October 15, 2010
The DOL regulation only applies to ERISA plans, however it is important for public plans to be aware of these regulations. Click here to view the text of the rule.
DOL issues rule aimed at boosting 401(k) fee disclosure
Regulation requires plan sponsors to inform participants about expenses deducted from investment accounts
By Mark Schoeff Jr.
October 14, 2010
Workers will be able to quickly and easily compare retirement plan investment options, including the fees charged in each, under a regulation promulgated today by the Labor Department.
The rule, which was released in its final form, requires 401(k) plan sponsors to provide quarterly statements to employees regarding the fees and expenses deducted from their investment accounts.
The regulation also requires that workers receive at the time of their enrollment decision — and annually thereafter — core information about investment options, including costs and returns.
It must be displayed in a chart or other format that facilitates comparisons between options (http://www.dol.gov/ebsa/participantfeerulemodelchart.doc). The disclosure also must include a plain-English glossary that defines the terms used in describing the various choices.
The goal is to provide in one document the information workers otherwise would have to obtain by wading through dense prospectuses.
“This rule gives them the tools to be more in control of their retirement and their future,” Labor Secretary Hilda Solis said in a conference call with reporters. Ms. Solis characterized the regulation as a “major breakthrough” that allows an “apples with apples” comparison of an employee's retirement investment options.
About 72 million workers participate in 401(k)-type retirement plans, which contain a total of about $3 trillion assets.
The regulation requires that plans outline administrative expenses — such as legal, accounting and record keeping fees — and individual shareholder fees as a percentage of total assets and in the dollar amount per each $1000 invested.
The agency has put an emphasis on helping workers understand the potential bite that fees take out of their retirement savings. Assistant Labor Secretary Phyllis Borzi, who heads the Employee Benefits Security Administration, said that a 1% difference in fees can lead to a 28% reduction in savings by the time a worker reaches retirement.
“Participants will be able to understand the dramatic difference that fees play in the returns they get,” she said.
The regulation will go into effect on Dec. 14 and apply to retirement plan years that begin on or after Nov. 1, 2011, which means that calendar-year plans would have to adhere to the rule as of January 2012.
The implementation time frame “will give the industry and plan administrators sufficient time to adjust to these changes,” Ms. Borzi said.
Retirement industry professionals have voiced concern about preliminary versions of the rule, saying that focusing on fees could encourage workers simply to select the lowest-cost investment rather than one with a higher fee, but provides better returns.
Ms. Borzi agreed that investment decisions shouldn't be made on the basis of fees alone. That's why the rule also provides information about investment returns and performance benchmarks.
“It will give you a sense of what you're paying for,” Ms. Borzi said.
The Investment Company Institute declined to comment on specifics of the rule, which it is analyzing, but did praise the department for its effort to help workers make informed decisions.
“ICI has long supported providing investors with key, comparable information about all of the investment options in their retirement plans,” said spokeswoman Rachel McTague. “While we are reviewing the new rule, we feel strongly that providing effective participant disclosure is a win for investors.”
The Labor Department regulation may halt efforts on Capitol Hill to achieve fee disclosure through legislation. Rep. George Miller, D-Calif., chairman of the House Education and Labor Committee, and Sen. Tom Harkin, D-Iowa, chairman of the Senate Health, Education, Labor and Pensions Committee, have both championed bills aimed at better illuminating retirement fund fees.
Their measures have met resistance from Republicans and industry groups that say they would impose an onerous regulatory burden on plan sponsors.
“We hope that [the new regulation] will go a long way toward satisfying [Mr. Miller and Mr. Harkin], but you can never say never with Congress,” Ms. Borzi said.