehicles make equivalent disclosure.

Q: Another witness testified about the broad variety of fees that exist and expressed concerns with how much money some vendors make. What is your view on this?

A: From an economist’s view, profit is irrelevant. Instead what matters is the quality that is provided. Courts can’t determine when profits are “too high” and the ability to profit is at the heart of capitalism. Professor Bullard believes that disclosure of sub factors of fees, if disclosed at all, should be disclosed in a comparative way such as in a pie chart.

Q: John Templeton’s argument was that his strategies were so successful because high fund fees deterred investors from taking short term views and moving money quickly. Is there a conflict of interest in banks and do bank customers choose bank services to protect other benefits?

A: There is not a great deal of conflict in this area. This is not necessarily the type of conflict that raises to the level of required disclosure.

Q: Have you looked at the fees associated with the employer stock holdings?

A: I’m not aware of this. Council discussion indicated that there are no management fees permitted. On the fee issue employer stock is very efficient.

Q: Can you reconcile the lack of concern with profits vs. interest in how much money is going into a broker’s pocket?

A: Those are separate matters. The need is to understand what the incentives are for the broker to push one fund over another. The best example is the revenue sharing payments that used to be made to brokers. This allegedly may affect a broker’s recommendations.

Q: Are there studies indicating that 401k plan participants would make a decision based on fees vs. returns?

A: Not aware of studies within the 401k context but there are studies indicating that investors do sometimes make decisions based on fees. Council discussion among members indicated that in plans most decisions are made on returns. Professor Bullard stated that costs are a better predictor of returns than past returns. As a general matter plan participants are better at choosing investments than other mutual fund investors.

Q: Follow up re: statement that lower costs correlate with higher returns.

A: That is true in large cap funds. In response to a question about small cap and international funds, Professor Bullard indicated that it becomes less true in those funds.

Q: Follow-up question to why plan participants do better than other mutual fund investors.

A: That occurs because plan participants trade less. In part that is due to inertia.

Q: Re: POS document, what should it look like?

A: It should be a one pager and the focus is likely to be core information on fees.

Summary of Testimony of Russell Ivinjack

Mr. Ivinjack discussed his background and that of his firm. Turning to his presentation materials, he discussed the importance of fee disclosure. He indicated that currently there is a good level of fee disclosure in defined contribution plans, but that the information presented is not useful to either plan sponsors or participants. Neither employees nor employers know the true costs they pay each year.

Mr. Ivinjack discussed the amount of information available to participants – SPD’s, fund fact sheets, prospectuses, etc., and indicates that it is possibly too much information. He then proceeded to review the costs that are currently required to be disclosed by Section 404(c). He discussed that the requirements for non-404(c) plans are not as stringent. He indicated that the disclosures for plans that are not 404(c) plans present fees on an aggregate basis, and not broken out in terms of explicit costs.

He recommended that some context should be provided with the fee disclosure. For instance, fees relative to an industry average or peer average would be helpful. However, creating a peer or industry average presents some problems of its own. If you use all relevant information out there to create a universe, it may not be relevant. He indicated that information presented by asset category would be most helpful. For example, equity index fund costs should be compared to other index fund costs, not to active management.

Mr. Ivinjack indicated that each participant should be told explicitly what their costs are on an annual basis in terms of dollars as well as on a percentage basis. Mr. Ivinjack indicated, as other witnesses had, that providing a snapshot point in time annual cost estimate was adequate. Mr. Ivinjack indicated that the industry can do a much better job of helping participants understand what the costs are and how that weighs into their investment decisions.

Summary of Testimony of Edward Ferrigno

Ed Ferrigno spoke on behalf of the PSCA. Mr. Ferrigno indicated that although participants need to be aware of the fees paid through their plan investments, ERISA’s fiduciary requirement that any fees paid with plan assets be reasonable reduces the risk of improper fees being imposed on participants.

Mr. Ferrigno stated that PSCA supports improving the information that is provided in a mutual fund’s prospectus by mandating that additional expenses which are reported in the fund’s Statement of Additional Information (SAI) be included in the prospectus. Brokerage fees, which are usually not included in the expense ratio in the prospectus but are reported in the SAI, should be included in the prospectus and the fund profile.

