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| > Investing > Fiduciary Focus |
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| The Politics of Reforming Fee Disclosure in Qualified Retirement Plans |
| by
W. Scott Simon
| 07-03-08 |
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Ah, 'tis the season again. Not the holiday season, of course, but the political season which, at the presidential level, descends upon us every four years. I'm always interested in this quadrennial spectacle because I served two tours of duty in Washington, D.C., politics. Yes, folks, I must confess: I am a political animal.
Politicians can be fascinating creatures. In The Crack-Up, F. Scott Fitzgerald wrote: "The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function." I think I saw a demonstration of this one time before my very own beady eyes at a lobbyist's reception on Capitol Hill back when yours truly was a young pup politico-in-training.
A well-known politician joined our gaggle of interns standing around in a congressional caucus room gossiping about the latest political goings-on. His eyes darted around the room at warp speed as he mentally ticked off those he had to greet and those he could safely ignore. While doing so, he never locked eyes with any of us but merely scanned the horizon above our heads--all the while carrying on a perfectly normal conversation without missing a beat. Our lowly group, alas, was merely a way station for him before he buzzed off on his rounds. This encounter with the politician was remarkable to me at the time, whether or not it passed Fitzgerald's test of a first-rate intelligence.
The Failure of Congress to Stand Up for Meaningful Fee Disclosure
Given that level of intelligence, you'd think that the political class in Washington D.C. would have jumped at the chance to correct the great disconnect in the ERISA statutory scheme that I described in this column in May: non-fiduciary plan providers have no duty to disclose the total economic impact that the costs of a retirement plan have on plan participants to fiduciary plan sponsors who have the duty to identify and understand such costs with some specificity.
The politicians, however, failed to enact any meaningful reform of fee disclosures for qualified retirement plans in this session of Congress. Passage of H.R. 3185 in the U.S. House of Representatives has been placed on hold for now to await probable reintroduction of the bill in the new Congress next year. This bill provides that the costs of retirement plans must be disclosed at two primary levels: disclosures from service providers to plan sponsors and disclosures from plan sponsors to plan participants.
These provisions are meant to give real teeth to one of the most basic fiduciary duties of plan sponsors. ERISA section 404(a)(1)(A) states, in part: "a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan." This requires plan sponsors to identify and understand plan expenses that are paid to service providers so that they can determine whether they're reasonable in light of the level and quality of services offered by the providers.
The fact that even many Fortune 500 companies offer retail-priced (instead of institutional-priced) 401(k) plans is a shocking indication that fee disclosure is an area needing substantial reform. Much of the media coverage on H.R. 3185 (as well as the proposed DOL regulations section 408(b)(2)) has centered, rightly, on the importance of plan sponsor-to-plan-participants fee disclosures. It might be even more important, however, to focus on the service providers-to-plan sponsor fee disclosures and why they've been resisted by certain interest groups which should instead, in my opinion, be leading the charge to make sure they become law.
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| W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understanding is the definitive work on modern prudent fiduciary investing. Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals. For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. |
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