Many investment industry leaders worry that the proposed 401(k) fee-disclosure regulations being pushed through Congress would actually increase the fees investors pay — and their confusion.
"Regulators feel they need to add nuances to 401(k) fee disclosure, but what's it going to cost the industry to comply?" Fred Teufel, a principal of institutional retirement plan services at Vanguard Group, asked last week during a conference in Washington presented by the Society of Professional Asset-Managers and Record Keepers.
"We spend an increasing amount of our budget on regulatory compliance," said Barbara March, executive vice president of workplace investing for defined contribution plan services at Fidelity Investments. "This reminds me of redemption fees. The cost of complying with the rules was more than anyone would have been hurt by the fees."
Any increase in fee disclosure would be expensive, and those costs would be passed along to investors, March said.
Mutual funds charge fees to pay for administrative costs, investment management fees, transaction costs and other charges. Steve Saxon, a principal at Groom Law Group in Washington, said that this fee disclosure is inconsistent and that some information can be difficult for investors to find on their statements without doing some serious digging or having to go through the process of requesting a prospectus, in which the fee table is buried.
Last week a House subcommittee approved HR 1984, the Elderly Protection Act. It would require service providers to break down the fees into those four categories, as well as mandate quarterly statements to participants that list contributions, earnings, account balances and all the fees taken out of their accounts. The resolution also contains a provision that would require defined contribution plans to include at least one index fund in their lineup.
The subcommittee also approved separate legislation that would allow independent financial advisers to provide investment advice to workers in company retirement plans. Both bills passed on a 13-to-8 vote along party lines, with Democrats voting for the measure.
Industry leaders generally support fee disclosure — to a point.
"Investors need clear, concise, actionable disclosure that helps them make choices," said John "Jamie" Kalamarides, senior vice president of retirement solutions at Prudential Retirement. "But where does fee disclosure stop being meaningful and start being a burden and create additional costs? When we start to disclose the cost of fee disclosure?"
401(k) retirement plans and their fees have come under attack in recent months after millions of investors lost a good part of their retirement savings as the global economy plunged into recession. Investors are angry and are looking for a scapegoat, but industry leaders say this anger is misplaced.
401(k) plans are meant to provide a retirement savings outlet through tax-deferred market diversification, and to that end they have succeeded. The damage from the global recession was so widespread, however, that diversification didn't work. Everything went down.
Saxon said that the drop in markets and fee transparency are two important issues, but that they are not related.
The bills' co-sponsors, Reps. George Miller, D-Calif., and Robert Andrews, D-N.J., have said that the lack of transparency in the 401(k) system is unacceptable.
Republican opponents say the legislation does not improve retirement savings options for workers and instead makes the plans more complicated and limits options to seek investment advice.
Industry leaders say increased fee transparency is likely to have many unintended outcomes, such as more complicated 401(k) statements, an increase in mutual fund litigation and a shake-up of investment relationships as fund companies, plan sponsors and participants struggle to understand what they are paying for. "What action will participants make when they become aware of fees?" March asked. "How will it change their behavior?"
"I think participants will be placed in an information-overload situation," Saxon said. "Participants shouldn't allocate their account balances solely based on fees."
Sometimes the lowest-cost option in a plan, such as investing in company stock, isn't the best option, Saxon said. Investors who put 100% of their assets in the company stock are putting themselves and their life savings at risk if something should happen to their company.
Fiduciaries have the responsibility to find out what their fees are paying for, and whether or not they are using the services for which they are being charged. The more expensive plans typically have more features, and plan sponsors that switch providers to save a few bucks may find that they're not getting all the services they need, Kalamarides said. "We need to create a dialogue with plan sponsors about their needs," he said.
Fund companies will need to educate plan sponsors and explain the value of the services they provide, and unbundled fees could help some larger plans eliminate inefficiency and redundancy, Teufel said. "Hopefully, plan sponsors will come to realize what it costs to service a plan," he said.
Saxon said that big class-action law firms have been looking for new cases, and separating fees at the participant level will make it easier for them to sue mutual funds for breach of fiduciary duty.
"Their legal strategy is to throw spaghetti at the ceiling and see if it sticks," he said.