The DOL should determine whether the prospectus information provided on mutual funds is provided for other types of investments and, if not, the regulations should be changed to achieve this.

Mr. Ferrigno stated that the PSCA supports revising 404(c) to require disclosure of changes in investment costs annually. However, Mr. Ferrigno cautioned that mandatory fee disclosure could produce unintended results. An unsophisticated investor could be improperly influenced by relative plan fees if that investor does not understand what drives fee levels. He addressed the cost-benefit issues that should accompany any discussion of enhanced fee disclosure. Mr. Ferrigno also addressed fees not connected with investment decisions such as trustee fees, recordkeeping fees, etc.

He stated that PCSA is intrigued by the concept of analyzing and reporting at the account level on fees not related to investment decisions. He stated this should be further investigated.

Summary of Testimony of Dennis Simmons and Stephen Utkus

The Vanguard Group is the world’s second largest mutual fund family, and the nation’s second largest provider of investments and recordkeeping services. Vanguard administers more than $215 billion of defined contribution plan assets on behalf of more than 3200 plan sponsors and more than 2.5 million plan participants.

Vanguard was represented by Dennis Simmons and Stephen P. Utkus. Mr. Simmons is Senior Counsel in Vanguard’s ERISA Legal Department and manages Vanguard’s Plan Consulting Group. Mr. Utkus is the director of Vanguard’s Center for Retirement Research.

Mr. Utkus testified that retirement plan costs have a critical influence on retirement savings plan participants. Lower plan costs lead to higher retirement accumulations and greater security for plan participants. While plan sponsors and participants cannot control investment returns or performance, they have some control over the costs they pay for participating in capital markets through plan investments. Any steps taken to encourage price competition and reduce fees and expenses charged against retirement plan accounts directly contribute to the long-term retirement security of American workers.

Mr. Utkus provided an illustration of how costs affect retirement plan savings over a working career. In his illustration, a participant in a low-cost retirement plan (30 bp annually) would save $132,000 more over the participant’s working lifetime than a participant in a medium-cost plan (100 bp annually), and $182,000 more than a participant in a high-cost plan (130 bp annually).

Because plan sponsors set the aggregate level of fees and expenses charged to the plan as a whole and to plan participants, plan sponsors must take the initiative to obtain competing bids for services and to negotiate the fees and expenses charged against participants’ plan accounts. To assist plan sponsors, a public policy goal should be to encourage greater price transparency and greater price competition at plan sponsor level.

Plan participants must understand the costs associated with each available plan investment options and assess those costs in relation to other factors and characteristics of the options that are important to investment decision making. To assist plan participants, a public policy goal should be to insure that plan participants have full access to information on the costs of investment options available to them. This disclosure should be simple to understand and provided in a uniform manner for all investment options.

Costs incurred by defined contribution retirement plans are either flat fees for participant accounts, commonly but not universally paid by employer, or asset-based fees usually charged against the investment return of individual participant accounts. Mr. Utkus indicated that there has been a shift in the last decade away from flat fees to all asset-based fees, which are less visible to both plan sponsors and plan participants. This is a harmful development for plan participants because, according to research cited by Mr. Utkus, investors will go to great lengths to avoid visible flat fees, but can be oblivious to amount of indirect investment management fees charged against investment performance. Therefore, enhancing participants’ and sponsors’ understanding of indirect charges should be a top priority for enhancing cost disclosures for sponsors and participants.

Mr. Simmons presented Vanguard’s recommendations for improving fee and expense disclosures to both plan sponsors and plan participants. The first recommendation for disclosures to plan sponsors is that service providers should provide plan sponsors with an all-in fee expense ratio (as illustrated by an example provided by Vanguard). The all-in fee expense ratio is a more comprehensive cost measure, and thus is a more helpful and useful measure. The all-in fee expense ratio includes the investment related expense ratio for each plan investment plus direct administrative and recordkeeping charges paid by the plan. The Department of Labor should encourage plan sponsors to use the all-in fee expense ratio because:

  1. It is a simple and effective way to obtain measure of total cost of plan;
  2. Evaluating all plan fees is a fiduciary best practice; and
  3. It enables the plan sponsor to monitor trends with respect to total fees paid by plan, which encourages greater price competition and more cost efficiency.

