November 10, 2004
Report of the Working Group on Fee And Related Disclosures To Participants
The working group on fee and related disclosures to participants(1) framed the issue for study as follows:
This working group is going to study fee and related disclosures to participants in defined contribution plans that relate to investment decisions and retirement savings. The scope of the study will encompass both plans that are intended to meet the ERISA(2) §404(c) requirements and those that are not intended to meet those requirements. Existing disclosure requirements within the scope of this study will be examined. The goal is to assess the adequacy and usefulness of the current requirements and whether changing the disclosure requirements could help participants to more effectively manage their retirement savings. Among the hoped for results are a determination of whether:
The description and questions were given to all of the witnesses in advance of their testimony. The witnesses were all told that the questions were merely a starting point to generate thought and discussion of the issue being studied. The questions were not intended to limit the parameters of their testimony.
The working group solicited testimony of witnesses from a variety different backgrounds. The witnesses and the dates of their testimony are as follows:
August 5, 2004
September 21, 2004
Presently Required Investment Expense Disclosures
ERISA contains numerous statutory and regulatory disclosures. Disclosure requirements aimed at identifying investment expenses are relatively few.
Russell Ivinjack identified general disclosure requirements applicable to ERISA defined contribution plans that can involve some identification of plan investment expenses. Most such plans are required to distribute to participants a summary annual report that identifies total expenses and benefit payments for the plan year. Additionally, a summary plan description of the plan's rules is required and some description of expenses might be included in that document.
Louis Campagna's testimony listed the materials that must be disclosed and the materials disclosed on request under the ERISA §404(c) regulations. The testimony of Russell Ivinjack and his handout material also described these disclosures.
ERISA §404(c) and the regulations interpreting that provision allow plan fiduciaries to avoid liability for participant investment decisions if specified requirements are met.(3) These requirements include a mandatory expense disclosure and an expense disclosure that must be made upon request.
The required or automatic disclosure in this regard is a description of transaction fees and expenses that affect the value of the participant's account. Examples of these expenses are commissions, sales loads, deferred sales charges and redemption or exchange fees. Expense information can also be extracted from the investment option prospectus that must be distributed to the participant after the initial investment. This requirement only applies to investment options subject to the Securities Act of 1933.
There are two kinds of investment expense information available on request. The first is the annual operating expenses that reduce the rate of return of the investment options. The participant may also request to see these expenses as a percentage of average net assets. Examples of these expenses include investment management fees, administrative fees and transactions costs. The second is information about the value of shares or units in the investment options, as well as the past and current investment performance determined net of expenses.
John Kimple also testified that ERISA §105 requires that participants be given a statement of their accrued benefits upon demand. He said that this requires that the account balance of a participant in a defined contribution plan be provided net of all expenses that reduce the account and that all such fees be identified on any account statement.
Range Of Available Investment Expense Disclosures
The working group heard a variety of testimony about the wealth of information available to plan participants about plan investment options. Much of this material goes beyond what is legally required to distribute to participants. A common problem concerned the format in which much of this information may be presented. Some formats, like a prospectus, are not user friendly. Additionally, many witnesses noted that the available information is so dispersed that it takes a determined participant to corral it all.(4)
Examples of the available information (which include some items produced pursuant to legal requirements) are 5500 annual reports; summary annual reports (SARs); prospectus for plan investments subject to regulation under the Securities Act of 1933; summary plan descriptions; fund fact sheets; information on investment option expenses available through the Employee Benefits Security Administration (EBSA) web page on the Department of Labor's (DOL's) web site;(5) and recordkeeper web sites.
Scope Of Plans Subject To Consensus Recommendation - The consensus is for additional disclosure of fees in defined contribution plans that seek the protections of ERISA §404(c). This makes sense because plan sponsors use §404(c) for protection against fiduciary liability for participant investment choices, although the plan sponsor still retains the fiduciary obligation to monitor the funds available for investment decisions by the participants. Testimony from Louis Campagna, an attorney with the DOL is consistent with this conclusion. He testified that ERISA §404(c) “offers a defense for liability for plan sponsors and other plan fiduciaries if there is an informed choice and control by the participant with respect to the investment choices available to them under the plan.” He also testified that plans not intended to meet the 404(c) requirements operate under the working assumption that the fiduciary decided to be the party liable for investment choices, “[s]o the same type of control issues won't be present in those types of plans.”
