W. Scott Simon
Advisors should know that it’s quite possible the Department of Labor’s proposed rule §2550.404a-5 (what I refer to as the “anti-participant rule”) to require “disclosure” of certain costs and fees associated with qualified retirement plans such as 401(k) plans will never see the light of day.
Some special-interest groups insist that the proposed implementation of the rule on Jan. 1 is not administratively feasible and urge the start date to be put off until Jan. 1, 2010. That impetus, coupled with a change of presidents (whether McCain or Obama) and probable heavier majorities of Democrats in both houses of Congress, could mean that the “anti-participant rule” will end up being the rule that never was; if perchance that is the case, I say good riddance.
Some of the special-interest groups involved in what I termed, in last month’s column, the “charade” of the Department of Labor’s 408(b)(2) cost-disclosure project would be more than glad to see the demise of the “anti-participant rule” if that should come to pass. These groups just don’t want any comprehensive disclosure of costs in retirement plans. But as an Aesop’s fable warns, be careful what you wish for. In the new Congress that will convene in January, the groups may have a difficult time resisting implementation of H.R. 3185, which really does require a truly comprehensive disclosure of costs in retirement plans.
When groups (or human beings for that matter) behave in a way that seems to conflict with their self-interest, in many cases it’s because their true motives are obscured. In a previous column, I noted that some special interest groups–representing plan sponsors and, according to their Web sites, plan participants as well–are highly resistant to any meaningful cost disclosure. I asked: “Why would these interest groups ever want to make it at all difficult for their (plan sponsor) membership to be able to precisely identify the nature and amount of the costs associated with the 401(k) plans they offer to their employees so that they can prudently carry out the duties that basic ERISA law prescribes for them?”
In fact, making disclosure of costs easy and transparent would benefit the plan sponsor membership in these interest groups in the way noted in the preceding question as well as the plan participants–the center of the ERISA universe–that these groups say they also represent. And yet such groups have an interest in obfuscating the real costs of retirement plans–much to the detriment of plan participants–even though they claim to represent their interests. But why do these groups oppose comprehensive disclosure of costs in retirement plans unless they have something to hide? Why are they behaving in a way that seems to conflict with their self-interest (representing the interests of plan participants)? What are the motives that they’re obscuring?
There are a number of reasons why such groups oppose comprehensive disclosure of costs in retirement plans. One involves the nature of their membership. At inception, these groups were composed primarily of plan sponsor employers. Over time, though, their membership ranks began to swell with mutual fund companies, insurance companies, and other financial-services firms. After all, these organizations not only are plan service providers but also plan sponsors. As a result, membership categories in the special interest groups multiplied from the usual suspects–human resource and finance functions–to functions that only large financial-services firms (not plan sponsors) fulfill: servicing, selling, and marketing retirement plans (to plan sponsors).
These special interest groups then found over time that a considerable portion of their membership came from large financial-services firms. Such member firms are disproportionately active in the interest groups through their volunteering to serve on committees, plan conferences– and especially welcome to the interest groups–laying out the cash to sponsor functions and underwrite operations.
The not unexpected result is that the special-interest groups that were established initially to support plan sponsor employers have now been hijacked by the purveyors of a Rube Goldberg-like business model that hides high costs, thereby keeping plan sponsors (and ultimately plan participants) in the dark about the harmful total economic impact this model has on participant account balances. Because of this hijacking, the special interest groups in question oppose any proposals that are seen as disadvantageous to financial-service firms, even if they would be beneficial to plan sponsors–not to mention plan participants.
Another reason why certain special interest groups oppose comprehensive disclosure of costs in retirement plans results from a don’t-rock-the-boat attitude. They believe that the current system (albeit Rube Goldberg-like) of hiding high costs is actually good for plan sponsor employers and any new rules that let in the light of day about costs would be oh so tedious. Under this system, plan participants pay for many services that are necessary and desirable, such as Web sites, employee meetings, and educational materials. Yet many participants have no idea how much they’re paying for these services and many of them even think that such services are free.
If a comprehensive cost-disclosure rule were implemented by the Congress, plan participants would actually receive comprehensive cost information. These special interest groups believe that participants would then either demand that they pay less for services or that their plan sponsor employers pay for them. Under the current system, participants pay for these services without knowing what (or even that) they’re paying, while plan sponsor employers get much of the credit for delivering the services.
A comprehensive cost-disclosure rule, according to these interest groups, would likely mean that plan-sponsor employers would have to pay more to run their retirement plans, face increased liability if the disclosures weren’t made properly, not to mention having to field lots more questions from pesky plan participants than they do now. The status quo of hiding high costs is therefore preferable from the perspective of these groups to any legislative or regulatory comprehensive cost disclosure. That’s why no one in these groups wants to rock the boat, even though that status quo is demonstrably harmful to the interests of plan participants and their beneficiaries, and this is the exact opposite of what ERISA requires.
The role played by the exotic financial instruments in the current economic turmoil demonstrates the critical importance of always remembering that risk is ever-present in investment products. When investing, there’s always the need to consciously take risk into consideration and to understand and assess it.
The same kind of vigilance is needed to effectively understand and accurately assess the costs associated with investment products that are offered in retirement plans. Only a cost disclosure system that’s comprehensive in scope can inform all interested parties of the harmful total economic impact that high costs can have on the account balances of participants in retirement plans. This exposure will help to reduce costs, the effect of which will go straight to the bottom line of plan participants’ account balances. Nothing less can help begin to restore the faith of America’s workers in our private retirement system. Nothing less can help begin to strengthen the very fabric of America. Nothing less is acceptable in this day and age.
W. Scott Simon is an expert on the Uniform Prudent Investor Act, Restatement (Third) of Trusts and Title I of ERISA. He provides services as a consultant and expert witness on fiduciary investment issues in depositions, arbitrations and trials as well as in written opinions. Simon is the author of two books including The Prudent Investor Act: A Guide to Understanding. He is a member of the State Bar of California, a Certified Financial Planner® and an Accredited Investment Fiduciary Analyst™. The author’s views expressed in this article do not necessarily reflect the views of Morningstar.