Vanguard’s second recommendation for disclosures to plan sponsors is that the Department should require each investment provider to deliver to the plan sponsor the investment-related expense ratio for each investment offered in the plan. The investment-related expense ratio for an investment includes all fees and expenses taken directly from investment returns, which reduces plan participant’s return.

The third Vanguard recommendation for plan sponsor disclosures is that the investment-related expense ratio for each investment option should be accompanied by a comparative benchmark, so plan sponsors can compare the expense ratio of each investment option against an appropriate industry benchmark.

With respect to disclosures to plan participants, Vanguard’s first recommendation is that the Department should require, under ERISA Section 404(c), that disclosures to plan participants must include investment-related expenses that indirectly impact a plan participant’s retirement savings. This disclosure should be in the form of an expense ratio for each investment option, and should be required to be provided annually. Presently, the plan sponsor is only required to provide this information upon request.

Vanguard’s second recommendation for disclosures to plan participants is that the Department should require investment expense ratios disclosed to participants to be accompanied by appropriate comparative benchmark for other investments in similar asset class.

Mr. Simmons testified that the third recommendation for plan participant disclosures is that fund fact sheets should be used as the main format through which to communicate to plan participants costs and other aspects of investment options, because the fact sheets are concise, easy to read summaries of vital investment information.

Vanguard’s final recommendation for plan participant disclosures is that the Department should continue to permit and encourage the use of web sites and other electronic media for delivery of ERISA disclosures.

In response to questions from the Working Group, Mr. Simmons and Mr. Utkus stated that developing the appropriate comparative benchmarks to be disclosed to plan sponsors and plan participants should not be a difficult or expensive task for investment providers, because in general the required information is already available and only needs to be compiled. They did acknowledge that the comparative benchmarks may be more helpful to plan sponsors than plan participants, because the plan participants do not have any control over the investment options offered in the plan. However, the benchmark provides context to both the plan sponsor and the plan participants, even if the benchmark is more valuable to sponsor. They noted that the benchmark may be more valuable to a plan participant if the plan’s options include multiple options from same investment class. It was also noted that the benchmark may be more valuable to a plan participant if the investment-related expenses are expressed as a dollar value instead of a percentage of assets.

Mr. Simmons and Mr. Utkus conceded that the Department may not technically have the authority to require investment providers to make disclosures to plan sponsors. However, if the Department encourages or requires plan sponsors to obtain these disclosures, providers will begin providing the information.

With respect to the contents of disclosures to plan participants, it was noted that wrap fees need to be disclosed in addition to the investment-related expense ratio. However, unless these fees are stated separately or included in the expense ratio without additional explanation, the benchmark comparison may be affected. Plan participants need to know the bottom line of the total fees and expenses charged against their plan accounts as well as the components of that bottom line.

Mr. Simmons and Mr. Utkus agreed that it would be difficult and expensive to tell a plan participant the actual fees that were netted against the participant’s individual investment return for a specific period of time. However, it should be simple and inexpensive to provide estimated fees based on a snapshot of the participant’s account.

It was noted that plans of different sizes may have different total expense ratios or investment fees for the same investment option. This can also complicate the disclosure of an appropriate benchmark. However, if investment providers are required to provide benchmarks, those providers will develop the appropriate benchmarks, which will make appropriate benchmarks available to small plans.

Summary of Testimony of Elizabeth Krentzman

Ms. Krentzman indicated that the Investment Company Institute strongly supported the disclosure of detailed fee information for all plan alternatives during the DOL hearings on plan fees and expenses, and the Institute continues to strongly support meaningful disclosure, both to plan sponsors and to plan participants.

The marketplace is highly competitive with respect to fees and expenses. Many fiduciaries choose bundled fee arrangements which provide a package of administrative, custodial and investment services. In bundled arrangements, plan providers may receive compensation from the mutual fund itself through 12b-1 fees, or through revenue sharing where the fund advisor compensates the service provider from its profits.

