The mutual fund industry and independent 401(k) service providers squared off last week before the House Ways and Means Committee over whether fees for various 401(k) services should be broken down in disclosures to employers.
"Resist calls to dictate one business model for 401(k) service pro-viders over another," Paul Schott Stevens, president and chief executive of the Investment Company Institute, told the committee. The hearing was titled, "The Appropriateness of Retirement Plan Fees."
"A highly competitive market has given rise to different business models," Mr. Stevens said. In some plans, he noted, the employer or a consultant assembles different components of plans, such as record keeping, investment management, participant services and compliance. In others, employers engage full-service providers, such as mutual fund companies that manage 401(k) plans, to supply all the services.
Three-quarters of plan sponsors use the full-service, or "bundled," approach, Mr. Stevens said. That gives employers a lower cost of contracting, easy access to additional services and the ease of dealing with only one party.
Some 401(k) record keepers that do not bundle all services "want Congress to legislate their business model for the entire industry," Mr. Stevens testified. Three bills introduced in Congress — by Rep. George Miller, D-Calif., the House Education and Labor Committee chairman; Rep. Richard Neal, D-Mass.; and Sen. Herbert Kohl, D-Wis., chairman of the Senate Special Committee on Aging — would require that fees for bundled services be broken down in disclosures made by 401(k) service pro-viders to plan sponsors.
Requiring full-service providers to disclose separate prices for record keeping and investment management, even if both services are provided for a single fee, "is akin to a travel agent that only books airfare lobbying you to require its packaged-tour competitors to break out hotel, transfers and other charges separately," Mr. Stevens said.
Congress should "reject this special pleading," he said.
Employers who sponsor 401(k) plans should be informed of all payments received by plan service providers, whether directly from plan assets or indirectly from third parties, Mr. Stevens testified. That would enable plan sponsors to judge the reasonableness of total fees and help them identify any potential conflicts of interest.
Mutual funds manage more than half of the $4.1 trillion in 401(k) and other defined contribution plans.
The ICI's position was backed by the Profit Sharing/401(k) Council of America, which represents plan sponsors. "If a person buys a car, they don't need to know the price of the engine as if it were sold separately," said David Wray, president of the Chicago-based council.
Some members of the committee were skeptical of the position that breaking down fees is not necessary for plan sponsors. Rep. Jim McDermott, D-Wash., questioned, "How can you have competition without full disclosure of all the fees?"
Tommy Thomasson, president and chief executive of DailyAccess Corp., a third-party 401(k) service provider in Mobile, Ala., agrees with Mr. McDermott. Mr. Thomasson spoke on behalf of the American Society of Pension Professionals and Actuaries and the Council of Independent 401(k) Recordkeepers, two Arlington, Va., groups that represent third-party service providers.
"How can anyone have a decision-making process for buying or -purchasing anything ... without disclosure of what is involved in those products or services?" he said in reply to Mr. McDermott's question.
"There are currently no rules governing the disclosure of fees charged by plan service providers, and thus disclosure is generally inconsistent and too often nonexistent," Mr. Thomasson said in his testimony. "Any disclosures required of service provider fees to [a plan sponsor] must be provided in a uniform manner regardless of how plan services are delivered."
Although Mr. Stevens argued against breaking down costs for plan sponsors, he advocates making disclosures more uniform for 401(k) participants. Workers need a concise summary of investment objectives, historical performances and risks, as well as information about investment managers and fees, he said.
Mutual funds disclose all those items, Mr. Stevens said. "But required disclosure of this kind should not be limited to mutual funds," he said. It should include all investment options available to workers in all defined contribution plans.
Sara Hansard can be reached at [email protected].
