U.S. 401(k) Fee Alert: How Much Does my 401(k) Investment Really Cost?
Complaints that participants get a lower investment return because they pay excessive and hidden 401(k) retirement plan fees through practices such as revenue sharing have been in the news for years. Plaintiffs have not prevailed in the court challenges decided on the merits so far, although as indicated in an earlier blog post , an appeals court refused to dismiss a challenge against the huge WAL-MART 401(k) plan.
Further, the U.S. Department of Labor proposed regulations – which are not yet finalized – requiring more extensive disclosure of fees by service providers to plan sponsors and also by sponsors to participants. There has also been proposed legislation to establish clear rules for disclosure repeatedly introduced in Congress. One of these bills recently took a major step forward towards enactment, although the provisions were dropped by the Senate.
Regardless of what happens in 401(k) fee litigation, new U.S. legislation has the potential to create new burdens for administrators and plan service providers. For example, lurking in The American Jobs and Closing Tax Loopholes Act as passed by the U.S. House of Representatives on May 28 (H.R.4213), were new rules with real teeth requiring standardized 401(k) plan fee disclosure. It would affect all plans in which participants invest their own retirement accounts. The statutory requirements passed by the House would be effective in 2012 and would supersede any regulations the Department of Labor was planning to release.
H.R. 4312 would include the following requirements:
- Disclosure to participants before they begin to contribute of detailed information about available investments and disclosure to participants of the fees for each investment option chosen for their accounts as either a dollar amount or a percentage of the investment.
- Disclosure by 401(k) service providers to hiring fiduciaries of annual expected revenue from the plan and all fees assessed against participants’ accounts broken down into 3 categories: administration and recordkeeping, investment management, and all other fees. This information would also be available to participants on request.
- A requirement to provide participants with fee comparison charts detailing charges and costs for investment options, including loads and redemption fees. The charts would also list net historical returns for the previous year, 5 years and 10 years, and compare them to the historical returns of a similar benchmark or index over the same period.
Service providers who failed to disclose fees would be subject to a civil penalty or tax of up to $1000 per failure for each day of noncompliance. Plan administrators who refused to provide required information would risk a $110 per day civil penalty or a $100 a day excise tax for each failure. In addition, H.R. 4213 directs the Department of Labor to audit plans to determine compliance.
What is a plan administrator to do now?
Even if plaintiffs lose the remaining 401(k) fee cases, and even if this particular legislative attempt to change the requirements is unsuccessful, it seems clear that better disclosure is going to become legally required, either by a new law – because the proponents of reform in Congress will keep trying – or the anticipated Department of Labor regulations.
U.S. employers should begin by reviewing current fee disclosures and trying to make them as complete and accurate as possible, and consider including some of the new information that would be required if H.R. 4213 became law. Finally, it is important to keep an eye out for new final regulations at all times, as these will affect all 401(k) sponsors.
It's a fascinating topic and for the benefit of plan sponsors and participants I hope this new legislation comes into law. My question to you is what is your guess on the chances that we see HR 4213 approved?
Prospects are uncertain now, but Rep. Miller has been trying to get this legislation passed for some time, and if it is not enacted now, I think that he will keep trying to add it to future legislation. Some of these changes may be part of new DOL regulations as well.