This does not minimize the need for disclosure and the availability of information for participants in defined contribution plans not subject to §404(c). The sponsors of those plans, however, do not have any special protection from investment choices that may be allowed to participants. Therefore, the level of participant disclosure may not be as acutely needed as it is in the context of §404(c) plans. Nonetheless, we do not purport to address the general fiduciary duties of sponsors under such plans as those duties may relate to participant disclosures. That topic is beyond the scope of this investigation.
Considerations In Arriving At The Consensus - The working group heard testimony that information on investment option expenses is important to the health and vitality of plan participants' retirement accumulations. Testimony from Professor Mercer Bullard and from Stephen Utkus indicated that while future investment returns are unpredictable and beyond a participant's control, investment expenses are known.
The working group agrees that disclosure to participants of factual information on investment option expenses is, in the abstract, beneficial. Nonetheless, there are practical constraints on the degree, quantity and cost of disclosures. A balance must be struck between the desire for complete disclosure and the utility of additional disclosure.
Additionally, a balance must be struck between what can reasonably be expected of small plan sponsors and the potential capabilities of larger plan sponsors. The working group wants to avoid a rule that is so burdensome that it discourages the adoption and maintenance of defined contribution plans. Section 401k plans in particular have become popular and convenient investment vehicles for the US workforce. Disclosure rules should not be so onerous that they impede this popular and useful savings vehicle. Finally, the fee disclosure rules should be user friendly. The disclosures must be in an easy to read format that provides pertinent information for the investment decision. The disclosures must be easy to read and understand.(6) They must also be presented in a context of other investment information typically utilized by investors to make investment decisions. One item of information cannot be presented in a vacuum and fees must be presented with other information about the investment option.
Finally, the fee disclosure rules should be user friendly. The disclosures must be in an easy to read format that provides pertinent information for the investment decision.
Recommendation - The working group recognizes that providing actual fee information for a particular participant's account over a stated period of time is not justified at this time by the cost of providing that information. Given the current state of technology and recordkeeping practices, it is a complex and costly procedure to sum the total costs to a particular participant's account because of investment changes over time.(7)
Nonetheless, the working group saw examples of investment statements showing the expense of each investment option expressed as a ratio for each fund in which a participant was invested as of the date of the statement. The working group believes that this is pertinent information that is helpful in making the investment decision. This information can also be presented in an understandable format.
One example was in materials distributed in connection with Russell Ivinjack's testimony. It consisted of a table having the following information going across the page: fund name, fund type, objective/strategy, risk level and expense ratio. Another example was in materials distributed by Dennis Simmons and Stephen Utkus who were from the Vanguard Group. The sample all-in fee report and the sample fund fact sheet are attached as exhibits to this report. The sample all-in fee report is substantially similar to the DOL Fee Disclosure Form.
The consensus of the working group results in only minor suggestions for regulatory improvement. The weakness of the present §404(c) regulatory framework is in the manner the fee information is made available. The working group recommends a remedy to this without suggesting drastic changes to the information that must be provided. The working group, however, recognizes that different considerations apply to open platform (also known as open brokerage) options in plans subject to §404(c). Therefore, the recommendations of the working group do not apply to such investment options.(8)
The consensus recommendation is as follows:
Click here for a Summary of Testimony received by the working group.
401khelpcenter.com, LLC is not the author of this material. The material referenced was created, published, maintained, or otherwise posted by institutions or organizations independent of 401khelpcenter.com, LLC. 401khelpcenter.com, LLC does not endorse, approve, certify, or control this material and does not guarantee or assume responsibility for the accuracy, completeness, efficacy, or timeliness of the material. Use of any information obtained from this material is voluntary, and reliance on it should only be undertaken after an independent review of its accuracy, completeness, efficacy, and timeliness. Reference to any specific commercial product, process, or service by trade name, trademark, service mark, manufacturer, or otherwise does not constitute or imply endorsement, recommendation, or favoring by 401khelpcenter.com, LLC.