Financial advisers favor the 401(k) fee breakdowns that would be required in the Fair Disclosure for Retirement Security Act, which was approved April 16 by a 25-19 party-line vote of the House Education and Labor Committee, even though that stance is at odds with the position taken by the mutual fund and brokerage industries.
"This is a classic example of mutual fund companies and broker/reps who sell their products not wanting full disclosure," Bob Smrekar, a financial adviser with Wade Financial Group Inc. of Minneapolis, wrote in an e-mail. "It's a huge conflict of interest," wrote Mr. Smrekar, whose firm manages $245 million and works with six small businesses that have about $10 million in 401(k) plans.
Not breaking down fees is "a way for [plan providers] to bury the true costs of the plans inside fund expense and other disclosures made in the fine print that nobody usually reads," Mr. Smrekar said in an interview. "It's very important to have those fees broken down, as we have found most business owners have no idea what the total costs of their plan are, much less the different components."
The Fair Disclosure for Retirement Security Act, which was introduced by House Education and Labor Committee Chairman George Miller, D-Calif., would require that 401(k) service providers and plan administrators disclose fees to both plan sponsors and to plan participants, broken down into administrative fees, investment management fees, transaction fees and all other fees.
In an April 15 letter to the committee, six financial services industry associations argued that service providers that offer plan services for a single disclosed price shouldn't be required to provide separate prices for services that aren't offered separately.
"Congress should not require providers to develop artificial numbers, as they are not useful to plan fiduciaries," said the letter, which was sent by the American Council of Life Insurers, the Financial Services Forum, the Financial Services Roundtable, the Investment Adviser Association and the Investment Company Institute,all of Washington, and the Securities Industry and Financial Markets Association of New York and Washington.
As long as plan sponsors can compare the services and total costs of the different options that are available, they can fulfill their duties as fiduciaries of the plans by choosing plans that have reasonable costs, the groups said.
The legislation also would require that, in order to receive liability protection for participants' investment losses, plan administrators would have to include at least one low-cost
index fund in plans. Service providers also would have to disclose potential conflicts in the financial relationships that they have with other companies that sell services to plans.
The requirement for stipulating the types of investments that must be offered in the plans is "unprecedented," the letter from the six associations said.
The Employment Retirement Income Security Act of 1974 puts the obligation to determine plan investments on companies that sponsor the plans, and "there is no evidence that plan fiduciaries are not exercising their obligations properly," the letter said.
The American Society of Pension Professionals & Actuaries, which represents third-party plan service providers, is one of the few financial services organizations that supports the fee breakdown requirement in the bill. Smaller companies that sponsor 401(k)s don't typically monitor specific fees after they enter into contracts with plan providers, said Judy Miller, chief of actuarial issues and director of retirement policy for ASPPA, based in Arlington, Va.
"A bundled fee may look good" initially, she said. "A few years down the road as assets have grown, the portion of that asset-based fee attributable to administrative costs may no longer be competitive."
Indeed, advisers who consult on 401(k) plans say they need fee breakdown information so they can compare fees for different services to industry averages.
"It's important because there is a lot of room to hype fees," said Roger Wohlner, a senior consultant in the Arlington Heights, Ill., branch office of Asset Strategy Consultants LLC, a Baltimore-based advisory firm that manages $7 billion. Mr. Wohlner is a consultant to 10 plan sponsors that have 401(k) assets of between $1 million and $30 million.
"This would be very helpful to me as a consultant, and more importantly to the plan sponsor," he said.
While advisers agree that they and 401(k) plan sponsors need the fee breakdown information, they say it isn't likely to be as useful to many plan participants.
"More communication is better than none or little," said Greg Zandlo, president of Northeast Asset Management Inc. of Minneapolis, which manages $25 million. "Whether plan participants do anything with it, that's a different story."
Mr. Zandlo works with 401(k) plans and their participants that have about $50 million in total.
E-mail Sara Hansard at [email protected].
