Congress Gives Retirement Plan Fee Disclosure a Closer Look

by Gregory Dyson

Employers have many issues to consider in choosing the right retirement plan provider for their employee retirement plan. Certainly, the educational and support services as well as the investment choices are critical factors for any employer to consider.

City and county managers who place additional focus on appropriate disclosure of the costs associated with their retirement plan are giving their employees a better opportunity to build savings for their retirement. Transparency and full disclosure about the costs and fees associated with their plan are essential for designing the right program for public employees and should be part of the decision process.

Now, Congress and the regulatory agencies are taking a closer look at fee disclosure practices, especially fee disclosures in the 401(k) market, to determine whether employers and their participants have sufficient information about their plan to meet their retirement investment objectives.

Given the added scrutiny of Congress and the administration on the issue, some type of regulatory or legislative mandate on fee and expense disclosure appears likely this year. Key congressional leaders have indicated that they plan to place their concern about fee disclosure on their agenda. Chairs of the key committees overseeing retirement plans have signaled their intention to act this year on some of these proposals:

Defined Contribution Plan Fee Transparency Act. Introduced by Rep. Richard Neal (D-MA), the bill would require that the employer disclose the objective and investment manager, risk and return characteristics, and historic rates of return for each investment alternative in the plan. Employers would also be required to disclose fees being paid beyond investment management fees and whether there are any additional charges, such as redemption fees. The bill would specifically apply to 457 plans.
Mutual Fund Fee Reform Act. Introduced by Rep. Dennis Moore (D-KS) and Rep. Mike Castle (R-DE), the bill would direct the U.S. Securities and Exchange Commission to require detailed fund marketing fees (called 12b-1 fees) to investors. It would apply to all funds covered by the Securities and Exchange Commission.
401(k) Fair Disclosure Act for Retirement Security Act. Introduced by House Education and Labor Committee Chair George Miller, the bill would require annual disclosure to participants of all fees charged to their accounts and any possible conflicts of interest. Many industry groups have stated that the amount of disclosure would be confusing and burdensome. This bill would apply only to private sector plans.
Defined Contribution Fee Disclosure Act. Introduced by Sens. Tom Harkin (D-IA) and Herb Kohl (D-WI), the bill would follow the lines of the Miller bill but require less extensive disclosure.

What gave particular impetus to the fee disclosure issue was the December 2006 report by the Government Accountability Office (GAO), the research arm of Congress, which cited evidence that the majority of participants in 401(k) plans did not know how much they were paying for their retirement plan in fees and expenses. (No comparable study has been undertaken on participants in 457 deferred compensation plans.)

In its report to Congress, the GAO stated that “for plan sponsors, understanding their expenses helps fulfill their fiduciary responsibility to act in the best interest of plan participants. Given this responsibility and the potentially large impact on an individual’s account balance over time, it is important that both plan sponsors, typically the employer, and participants, as investors, receive and understand the fee information necessary to make informed decisions.”

Mindy Harris, president of the National Association of Government Defined Contribution Administrators, testified during a hearing on the issue before the House Ways and Means Committee.

“NAGDCA believes that to achieve retirement security—and to assure that millions of public employees will be self-supporting during their retirement years—it is imperative to maintain a shared responsibility between employers and employees to fund retirement income,” she told the committee.

Most of the regulatory and legislative proposals apply only to plans in the private sector, although at least one would specifically cover 457 plans. More hearings are being discussed and other proposals may be introduced later this year. There is also some talk on Capitol Hill that regulations, rather than legislation, may be able to resolve the concerns.

While the outcome of Congress’s interest in fee disclosure practices is uncertain, there appears to be general consensus that more information must be made available to both plan sponsors and participants. Since the fees charged are a factor in the ultimate benefit that the participants will receive from their retirement plans, participants have a right to know what they are being charged and any arrangements that the providers and funds have made with their employers.

Plan providers will be responsible for assisting employers in complying with the new laws or regulations after they are finalized. In the meantime, employers should maintain a careful watch on the progress of the issue as Washington moves toward its resolution.

ICMA-RC’s Part

Consistent with its origins with ICMA, the ICMA Retirement Corporation has consistently strived to be transparent with its plan sponsors and participants. Here are a few of the initiatives the corporation has taken to increase fee transparency:

ICMA-RC’s retirement investing guide provides detailed information about all the fees and expenses in its retirement plans. Although the guide is not a required disclosure document, the corporation designed the document to meet all federal standards.
ICMA-RC provides employers with specific information about their plan fees.
Account Access, located on the ICMA-RC Web site, is a resource to participants for information on fees and expenses related to their retirement accounts.
ICMA-RC discloses all the amounts that the corporation receives from its partners and service providers, in an effort to be as transparent as possible.
The Legislative Report on ICMA-RC’s public Web site (www.icmarc.org) provides an ongoing update on the regulatory and legislative activities related to fee disclosure.
ICMA-RC is active in many industry groups advocating and promoting fee transparency and disclosure.

ICMA-RC prides itself on being a leader in the effort to provide employers and participants with the best information possible about the fees that they are paying for the services that we provide. It is part of our ongoing commitment to help participants build for a secure retirement.

Gregory Dyson is senior vice president, marketing, ICMA Retirement Corporation, Washington, D.C. (gdyson@icmarc.org).

This article is intended for educational purposes only and is not to be construed or relied upon as investment advice. The ICMA Retirement Corporation does not offer specific tax or legal advice and shall not have any liability for any consequences that arise from reliance on this material. It is recommended that you consult with your personal financial adviser prior to implementing any new tax or retirement strategy. Vantagepoint securities are sold by prospectus only, and the prospectus should be consulted before investing any money. Vantagepoint securities are distributed by ICMA-RC Services, LLC, a broker deal affiliate of ICMA-RC, member FINRA/SIPC. ICMA Retirement Corporation 777 North Capitol Street, N.E., Washington, D.C. 20002-4240; 1-800-669-7400; www.icmarc.org. AC: 0308-2064

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