The Institute recommends disclosure to the plan sponsor of the fees and expenses of all investment options. The Institute also recommends that the Department require that plan sponsors receive from prospective service providers information concerning the provider’s potential receipt of compensation, including revenue sharing. A third recommendation was for the Department to assemble a task force to assist the Department in developing a disclosure regime for compensation arrangements.

Regarding fee disclosures to plan participants, the Institute recommends that plan participants be provided, upon request, an investment summary for each investment offered under the plan. The summary would include fee disclosure via a fee table. A second recommendation is that participants in 404(c) plans be provided with disclosure comparable to that provided in a mutual fund profile for all investment options provided under the plan. The Institute also recommends that electronic reporting through hyperlinks and e-mail would enhance exposure to participants while reducing costs for plans and participants.

Summary of Testimony of Bruce Ashton

Mr. Ashton indicated that by year-end 2003, an estimated 42 million workers in the U.S. participated in 401k plans, holding assets of $1.9 trillion. Given the significant amount of money in defined contribution plans, the level of fees incurred by participants is a major factor in determining whether a participant will ever achieve retirement security. To illustrate the impact of fees, Mr. Ashton indicated that over a 25 year period, a participant account that bears expenses of 0.5% would accumulate 28% more retirement income than a similar plan bearing expenses of 1.5%.

Mr. Ashton pointed out that fees and expenses are an inherent and necessary part of the operation of a plan, and that the per participant cost of operating a plan covering 100,000 participants is less than the cost of operating a 20 life plan. ASPA believes that full disclosure of all plan fees and expenses charges against a participant’s individual account in a defined contribution plan should be provided to each participant. Mr. Ashton then discussed the various types of fees charged to participant accounts – third party administration, commissions, wrap fees, 12b-1 fees, recordkeeping, compliance, loan processing and withdrawals. Costs may be charges as a percent of total plan assets, or as a fixed amount per participant.

The current rules relating to the disclosure of plan related fees and expenses only go so far in disclosing to the plan participant what he or she is really paying out. ASPA believes that plan participants should receive full and complete disclosure of all fees and expenses paid out of plan assets that can be reasonably identified. Further, this disclosure should be provided in a meaningful and understandable format. To minimize administrative burdens, the disclosure could be distributed in conjunction with the plan participants regular year-end statement. Although specific disclosure of the amount actually charged to a participant’s account may be preferable, the burden of providing this individualized information is significant, and providing such information could have a chilling effect on the creation and maintenance of such plans.

Mr. Ashton also presented an ASPA recommendation regarding section 404(c) disclosure, and requested guidance on certain applications of 404(c).

Summary of Testimony of Norman Stein

Professor Stein opened his testimony by framing the three sections of his testimony. The first focuses on the disclosure of fees charged to participants by vendors providing investment products and services to the plan. The second focuses on the fiduciary’s responsibility to choose investment products with competitive fees and to regularly monitor those products. The items monitored include investment related fees, non-investment related fees and investment returns. The third section covers other items including non-investment related fees charged against participant account balances.

Professor Stein next told a personal story. In 1987, he was a visiting professor at the University of Texas. While there, he was able to contribute to a 403(b) annuity. An insurance salesman from a prominent company sold him an investment product for this and Professor Stein contributed $1,000 to it.There was no discussion of fees, but there was a fee of $30 per year. That fee sometimes exceeded the investment return. He did not know why he did not ask about fees for this product. He speculated that he might have thought that his employer would not permit an investment product to be sold that could be disadvantageous.

The point of the story was how important the disclosure of fees can be. Nonetheless, Professor Stein also said that he believes that many participants lack the investment savvy for fee disclosure to be of much utility for them.

Clear and understandable disclosure of fees is still important. Uniformity of presentation is necessary so that participants have the same information about all investment options. The disclosure must also provide examples of how fees affect the rate of return and of how fees can make it more expensive to move in and out of investment options. He also points out the DOL does not have expertise in the area of investments. The SEC does, however, have expertise in this area. Therefore, the DOL should consult with the SEC when designing rules for these kinds of disclosures. Nevertheless, the DOL has more expertise in designing the format of such a disclosure than the SEC, so the DOL should prescribe the format.

