I spent some time digging through the public comments to the rule proposed by the DOL on 12/13/2008 relating to Regulation 408(b)(2).Â The comments paint a very clear picture about where individual firms and industry trade groups fall on each side of the debate. The battle lines have been drawn along the lines of economic interest.
Participants, independent fiduciaries, independent/fee-based advisors and some consultants align under the “Disclose As Much As Possible” Flag.Â Â Their arguments are generally that full transparency aids decision-making, exposes conflicts of interest, makes markets more competitive and drives down fees.
The mutual fund companies, insurance companies and most of the service provider organizations largely come down in the “Disclosure Already Goes Far Enough” Flag. Their main arguments are that existing disclosures (ADV’s and Prospectus’) already satisfy disclosure requirements, and additional disclosures are costly, inefficient and will only serve confuse fiduciaries and participants rather than help them.
You can decide for yourselves which arguments you find more compelling.Â Here are some quotes and a few of my comments:
The “Disclose As Much as Possible” Camp
- “Watson Wyatt’s experience is that full disclosure of all revenue sharing amounts allow plan sponsors to be better informed buyers and, as a result, can lead to lower overall plan fees. . . Thus, we recommend that the proposed regulation be modified to clearly require separate disclosure of revenue sharing amounts related to proprietary investment funds.”
- “Too often I have run into plans where a broker is offering “advice” which does little more than result in additional revenue sharing going to the broker . . . a “proprietary or confidential” revenue sharing agreement could cause harm to the public as the end participant could be lulled into a false sense of complacency.Â In order for the proposed amendment to have any value to the investing public, this exception should be reviewed.”
- ” . . . with respect to bundled arrangements, I find the proposed regulations unclear, particularly on the most important reason for the regulation. The central truth that must be embodied in any disclosure regulation is that disclosure is inadequate unless it tells the Sponsor and the Participant how much investment managers make (and keep) for the investment management and how much administrative service providers make as a result of their position. Without this knowledge and understanding, Sponsors and Participants are unable to assess quality of services, monitor and evaluate efficiency and proficiency of service providers, and ultimately determine whether what is being paid is in fact worth the results obtained.”
American Association of Retired Persons (AARP):
- ” . . .plan fiduciaries — in selecting investment options — must consider fees and expenses. Accordingly, clear, comprehensive, and easily accessible information is essential for fiduciaries to make informed decisions concerning the reasonableness of plan fees in comparison to the services provided and the rates of investment return. Because plan expense and fee information is often scattered, difficult to access, or nonexistent, it is not only essential that the information be provided, but that the information be provided in a manner so that plan fiduciaries may compare â€œapples to applesâ€ when comparing different service providers. Moreover, plan fiduciaries should know whether their planâ€™s service providers have potential conflicts of interest. This may color the fiduciaryâ€™s decision to contract with that provider, at all; to increase the monitoring of that provider; and to negotiate certain provisions such as reduction of fees as assets increase. Thus, all direct and indirect compensation including revenue sharing should be disclosed.”
American Society of Pension Professional & Actuaries (ASPPA):
- “We also submit that this type of disclosure should be required of all providers, whether or not considered a bundled provider under the Proposed Regulation.”
- “Recordkeeping and administrative costs, separately disclosed, are relevant because they reflect the true cost of operating the plan. These costs are often buried in investment costs and enable providers to assert that there are no recordkeeping or administrative costs. We submit that this is misleading and is a disservice to the fiduciaries and ultimately to participants.”
- ” . . .while presumptively valuable as a disclosure tool, the fund prospectus only goes part of the way, and the additional requirement in the Proposed Regulation for there to be disclosure regarding who actually gets the transaction fee is, in our view, essential”
- “We also point out that the way the proposed regulation is written, disclosure requirements appear to be greater for unbundled versus bundled providers. If an unbundled provider must disclose its component investment management versus administration fees, while a bundled provider is not required to make such disclosure, it can be argued that the unbundled provider is being put at a competitive disadvantage.”
- “we believe the proposed regulation falls short in helping plan sponsors to obtain all of the information they need from bundled providers.”
The “Disclosure Already Goes Far Enough” Camp
The Investment Company Institute:
- This was by far the most interesting comment letter I read.Â It gave me a lot of insight into how the ICI thinks about these issues.Â It is clear that they don’t want to sound as if they are against anything related to disclosure.Â They provide plenty of soundbytes that if taken alone sound more like Matt Hutcheson or the AARP than the ICI.Â But, the difference is in the details of how the ICI “reads” the proposed rule.Â They consistently “read” the rule to be narrower in orientation than most of the other comments.Â There were also a plethora of sentences that begin with “Our reading of the rule . . . “Â or “One reading of this rule . ..”Â The ICI’s comments were also one of the longest — 17 pages — that I read, no doubt because the mutual fund companies it represents have the most to lose if the the rules are sweeping and broad.
The Council of Insurance Agents & Brokers:
- “The primary purpose of the regulation appears to be to protect plans from imprudent fiduciary decision making in the hiring and monitoring of service providers.Â We believe that ERISA already provides such protection.”
- ” . . . unlike other service providers, the Form 5500 Schedule A disclosure is already comprehensive and robust.”
The Spark Institute:
- “We also request that the final regulations allow the use of a statutory prospectus to satisfy the disclosure requirements with respect to a non-proprietary mutual fund that is an underlying investment in a separately managed account, such as an insurance companyâ€™s separate account, or any other fund of funds maintained by a record keeper for a plan. This approach is not intended to relieve the record keeper from complying with the rules and regulations that require it to disclose the compensation (or estimated compensation) it will receive from the mutual fund.”
- ” We are concerned that the requirement under the Proposed Regulations could potentially require service providers to respond to unreasonable and excessive requests for information.”
Investment Advisor Association:
- ” . . .we strongly believe the proposed conflict of interest disclosures as currently drafted are too broad and unworkable.”
- “As a general matter, we support the use of an â€œall-inâ€ compensation figure in the bundled context, and question whether further breakdown of compensation and fees is necessary. The â€œall-inâ€ figure represents the amount that the plan will pay for the bundle of services; therefore, the inclusion of other figures, such as a breakdown of all fees and costs reflected in the net value of investment, would likely be confusing to plan fiduciaries if they interpreted the component fees as additional fees.”
Bank of New York Mellon:
- “The amount that the agent, usually a subcontractor or vendor of the service provider, receives is irrelevant to the plan fiduciary when the service provider, not the plan, pays the agent’s fee.Â Having information about the fee that the service provider pays the vendor in this instance will be confusing to the plan fiduciary in assessing the reasonableness of the contract since this amount is not part of what the plan pays for the services.”
This is by no means a complete review of all of the comment letters, but hopefully these few quotes help illuminate the numerous areas of disagreement over the effective level of disclosure.Â I for one think that the current disclosure tool, the Form 5500, is inadequate.Â The 2009 Schedule C improvements were a step in the right direction, but they won’t solve the problem.Â My economic training suggests that the free market works best with minimal friction (ie regulation), but my practical knowledge of what is going on in the 401k market tells me that markets occasionally fail and that some combination of increased regulatory disclosures and a private market solution is the answer.
UPDATE:Â You can read all of these comment letters on the EBSA website.