ABC Suggests Improvements to Fee, Advice Bills

Specifically, the 401(k) Fair Disclosure for Retirement Security Act of 2009 would:

• Ensure that workers receive basic investment information, including information on risk, return, complete fees, and investment objectives before signing up for a plan;
• Require that all fees – in one number – that are charged against a workers account to be included in the account holder’s quarterly statement;
• Require service firms to tell employers the fees workers are charged on all investment options in four categories: administrative fees, investment management fees, transaction fees, and other fees;
• Require plan administrators to offer at least one low-cost index fund to plan participants in order to receive protection against liability for participants’ investment losses;
• Require service providers to disclose financial relationships so companies that sponsor 401(k) plans can make sure there are no conflicts of interest; and
• Give the U.S. Department of Labor the authority to enforce new disclosure rules and fine service providers who violate them.

(See Legislators Introduce 401(k) Fee Disclosure Bill, Hear Testimony )

However, before the committee’s vote, American Benefits Council President James A. Klein commended the subcommittee for preserving the broad-based provision of investment advice to employees while still protecting the many non-conflicted advice arrangements approved by IRS before the enactment of the Pension Protection Act of 2006 (PPA), but identified several liability issues raised under the bills.

“Plan sponsors and other fiduciaries cannot be expected to investigate and audit fee disclosure information provided by service providers unless the information is clearly questionable on its face,” Klein said.   He argued that inevitably, some of the information provided to sponsors by mutual funds will be incorrect due to inadvertent errors, and if the plan sponsor or the participants act on the erroneous information, this should not expose the plan sponsor to liability.

Likewise, Klein said service providers should not have a duty to investigate and audit fee information provided by their service providers unless the information is clearly questionable on its face. He contended that if service providers had to audit information provided to them by other service providers, plans would be unaffordable.

Klein also suggested the bill should make it clear that, by obtaining and disclosing the comprehensive information required by H.R. 1984, plan fiduciaries will have satisfied their fiduciary duties regarding the amount of fee information that they should obtain and disclose.

“Also importantly, coordination between legislative and regulatory measures is essential to a seamless transition for plan sponsors and participants. Lawmakers should revisit the bill’s effective date to address this concern,” Klein said.

The conflicted investment advice bill defines an "independent investment adviser" as one who is a fiduciary of the plan by virtue of the advice they provide to the plan.   That's significant because the bill also says that a plan sponsor/fiduciary for a defined contribution plan that allows participants to direct their investments "shall not appoint, contract with, or otherwise arrange for an investment adviser to provide investment advice… unless the investment adviser is an independent investment adviser" as defined in the proposed legislation - a term it uses in place of the term "fiduciary adviser" that was incorporated in the PPA (see Andrews Introduces Advice Legislation ).

House Republicans expressed concern that the bills would impact Americans' ability to save for retirement by making 401(k) plans more complex and costly while reducing workers' access to individualized investment advice.

"Republicans share the goal of improving retirement savings options for workers. Unfortunately, the legislation approved today by Democrats on a party-line vote fails to achieve that goal," said Representative John Kline (R-Minnesota), in a statement. "Worse, these bills could actually harm workers with a one-two punch that makes plans more complicated and limits access to the individualized investment advice that could help workers navigate the system."

The Republicans contend that H.R. 1984 calls for voluminous new disclosure that could overwhelm participants without providing substantial benefit, and that it picks winners and losers in the investment industry and puts the federal government in the business of dictating what type of savings plans must be offered to workers.

They expressed serious reservations about H.R. 1988, arguing that it would drastically limit the availability of investment advice by undoing the landmark 2006 reforms and erasing protections that had existed in the law even before the Pension Protection Act.