New rules on the horizon?
Posted on Tuesday, October 16th, 2007

Abstract: Most 401(k) plans allow participants to have participant-directed investments. To make well-informed investment decisions, participants must have all the necessary information — including plan fees and expenses. Currently, not many ERISA requirements cover fee and expense disclosures to participants in these types of accounts. This article examines the rules and explains why they may change.

Most 401(k) plans allow participants to have participant-directed investments. To make well-informed investment decisions, participants must have all the necessary information — including plan fees and expenses. Currently, not many ERISA requirements cover fee and expense disclosures to participants in these types of accounts. But this may soon change.

What plan sponsors must provide

Generally, on entry to a plan, the plan sponsor must provide the participant with a summary plan description. This will include some information about expenses, such as commissions, deferred sales charges, bonus payments or exchange fees.

Each year you must also distribute a summary annual report to participants that details the plan’s total expenses and benefit payments. However, these two documents alone don’t provide participants with all of the needed information to make wise investment decisions.

What plan sponsors should provide

To help participants make a more informed investment decision, categorize your plan’s selected funds by risk factor. This will help participants determine which investment option they’re most comfortable putting their retirement money in.

Remember, each of your selected funds may have separate fees and expenses that you must disclose to participants. Keeping participants well informed of each investment’s fees and expenses is important because they can affect the size of participants’ nest eggs.

What the DOL proposes

Earlier this year, the Department of Labor (DOL) issued a request for information to solicit views, suggestions and comments from plan sponsors, plan participants and plan providers to determine to what extent rules governing the disclosure of plan fees and expenses should be adopted or modified.

Once the DOL decides on a specific disclosure practice, it will be uniform so participants can easily compare investment options. Whether plan sponsors present the disclosure in a fee table or an “all-in” fee expense ratio, it will most likely have to include a comparison chart showing the industry average.

This type of presentation will be clear and understandable to most participants, but for some participants even this proposed amount of disclosure won’t be enough. A small group of participants rely solely on plan sponsors to monitor the investment options and their corresponding fees.

What this means for plan sponsors

Plan sponsors will need to be cautious of dealing with vendors who refuse to disclose their fees, expenses and compensation received in connection with their plans. These expenses include, but aren’t limited to:

• Revenue sharing agreements,

• Investment management fees,

• Administrative fees, and

• Transaction costs.

Get involved in your plan’s funds selection. Also, look into other mutual funds, or share classes within a mutual fund, that have lower revenue sharing arrangements before selecting investment options. Require vendors to provide annual written statements detailing all compensation received by them in connection with their services to the plan. This compensation is usually commissions and bonuses, but it may also take the form of a gift, such as a lavish vacation.

Monitor asset-based fees, as they increase with the growth of plan assets. As always, it’s the plan sponsors’ duty to ensure that employees receive fair value for the costs they are paying associated with their individual accounts and to make sure they receive a fair return on their invested money. Sponsors should ask questions in connection with the investments, fees and expenses associated with their plan.

What’s ahead

With the DOL’s increased interest in how fees and expenses are disclosed to participants, take the time to pay more attention and ask more questions in connection with your plan’s investments, fees and expenses. Your role hasn’t changed, but you’re accountable for your actions — or lack of action.