DOL and Service Provider Fee Disclosure
On May 16, 2005, the SEC issued a Staff Report Concerning Examinations of Select Pension Consultants.
In connection with the SEC report, on June 1, 2005, DOL and the SEC jointly released tips to help ERISA plan fiduciaries in selecting and monitoring fiduciaries.
The staff report and the jointly released tips focused on whether pension consultants were fully disclosing potential conflicts of interest, particularly where investment consultants' recommendations of money managers to clients might be based on financial incentives from the managers instead of the quality of the managers.
DOL has expressed concern about the difficulty that plan fiduciaries have in discerning the actual costs of services provided to 401(k) plans and has promoted on its WEB site a 401(k) Fee Disclosure Form.
DOL has in its regulatory agenda and in several public venues stated it is working on a
On July 21, 2006, DOL a proposed new rule for 5500 disclosure which would require plans to report insurance carriers that fail to provide required information on insurance fees and commissions. In addition, there would be expanded disclosure of direct and indirect service provider fees including revenue sharing.
Apparently, DOL is serious about increased fee disclosure by service providers. This raises some interesting questions:
Ultimately, what kind of disclosures for both 5500 reporting purposes and for compliance with 408(b)(2) will be required?
Assuming greater disclosure, will something positive come of it or will it merely add to the regulatory burden faced by ERISA plans and their service providers?
I wish to echo Roy Harmon's comments for welfare plans. Until there is a duty imposed on service providers (whether or nor fiduciaries)to supply Plan Administrators with Schedule C information (e.g., over $5,000 earned directly OR INDIRECTLY off the ERISA welfare plan)in the same way insurers have a duty to supply Schedule A information, no meaningful transparency will occur. No employer can get this information on their own and most service providers can come up with a number of arguments for why their contracts do not require such disclosure.
As to whether the additional burden would justify the benefit of transparency in the welfare plan area, there cannot be a serious doubt. The black box of welfare plan service providers (particulalrly PBMs) is well known to all.
Posted by: John Eggertsen | September 27, 2006 at 12:17 PM
I understand the DOL "investigated" but we still don't know how much of a problem it is. Abuses need to be minimized, but they'll never be eliminated. Is the cost of compliance greater than the abusive fees that will be saved?
As Scott notes, the issue is one of transparency. If plan administrators are forced to KNOW this information, more of them will pay attention to it.
Posted by: Ron Dean | September 26, 2006 at 03:22 PM
It is hard to argue against transparency in one's retirement benefit. There are a variety of fees now assessed against plan assets and or netted against returns (e.g. mutual fund and other investment management fees, consulting/compliance fees, legal and accounting fees, communications (SPDs) fees, QDROs, etc.). There is no standard methodology for assessing the fees (i.e. on a fund basis, a plan basis, an individual basis, etc.). As there is no single acceptable or appropriate method for assessing the fees, at least, there should be some meaningful rule for disclosing both to the sponsor and to participants the amount of such so that an individual can determine the net effect on returns and account values. It is possible, perhaps, for a participant to figure all this out now with a great deal of digging, but it seems unlikely that few if any participants actually understand what the plan is costing to run (i.e. invest, recordkeep, compliance, communicate, etc.). Let's hope for a clear, workable rule on transparency that is consistent with the interests of sponsors and participants regardless of the effect on providers.
Posted by: scott macey | September 26, 2006 at 12:57 PM
As to your second question, and with respect to welfare plans, which is my area of interest, I do not believe that the proposed changes will do much to avoid undisclosed fees and commissions. The plan administrator will often not have the information necessary to evaluate the compensation arrangements and I am skeptical that the new rules as to Form 5500 Schedules will change existing practices. The conflict of interest problem and the revenue-sharing possibilities are too subtle for resolution by a form change. Perhaps the changes will have a larger impact on retirement plans, and one of your readers could give an insight on that possibility.
Posted by: Roy Harmon | September 25, 2006 at 12:39 PM