After more than three years of study, debate, and widespread anxiety in the money management world, the Department of Labor has finally issued its long-awaited rules detailing how much information managers must provide to plan sponsors, and how much sponsors must tell participants, about 401(k) fees.
Depending on who is talking, it may not be much trouble in the short term to adapt to the manager-sponsor rules, which take effect next July. A bigger impact will probably come with Part Two, due to take effect in 2012, detailing how much information employees must get. But the biggest bang of all could hit later when plan sponsors start using their new information to bargain harder.
Under the new manager-plan sponsor rules, providers will have to unbundle their fee structures for any client paying at least $1,000 a year, spelling out exactly how much money they are getting for each service, such as asset management, administration, and compliance – even breaking down the fees for each investment option. They must also detail whether participants are explicitly billed or the money is deducted from their accounts. If the bundled recordkeeping has no dedicated fee, the vendor should try to estimate the cost, showing the methodology used.
The most dramatic change is that vendors must specifically show their income from revenue sharing – that is, the fees that outside money managers pay to a plan’s record keeper to be included in the investment lineup.
The Labor Department estimates it will cost these firms a grand total of about $153 million the first year to comply, and just $37 million annually after that, mainly for “reviewing and analyzing the regulation, conducting a compliance review ... and preparing any new disclosures,” according to a Labor press release. Divided among the universe of maybe two dozen vendors, that’s hardly prohibitive.
In fact, it’s probably less onerous than that. Most experts agree that large plan sponsors were already getting this information, although small companies were mainly in the dark. When the consulting firm Towers Watson informally surveyed 12 big record keepers this summer, “the vast majority didn’t think they’d have to change their approach significantly,” says Robyn Credico, a senior retirement consultant there.
A Vanguard Group spokeswoman told Institutional Investor the firm was already providing so much fee detail that it will have to make “only minor changes” in its information packets, such as “more detail on the description of services provided to each client.” Existing staff is handling the work, the spokeswoman says.
Fidelity Investments, however, has geared up. More than a year ago, it created a working group with over a dozen employees from compliance, systems, communications, product development, and other specialty areas to create “a more consolidated and streamlined and consistent disclosure form,” which will be available online and in print, according to Beth McHugh, vice president of market insights in Fidelity’s Workplace Investing Group. The group, which is working full-time, also plans to include ways sponsors can evaluate “the value of their services.”
Fidelity and other vendors have a lot of questions, which they posted in the Towers Watson survey and in letters to the Labor Department. How could they possibly break down the fees for every fund available through brokerage windows? Are they responsible for information from third party suppliers? What about the float from money that’s essentially held in escrow for a day, between the time the participant asks to withdraw it, before the check is actually cashed?
McHugh acknowledges that Fidelity is putting in so much effort now partly to prepare for Stage Two, “with an eye on participant disclosure, making sure everything is as comprehensive as possible so that it can be leveraged.” For instance, she expects that the firm may have to add staff to handle a flood of queries to its call centers.
Those participant information rules, which were just issued Oct. 14, call for participants to get detailed, annual or quarterly information about exactly how much is being taken out of their assets to pay for which fees; descriptions of the plan structure and investments; and historical investment performance compared to an appropriate index.
That may sound daunting, but David Wray, president of the Profit Sharing/401(k) Council of America, foresees a weaker reaction to the participant rules. With new approaches like target-date funds and automatic enrollment, he points out, the trend in recent years has been less investor involvement, not more. “Participants are not petitioning Congress for fee disclosure,” he said shortly before the Labor rules were announced.
So maybe it will turn out that telling your customers the full truth isn’t really that burdensome.
Fran Hawthorne is the author of the award-winning “Pension Dumping: The Reasons, the Wreckage, the Stakes for Wall Street” (Bloomberg Press) and “Inside the FDA: The Business and Politics behind the Drugs We Take and the Food We Eat” (John Wiley & Sons). She writes regularly about finance, health care, and business ethics.
