Open letter to DOL: fix fee disclosure faux pas now

It’s amazing what you learn at networking events. I was at one the other evening. As others imbibed their adult beverages, I stood, as usual, alone, sipping my Diet Pepsi. An industry friend spies me and walks on over, keen for some shop talk. I tell him about some of the newer things I’m doing and he, well, he was loaded for bear. He had to get something off his chest, but, in a room full of realtors, placement firm recruiters and the usual cadre of small mom & pop business owners, he needed to find someone “in the biz,” someone who could empathize with his dilemma. After only a few words, I knew where he was going.

The fellow services 401k plans. He’s a plan fiduciary, a good guy. He’s mainly working the 3(38) side of things. He had just come from a client meeting and the CEO was livid. Like most CEOs, he engages his own private investment adviser. He was quite surprised to learn he was paying such a “large” amount for “investment advice” in his 401k account. The CEO rightfully claimed he neither was receiving nor wanted to receive any investment advice. He was happy with his private investment adviser, thank you very much.

Understand my friend’s quandary. He had just shaved 25% off of the plan’s expenses, yet the CEO was complaining about fees for a service not provided by the plan. The CEO recognized the savings, but insisted he was paying for investment advice he didn’t want. And the CEO was demanding the fees be eliminated.

Of course – and you know where this was going – the fees listed on the CEO’s participant statement (and every other participant statement) were incorrectly labeled as “investment advisor” fees. They were actually the plan’s fiduciary adviser fee. (The difference in spelling is lost to most professionals, let alone sophisticated investors like the CEO.) Maria Wagner addressed this very problem in a recent interview (“Exclusive Interview: Omnipresent Maria Wagner on All Things ERISA,” FiduciaryNews.com, December 17, 2013).

It’s a problem many honest fiduciary advisers are finding themselves victimized by. But the problem is much worse than that. A year after the DOL’s 401k Fee Disclosure Rule, a 2013 Limra study shows 50 percent of retirement plan participants still don’t know what they pay and, worse yet, 40 percent still think their 401k is free. What gives? What’s the cause? And what can be done about it?

The root of the problem lies solely at the feet of the DOL, although the recordkeeper provided participant statement is clearly the source of the problem. Recordkeepers, though, have no template regarding how to disclose fees. They have loose guidelines. Unfortunately, some of them haven’t grasped the various nuances of the industry and the role played by different service providers. I looked at the offending document that was the impetus to his story. I was surprised to see the name of one of the largest providers of recordkeeping services on it. Apparently, even the big guys don’t know the difference between an “advisor” and an “adviser.” In fact, this particular recordkeeper had no provision for “Fiduciary Adviser” in the itemized fee list on the participant statement.

And, yet, these statements remain in compliance with the Fee Disclosure Rule. Why? Because the DOL has failed to provide a simple two column template instructing recordkeepers as to the proper way to disclose fees. There aren’t a whole lot of fees involved in a 401k plan. What’s more, you can easily break down the fees between plan level fees and participant level fees. The DOL can easily create a template that contains two columns (one for plan fees and one for participant fees) and then list the possible fees for each category under their respective columns. My guess is that’ll be no more than a dozen individual lines. You can either have an “other” category that can then be explained in a footnote not to exceed six words.

There. Now, really, how hard was that? And I didn’t even go to regulators school. (Although I do remember staying at a Holiday Inn Express once.)

About the Author
Chris Carosa

Chris Carosa

Christopher Carosa, CTFA, is chief contributing editor for FiduciaryNews.com, a leading provider of essential news and information, blunt commentary and practical examples for ERISA/401(k) fiduciaries, individual trustees and professional fiduciaries. With three decades of experience in the investment industry, Carosa has helped create or found a number of financial products and firms including mutual funds, common trust funds, registered investment advisers as well as a billion-dollar trust company. He is also the author of the new book, "401(k) Fiduciary Solutions." Follow Fiduciary News on Twitter and LinkedIn.

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