Providers get a jump on retirement plan fee disclosure

It isn’t too often that the financial services industry claims that its regulatory system isn’t tough enough, but that is the conclusion that Great-West Retirement Services and Lincoln Trust Co. FSB have made.

Both companies recently ramped up their retirement plan fee disclosure in anticipation of an upcoming Labor Department regulation.

Service providers must make fee disclosure to plan sponsors by April. In turn, employers in calendar-year plans must give participants their initial disclosures by May 31.

But while some industry participants said that employers and employees could be overwhelmed by excessive mandated disclosure, executives at Great-West and Lincoln Trust say that the Labor Department’s rules don’t go far enough.

‘NO REQUIREMENT’

“The DOL fell short; there is no requirement to disclose the fixed general account fees for insurers,” said Charles P. Nelson, president of Great-West Retirement Services.

The regulation also didn’t indicate whether plan participants ought to have their fees expressed as a percentage of their account value or as a dollar amount, he said.

Tom Gonnella, senior vice president of corporate development for Lincoln Trust, agreed.

“We thought the regulations fell short in leaving out investment expenses [for participants]; the regulations don’t spell out the investment fees,” he said, noting that the Labor Department doesn’t require that participants’ and plans’ total plan cost be calculated and displayed.

Indeed, to the extent that a service provider receives compensation for an insurance general account contract, it will have to disclose that information to plans. Rules for qualified-default-plan investments would also require a description of expenses, such as wrap fees, and mortality-and-expense costs.

For participants, though, the cost of an insurance product with a fixed rate of return doesn’t have to be disclosed as an operating expense.

Further, the participant disclosure regulation leaves flexibility as far as how a service provider ought to present the fee information.

“When service providers and plan fiduciaries are required to comply with the department’s new transparency requirements early next year, we intend to monitor compliance efforts by fiduciaries, insurance companies, trust companies and other plan service and investment providers,” said Labor Department spokesman Michael Trupo.

The regulations’ perceived shortcomings led Great-West and Lincoln Trust to revamp the way that they disclose fees.

Great-West recently released a template on how to express fees for plan sponsors. A 12-page sample draft features five sections: a summary of costs and expense estimates, an explanation of services, an estimated cash flow summary, disclosures on redemption fees and expense ratios, plus a chart of itemized fees, including 12(b)-1 fees.

The itemized fees break down even the most pedestrian fees, including the cost of maintaining a participant’s account.

PAYMENTS TO PROVIDERS

Meanwhile, the cash flow summary lists the payments that are made to investment providers and that are paid to record keepers from the providers, as well as a breakdown of trustee, custodial and advisory fees.

Mr. Nelson, noting that the Labor Department didn’t provide a template for plan fee disclosure, suggested the ways that its competitors ultimately may choose to show plan sponsors how their fees will vary.

“Some companies will do a single document disclosure, and others won’t,” he said.

Once disclosure becomes the norm, Mr. Nelson said, plan sponsors might start changing their providers in 2013 as employers realize what they are paying for.

On the other hand, the need for more detailed disclosure on the participant side gave rise to Lincoln Trust’s Personal Expense Ratio.

The ratio breaks down for participants, as well as advisers and plan sponsors, the amount paid by the employee to cover costs related to revenue sharing, record keeping, third-party administrators and advisers.

Mr. Gonnella said that the personalized expense ratio is based on the participant’s average daily balance and not just the period end balance.

Workers also get a figure for their estimated investment expenses or the fees that a mutual fund provider will pull from the employee’s investments. That expense estimate doesn’t include any brokerage commissions, however.

Participants, plan sponsors and advisers get a breakdown of the cost in dollars and as an annualized percentage of the account balance.

Marcia Wagner, an attorney with The Wagner Law Group, said that there is a fine line between giving participants good disclosure and providing them with too much information. She added that she was “a little surprised” to hear companies say that the regulation fell short.

“The mandate is so much more than what plan participants previously got; you don’t want overkill,” Ms. Wagner said. “These are just people who make widgets; they’re not investment professionals.”

Email Darla Mercado at [email protected]