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| > Investing > Fiduciary Focus |
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| The 'Anti-Participant Rule' |
| by
W. Scott Simon
| 09-04-08 |
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Any discussion about the regulatory effort (i.e., proposed rule §2550.404a-5 set forth by the Department of Labor) or the legislative effort (i.e., HR 3185) to disclose fees associated with qualified retirement plans such as 401(k) plans must begin with citation to the relevant portion of section 404(a)(1)(A) of the Employee Retirement Income Security Act (ERISA): "[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 essential duty of plan sponsor fiduciaries requires them (among other things) to identify and understand plan expenses that are paid to plan service providers so that they can determine whether they're reasonable in light of the level and quality of services offered by the providers. This is basic ERISA law and cannot be in dispute.
Only after a sponsor determines through a conscious, prudent process that the expenses associated with the investment options offered in a retirement plan are reasonable can the sponsor then make such options available to plan participants. The sequence here is important: The plan sponsor must make a determination of the reasonableness of costs before it can be in a position to disclose such costs intelligently to participants in the plan it sponsors.
In promulgating its proposed rule §2550.404a-5, the Department of Labor has failed to require that plan service providers, such as mutual fund families, insurance companies, and other large financial-services firms, make complete and understandable cost disclosures to plan sponsors in a uniform format. This failure means that plan sponsors will continue to have a weak grasp of the total economic impact that the costs in their plans have on the account balances of plan participants. If plan sponsors have a weak grasp of this, plan participants have little chance to get the cogent information they need to make intelligent decisions with respect to their plan accounts.
Certain plan providers with a keen self interest in obfuscating the disclosure of costs associated with retirement plans have had a direct hand in guiding the Department of Labor by the nose toward promulgation of its proposed rule, now commonly known as the "anti-participant rule." Part of this "guidance" has included focusing the Department of Labor on the supposed confusion and added costs of making expense disclosures to plan participants. Such commotion has never been anything other than a red herring. In fact, complete and cogent disclosure of costs by plan providers to plan sponsors in a uniform format would allow plan sponsors to make complete and cogent disclosure of costs to plan participants in a uniform format.
By the way, the bleating by plan service providers about the "added" costs they would incur by having to make cost disclosures to plan participants is pure baloney. In fact, plan record-keepers have this data readily available because it has already been compiled. Are we to believe that service providers don't know, to the penny, what their costs are and therefore what their profits are?
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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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