Disclosure will not be enough for all participants. Participants who lack investment sophistication rely on plan fiduciaries’ judgement to choose investment options with competitive fee structures. This includes the obligation to monitor the options once chosen.

Professor Stein acknowledged the challenges of small plan sponsors with limited resources. Therefore, he urged the DOL to provide useful tools to help these sponsors by providing appropriate benchmarks against which they can judge fees.

Professor Stein also criticized an administration proposal to exempt certain otherwise conflicted parties from giving investment advice from the prohibited transaction rules. He questioned the wisdom of this.

Professor Stein also criticized DOL Field Assistance Bulletin 2000-3. That Field Assistance Bulletin (FAB) gave plan fiduciaries more flexibility to allocate expenses against accounts on either a pro rata or per capita basis. In particular, he is concerned that pro rata allocations of non-investment expenses will inhibit the ability of lower income participants to build retirement savings. Additionally, the FAB would allow a participant’s QDRO expenses to be allocated against his or her account. This hits small accounts more significantly than large accounts and is a reversal of the prior position of the DOL. Nonetheless, if fees are charged to accounts in ways permitted by this FAB, participants should receive explicit disclosure with illustrations in the summary plan description.

In response to a question, Professor Stein opined that a balance between cost and benefit of investment expense disclosures could be struck with an initial disclosure of the expenses with that disclosure repeated annually. Also in response to a question, he again stated his opinion that some participants are not capable of making good investment decisions by themselves.

Professor Stein elaborated on his objection to being able to charge QDRO expenses to specific accounts. He opined that such expenses should be paid by the sponsor as part of the costs associated with the privilege of sponsoring a plan.

Summary of Testimony of John Kimpel

Mr. Kimpel commented that much had been written lately about how 401k and other plan participants are being “ripped off” by the high fees mutual funds and other providers charge for their services, and that some commentators suggested that participants do not know what fees they are paying. The legal standard embedded in ERISA is for the fees to be “reasonable”. Mr. Kimpel then offered four questions to illustrate the issue:

  1. Are plan participants (and sponsors) aware of what fees they are paying?
  2. What 401k plan fees are participants paying?
  3. What 401k plan services are participants receiving?
  4. Are the 401k plan fees a reasonable price to pay for the services that participants are receiving?

Mr. Kimpel then discussed the results of an independent study of 401k fees and expenses commissioned in 1997 by the DOL as a result of earlier public hearings on the issue of 401k fees. The DOL responded to the study by developing a pamphlet for participants, “A Look at 401k Plan Fees for Employees”, and another entitled “A Look at 401k Plan Fees for Employers”. Mr. Kimpel then discussed the SEC rules on fee disclosure for mutual funds. Mr. Kimpel indicates that participants should be able to look at available information and calculate the aggregate fees that reduce the value of his or her account. Mr. Kimpel indicates that the answer to the first question is that fees are fully disclosed, readily ascertainable, and easily calculable by any participant who desires to do so.

The second question asks what plan fees are participants paying. Mr. Kimpel walked through an approximation of the average fee paid based on an average account balance, allocated to different investment options as a typical account would be allocated, and including average recordkeeping and other administrative fees paid by participants. The approximate fees worked out to be $320 per year for an average account balance of $55,000, or approximately 0.58% (58 basis points).

Mr. Kimpel then discussed the services which the participant receives for this expense, including asset management, administrative services, daily valuation, transfer agent services, payroll and contribution processing, and educational services, among others. Mr. Kimpel then discussed the reasonableness of these fees, comparing the annual expense ($320) to other expenses in everyday life, such as the cost of a newspaper ($380 per year), a daily cup of coffee ($350), taking the family to a football game ($320) etc.

Mr. Kimpel then indicates that the median participant age at Fidelity is 44 years, and the median compensation is $53,000 per year. The average participant contributes 7% of pre-tax compensation, and the average effective employer match adds an additional 3%. This average participant should have over $720,000 at a retirement age of 65. Mr. Kimpel then present additional calculations for the average account balance and median compensation for 44 year olds. Mr. Kimpel concluded his presentation by asking whether anyone can argue that 58 basis points is an unreasonable fee given the menu of investment and other services provided to the typical 401k participant.


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