Service providers to 401(k) plans should not be required to be fiduciaries of the plans, the Department of Labor is being told.
The department, which is considering new regulations for disclosures, is listening to suggestions from service providers, companies that manage 401(k) investments and companies that sponsor the plans.
At hearings that were held March 31 and April 1 at the DOL in Washington, mutual funds, brokerage firms and third-party service providers testified on a proposal that the agency hopes to finalize by the end of 2008.
"It is imperative that the department make clear that this regulation does not turn service providers to mutual funds into service providers to plans," Paul Schott Stevens, the president and chief executive of the Investment Company Institute, said in a written statement of his testimony.
Mutual funds do not hold plan assets and their fund advisers are not fiduciaries under the Employment Retirement Income Security Act of 1974, Mr. Stevens said. Fiduciary standards under ERISA impose very stringent liabilities and restrictions.
Mutual funds have "dozens — sometimes hundreds — of service providers, none of whom has any idea about the extent to which particular employee benefits plans are invested in the mutual fund," Mr. Stevens wrote.
"If these entities were turned into service providers to every plan that invests in the fund, it would at the very least become extremely costly and difficult for mutual funds to be offered to employee benefit plans," he wrote. Such a requirement would also "expand exponentially the information that plan fiduciaries must review, and all or most of that information will not be of assistance to them — quite the contrary," he wrote.
The proposed rule is very broad, said Michael Hadley, associate counsel for pension regulation at the Washington-based ICI, who spoke to
InvestmentNews. It covers disclosures that would have to be made for defined benefit plans, health-care plans, and investments and services for those plans, he said.
The proposed rule needs to be clarified to ensure that service providers do not have to enter into separate contracts with company plans, Mr. Hadley said.
"We're not saying the fees of mutual funds shouldn't be disclosed," he said. Those fees are disclosed now, he noted. "The key is to be able to take existing SEC disclosures and make sure employers have that information when making decisions about investments to put in a plan's line-up without treating every service provider [to a mutual fund] as someone [who] has a contract with a 401(k) plan."
For plan sponsors, a central concern is the timing, according to Robert Chambers, a partner in the Charlotte, N.C., office of McGuire Woods LLP of Richmond, Va. Mr. Chambers testified at the DOL hearing on behalf of the American Benefits Council of Washington, which represents Fortune 500 companies that have employee benefit plans, as well as service providers to plans.
"What's very important to us is to make sure that the timing of the changes enables plan sponsors and their service providers to be able to cope with these new changes in a way that they can do it once and do it right," Mr. Chambers told
InvestmentNews.
Under the proposal, the rule would take effect 90 days after final regulations are issued. "We need to get the government to focus on the fact that this is going to be a very expensive and time-consuming effort by all of the parties involved," he said.
While the amounts of fees are already disclosed, Mr. Chambers said, the proposal would require disclosure of other relationships that 401(k) service providers have with companies that underwrite investments for the plans. Large companies already get much of that information, but small employers do not, he said. "This will be a brave new world."
American Benefits Council supports provisions in the proposal that do not require plan providers that offer "bundled" services, which include a range of investments and services offered to plans, to disclose separate fees for each service, Mr. Chambers said.
Service providers that do not offer bundled services would have to provide more specific cost information about different components of the plan, he said.
When there are separate companies providing services for plans, "they [should not] need to be responsible for disclosing information about each other, because they don't have it," Mr. Chambers said.
The proposal would work better for defined contribution plans than for defined benefit plans, said Karen Barr, general counsel of the Investment Adviser Association Inc. of Washington, speaking to
InvestmentNews. Many IAA members manage defined benefit plans, she said. IAA members manage more than $9 trillion in assets.
"The regulation was crafted with 401(k) plans in mind, and is not really structured to address the way that defined benefit plans work in practice," Ms. Barr said.
The proposal should be altered, she said. "It seems to be getting at all sorts of fees and expenses that aren't present in the defined benefit context. It doesn't fit. This proposal applies to all managers. It's a one-size-fits-all regulation."
E-mail Sara Hansard at [email protected].
