401(k) Fees 2007

A lot of hard work, but light at the end of the tunnel

Last year was the year of the 401(k) fee. In January 2007 I wrote that the employer-sponsored defined contribution system would receive increased scrutiny with plan-paid fees receiving the most immediate focus. Introduced legislation, final and proposed regulations (see the Washington Watch article), and numerous media interviews later, it is clear the public policy and media attention to 401(k) fees was even greater during 2007 than I anticipated. 

In 2007 PSCA had three 401(k) fee-related public policy goals, and I am pleased with our progress toward attaining them. Our first goal was to channel new fee disclosure requirements through the regulatory, not the legislative, process. Fee disclosure and transparency present complex issues. Amending ERISA through legislation to prescribe specific fee disclosure will lock in disclosure standards built around today’s practices. We believe that the regulatory approach of soliciting input and issuing proposed and final rules based on comments from all affected parties will result in carefully-structured rules that will avoid unintended consequences. Moreover, regulatory guidance is dynamic. It can be readily clarified and amended to adapt to changing conditions. It is now unlikely that fee-related legislation will be enacted until after all of the current DOL regulatory fee initiatives are completed. If, as I anticipate, the DOL appropriately addresses fee disclosure, there will be no need for statutory change and none will be enacted. 

Our second goal was to educate policymakers about appropriate fee disclosure to participants. Plan sponsors and participants have markedly different disclosure needs, and overly detailed and voluminous information to participants may impair rather than enhance a participant’s decision-making. Participants need to know about investment fees and other costs associated with the plan so they can make appropriate investment allocation decisions or decide whether to use plan features like the plan loan provision. It is up to the plan sponsor to ensure that plan-paid fees are reasonable. I believe that most policymakers now understand that bombarding participants with detailed fee breakdowns, including such items as sub-account transfer credits and revenue sharing, will add nothing of value to participant decision- making. In fact, such a requirement would likely reduce participation as employees will be even more intimated by what is already an intimidating process. 

Our final goal was that new regulations do not result in a higher fee-reasonableness fiduciary standard for employers — particularly small employers — by requiring that they analyze separately the cost of each component part of the plan. Many plan administrators prefer reviewing costs in an aggregate manner and, as long as they are fully informed of the services being provided, they can compare and evaluate whether the overall fees are reasonable without being required to analyze each fee on an itemized basis. As the Washington Watch article reports, it appears that the department of Labor agrees with our position. 

At the Ways and Means Committee hearing, I was asked by Representative Sam Johnson (R-TX) if investors in a 401(k) plan pay more or less in fees than retail investors. I replied most pay less as about two-thirds of participants work at large companies who are able to negotiate favorable fee arrangements. He followed up by asking, if so, are additional fee disclosure requirements necessary. I responded yes. “We feel the credibility of the system requires that all of the players see what the fees are even though I think the system is providing a very favorable fee outcome.” It is my hope that, following finalization of the DOL’s three fee-related initiatives, we will be able to put concern with fees behind us and devote our efforts to expanding participation by employees and small businesses not yet benefiting from what is the greatest wealth-building system ever.