The DOL asked for input on enhancing its 2012 fee disclosures rules and talking real change. Here are our suggestions on getting it done.
Last Tuesday, Phyllis Borzi, Assistant Secretary of Labor of Employee Benefits Administration (EBSA) opened proceedings for simplifying the fee disclosures under ERISA section 408(b)(2) that were finalized in 2012 – which she characterized as a “good first step.” Why? According to EBSA, the current disclosures have become too lengthy, complex and confusing.
“Some are filled with legalese, some have information that’s split between multiple documents,” said Borzi. In addition, she singles out small business 401k plans being in most need of a more straightforward disclosure document. She adds, “Some employers, particularly small business, may be having a hard time locating the required fee disclosures when they are embedded in lengthy or complex documents.”
If I’m dreaming, don’t wake me up!
EBSA’s proposed amendment would require service providers that use multiple or “lengthy” documents to satisfy the disclosure requirements to furnish a guide that identifies the documents and a “page or other sufficiently specific locator, such as a section,” to help the plan fiduciary “quickly and easily” find each item of information required to be disclosed under the service provider fee disclosure regulations.
EBSA has requested comments on the proposal by June 10, 2014.
EBSA also intends to conduct focus groups with small 401k plan fiduciaries. These focus groups “may provide information about the need for a guide, summary, or similar tool to help responsible plan fiduciaries navigate and understand the required disclosures.”
Employee Fiduciary stands up for small business 401k plans
Our company submitted its comments on Friday, which will become part of the public record. We have advocated fee disclosure reform for some time, and we are pleased to state our case. Here is a link to our letter to EBSA, which includes our amendment proposal to Section 408(b)(2).
We don’t think EBSA’s amendment proposal fixes a fundamental flaw of the current regulation – fiduciaries can’t easily compare providers “apples to apples.” The cornerstone of our proposal is a simple one or two page document that summarizes the fees and services a covered provider reports in their long-form disclosure. Key elements of our summary include:
- Standardized format – Current rules allow great freedom in choosing the word choice and graphic design of the disclosure. This issue makes it more difficult for fiduciaries to compare providers “apples to apples.” We think a standardized format empowers fiduciaries to make more informed provider comparisons.
- Calculation of “all-in” fees expressed in dollars – To make provider comparisons easier, common data points are required. By using dollars as the data point, plan sponsors can be presented with an “all-in” total cost of the plan, whether fees are paid by the sponsor or deducted from plan assets.
- Stated assumptions used in determining fees – It is important for fiduciaries to understand the assumptions that unpin plan fees. These assumptions generally consist of the value of plan assets and the number of employees covered in the plan.
- Statement of services provided – The provider should check off the services provided for the fees stated. Bundled providers would simply check multiple boxes on the disclosure. Other service providers would simply check the one box for the services they provide. Simplicity and clarity is the best way to cut through Secretary Borzi’s “legalese.”
- Share class – It’s hard to believe, but the current regs do not require providers to disclose the share class of the mutual fund investment provided. Many fiduciaries do not understand that a particular mutual fund may contain different share classes, each with different expenses. This is a loophole that needs to be closed.
In short, we want a standard summary that clearly states services provided, assumptions, all-in dollars charged, and whether fees are paid from plan assets or by the sponsor. Detail for any charge can be found in the provider’s long-form disclosure. Because the form is so simple, and the provider is already making the necessary calculations, we believe the cost of compliance with such a summary page would be minimal.
We sincerely hope EBSA’s “next step” is toward clarity. If plan sponsors get the appropriate information to evaluate service providers, we are confident they will make competitive choices that will strengthen the industry, not disrupt it.
About Greg Carpenter
Greg Carpenter founded Employee Fiduciary in 2004. With 29 years of experience in accounting and finance, Greg has brought his expertise to a variety of advisory, senior and executive management roles. Greg has worked for a national accounting firm, a Fortune 500 plan sponsor, a major brokerage firm, and he served as the CEO of a major 401k TPA firm. He is a CPA and earned his BA from Yale and his MBA from The University of Chicago Booth School of Business.