Apparently, mandated 401(k) fee disclosure is causing some head-scratching. This was the case for Chris Tobe, principal of Stable Value Consultants, when his wife received her plan statement.
Her 401(k) stable-value fund, an investment option that purports to preserve principal and offer steady growth, was depicted as having zero fees and shared no information about the spread the fund providers made from their bond investments, he said.
The discovery spurred Mr. Tobe to produce a white paper, which was published on Friday, calling for greater disclosure from stable-value-fund providers, namely insurance companies that provide these investment options as part of a bundled 401(k) package.
“The main gist of it is that the companies are saying that the fund has zero fees,” he said. “But there is this big question of if you make money on spreads, is it technically a fee or not?”
Stable-value funds generally involve a portfolio of fixed-income investments that are “wrapped” with a contract from a bank or insurance company to protect the investments from interest rate gyrations. The funds not only protect principal, but also provide a set rate of return over time.
Fund providers make money on the spread between the rate that the provider is crediting to the fund and the actual return on the bond portfolio, Mr. Tobe said. He argues that that information ought to be shared with plan participants, as well as whether any of that spread goes toward broker compensation.
“While insurance companies may disclose some fees, [the disclosure] may only tell 25% of the story, as they make the majority of their profit on the spread,” Mr. Tobe wrote in his paper.
He asserted that the insurers are not providing greater disclosure because they interpret the fee disclosure regulation in a manner that exempts products with stated rates of return and term from having to spell out their expense ratios. This is a “loophole” in the regulation, Mr. Tobe said.
A recommended fee-disclosure template form from the Stable Value Investment Association breaks down costs tied to fixed income management, insurance company separate-account fees and wrap fees, among other things. However, it does not have a field that would cover information tied to spreads.
A call to the SVIA was not immediately returned.
Aaron Friedman, assistant vice president, retirement and investor services at The
Principal Financial Group, noted that stable value funds that provide guaranteed returns are treated differently in the 401(k) disclosure regulation because of their structure.
“That's not a loophole, but a deliberate difference in the regulation because the DOL recognizes that guaranteed instruments are not portfolios from which expenses are deducted,” he said.
Though stable value investments that guarantee interest don't have expense ratios, there are expense assumptions that underlie the calculation of the guarantee, including revenue sharing and expenses for recordkeeping and other services. The extent to which that's spelled out varies from one service provider to another.
Mr. Friedman noted that while some companies show zero expenses on these so-called guaranteed options, Principal's stable value option disclosures spell out the expense ratio of the share class and the cost per $1,000.
