Commentary: Dept. of Labor wants a better consumer

Daily Record (Rochester, NY), Aug 25, 2008 by Kimberly DiMaria

On July 23, the Department of Labor (DOL) released its proposed rules for "Fiduciary Requirements for Disclosure in Participant- Directed Individual Account Plans."

Try saying that three times fast.

The long and short of this 32-page document is the latest in regulation aimed at providing the 401(k) plan participant (my "consumer") with the "the information they need to make informed decisions about the management of their individual accounts and the investment of their retirement savings."

According to the DOL, "This document contains a proposed regulation under the Employee Retirement Income Security Act of 1974 (ERISA) that, upon adoption, would require the disclosure of certain plan and investment-related information, including fee and expense information, to participants and beneficiaries in participant- directed individual account plans (e.g., 401(k) plans).

The proposal also contains conforming changes to the regulations applicable to ERISA section 404(c) plans (29 CFR 2550.404c-1). Upon adoption, the new requirements will affect plan sponsors, fiduciaries, participants and beneficiaries of participant-directed individual account plans, as well as providers of services to such plans," (www.dol.gov/fed-eralregister/ PdfDisplay.aspx? DocId=20973).

What does all of this mean? If the proposed regulations pass as currently written, participants will be provided quarterly with a statement of the actual dollar amount of any explicit fees which are assessed against their individual accounts, including but not limited to legal, accounting and recordkeeping costs, as well as loan, distribution, QDRO, and investment advice fees. Further, upon meeting eligibility and at least annually thereafter, participants must receive investment related information in a comparative chart format, including performance, benchmarking, fees and expenses.

With all of this information delivery at hand, how might participants react? It's not a stretch to believe that, with the exception of loan fees, participants generally are oblivious to the fact that their 401(k) plan has an operating expense and, in many cases, they bear some, if not all, of the costs. Looking first at the explicit fees, participants should have a very clear picture of what expenses are being charged directly against their account. This could potentially be a shell-shocking experience for many participants.

As to investment fee and expense information, participants may still be fairly ignorant of how expense ratios and shareholder-type fees impact their account. This information has always been available to participants in the mutual fund investment prospectus, but unless employees are further educated on how to take that information and apply it against individual fund balances, displaying this information in a different format may have little impact.

So, the question becomes, what will participants do with all of this newly disclosed information? Will they be so discouraged by the price they pay that they opt-out of the plan altogether? Or, will they use this information as an opportunity to question their plan sponsor about the charges and ask for lower cost alternatives?

One thing is for sure, plan sponsors will feel the additional fiduciary burden in a number of ways. First, the new regulations necessitate that plan sponsors have access to and understand all fees associated with the administration of their 401(k) plan. Next, plan sponsors will have to ensure that plan fees for administration, recordkeeping, investment management, etc. are reasonable for the services provides.

As fiduciaries, plan sponsors also will want to make sure that any plan fees assessed or revenue sharing off-sets are applied equitably across all participant accounts.

Lastly, new regulation calls for renewed participant communication and education. Plan sponsors will have to help the plan's consumers (i.e., participants) understand that providing a 401(k) retirement savings plan isn't a "free" benefit, but a service purchased like many other company benefits such as medical, dental, and life insurance programs. In some cases, the company can and does pay for these services, and in others, the employee pays a share of the purchase price.

At this juncture, the DOL might want to adopt apparel retailer Syms Corporation's well known slogan, "An Educated Consumer is our Best Customer." Combining their participant and service provider fee disclosure rules, the DOL's desired outcome is for better informed plan sponsors and better informed participants; each being provided with relevant, timely information for making sound purchase decisions. That would be my desire too.

How about you?

Kimberly A. DiMaria is the manager of Marketing & Corporate Communications for EPIC Advisors, Inc., a full-service retirement plan service provider with an emphasis on 401(k) plans. Offices are located at 150 State Street, Suite 200, Rochester, NY 14614; (585) 232-9060; www.EPIC1st.com and www.401kTalk.com.