House bill would increase corporate costs and disclosures on 401s

Strategic Finance, June, 2008 by Stephen Barlas

A bill (H.R. 3185) heading to the House floor would require employers to provide employees with much more detail about the fees associated with the 401(k) plans the company offers and the portion of those costs that the company pays. Rep. George Miller (D.-Calif.), chairman of the House Education and Labor Committee, has been inching the bill along for a year and a half, talking with business and labor in order to get them on board. The American Benefits Council (ABC), the representative of Fortune 500 companies, generally approves of this new version of the Miller bill, which greatly improves its chances of passage this year. The ABC, in a letter to Miller prior to the Committee vote on April 16, called Miller's latest draft "more effective and administrable in a number of ways" but said it still lacks "appropriate liability protections for any plan sponsor and service provider who acts in a reasonable manner in good faith reliance on information provided by a third party." That liability shield is important to many big companies who are worried about employee-filed lawsuits such as the one filed in March against Wal-Mart, where plaintiffs allege their 401(k) plans did poorly because of the high fees charged by the mutual funds whose products were offered by Wal-Mart. What was worse, those actively managed mutual funds did worse than companion funds offered by low-expense Vanguard, whose products weren't offered.

The Miller bill requires the employer to break down each worker's 401(k) costs into four categories: administrative, investment management, transaction, and other. That would create additional work for the third-party managers, thereby increasing their charges to companies offering 401(k) plans. That means an increase in corporate pension costs should this bill pass Congress and be signed into law by President Bush. Moreover, the bill also requires the plan administrator to give employees a good bit of information they may not currently be receiving, including the name, risk level, and investment objective of each available investment option; the historical returns for and fees assessed on each investment option; and where plan participants can obtain additional plan and investment information. Another new requirement is that plan administrators would have to include at least one index fund in the array of investment options in order to get federal liability protection against losses in a plan. The House Education and Labor Committee passed the bill along party lines, which probably presages a similarly partisan House vote and eventual passage. Sens. Herbert Kohl (D.-Wis.) and Tom Harkin (D.-Iowa) have introduced a pension fee disclosure bill.

Senators Push Cox for More Aggressive Action on Credit Rating Agencies

It appears that some members of Congress believe the SEC's first set of rules to implement the Credit Rating Agency Reform Act of 2006 were too light-handed. That law allows credit rating agencies to voluntarily apply for the status of nationally recognized statistical rating organizations (NRSROs) and, once they are designated, for them to be regulated by the SEC. According to the first set of rules, published in July 2007, the SEC can examine the NRSRO's books as well as place limitations on its activities, censuring it or revoking or suspending its registration. In the upcoming second round of rules, SEC Chairman Chris Cox wants NRSROs simply to publish more information, such as a summary of how accurate their ratings turned out to be. Yet members of Congress want Cox to go further. During Cox's testimony before the Senate Banking Committee on April 22, Committee Chairman Chris Dodd (D.-Conn.) asked Cox whether he might pull the charter of an NRSRO that made too many bad calls. Cox answered that the SEC didn't have that authority, but it could revoke the NRSRO designation. Sen. Richard Shelby (R.-Ala.), the top Republican on the Committee, signaled he, too, expected a comprehensive second rule from the SEC--one that particularly focused on how the "the sophisticated underwriters that structured and sold these securities reaped huge fees for their efforts regardless of how the securities performed for investors."

STEPHEN BARLAS, EDITOR