THE PARTICIPANT FEE DISCLOSURE ERA: FIRST YEAR INREVIEW1Since the start of a new year is a time for reflection, looking back on the first compliance year underthe participant fee disclosure regulations seems in order. These regulations made disclosure ofimportant fee information mandatory for the first time. An estimated 72 million participants received feedisclosures last year. Did participants find the disclosures useful? Did they have questions about thefees disclosed? Did they apply the information received to decisions that they made? These and otherquestions will linger a while longer until relevant data matures, but what do we know so far?BackgroundThe participant fee disclosure regulations under ERISA section 404 require plans that allow participantself-direction of investments to deliver certain plan, investment and fee information to participants onceannually—by August 30, 2012 for most plans in the first, transitional compliance year. Thesedisclosures must also be provided to newly eligible employees on an ongoing basis. In addition, theparticipant fee disclosure regulations require plan sponsors to deliver quarterly participant statementsthat disclose the actual dollar amount of fees paid by each respective participant—by November 14,2012 for most plans in the first, transitional compliance year, and within 45 days of the end of the priorcalendar quarter for quarters ending thereafter.Primary(?) ObjectiveBy publishing the participant fee disclosure rules as a complement to the service provider-to-plansponsor fee disclosure regulations under ERISA section 408, the Department of Labor (DOL) 2established a stern position in favor of mandatory retirement plan fee transparency at all levels. Inthe prelude to the participant fee disclosure regulations, the Department of Labor states the participant1 Information contained herein is provided “as is” for general informational purposes only and is not intended to becompletely comprehensive regarding the particular subject matter. While Multnomah Group takes pride in providingaccurate and up to date information, we do not represent, guarantee, or provide any warranties (express or implied)regarding the completeness, accuracy, or currency of information or its suitability for any particular purpose. Receipt ofinformation herein does not create an adviser-client relationship between Multnomah Group and you. Neither MultnomahGroup nor any of our advisory affiliates provide tax or legal advice or opinions. You should consult with your own tax orlegal adviser for advice about your specific situation.2 In addition to compliance with participant and plan level fee disclosure regulations, the Department of Labor alsorequires governmental reporting of plan fee information via Schedule C of the Form 5500. Schedule C was revised foryears beginning in 2009.
disclosure regulation objective as follows: “Plan fiduciaries must take steps to ensure that participantsand beneficiaries are made aware of their rights and responsibilities with respect to managing theirindividual plan accounts and are provided sufficient information regarding the plan, including its feesand expenses and designated investment alternatives, to make informed decisions about themanagement of their individual accounts.” Stated simply, the primary objective of the participant feedisclosure regulations is to ensure that participants have the information necessary to make wisedecisions with regard to their retirement plan accounts.While this objective deserves applause, there is no denying the practical headwind. The heaviness,volume and technicality of the information that must be disclosed to participants cause someimmediate skepticism that participants will respond to receiving the disclosures—and not withoutreason. Plans with dozens of fund options and/or multiple service providers might produce participantdisclosures over 40 pages long. Length aside, the model chart uses language that is not at all commonparlance; including words like retirement, fee, investment, that instantly cause some participants to feelanxious.Burdens and BenefitsIf participants are unlikely to pay attention to the disclosures, why is the DOL really requiring them—especially considering implementation and maintenance costs? The cost of plan sponsor andparticipant fee disclosure implementation and administration over a 10-year period is predicted by theDOL to be dwarfed by the estimated fee savings over the same 10-year period.In the Fact Sheet accompanying the disclosure regulations, the DOL estimates the total industry costof implementing and complying with the regulations in 2012 at $425 million. Over the 10-year periodspanning from 2012-2021, the cost of complying with the regulations is estimated to be $2.7 billion.However, over the same time period, the DOL expects that plan fees and expenses charged byservice providers will decrease noticeably to help offset these costs. In fact, between 2012 and 2021,the DOL projects lowered plan fees and expenses to the tune of $14.9 billion in the aggregate as aresult of the participant fee disclosure regulations. Considering the heavy emphasis on expectedparticipant savings, it seems appropriate to conclude that the DOL has an ulterior objective: feecompression.Measuring ImpactsMeasuring the impact of the participant fee disclosure will require collecting and analyzing a slew ofinformation. Desirable measurable data includes the percentage of participants that recall receiving the
disclosure, read the disclosure, understood the disclosure after they read it, or took any action as aresult of the information provided in the annual or quarterly disclosures. It will be useful to knowwhether plan sponsors have considered replacing service providers or changing their participanteducation programs as a result of the disclosure requirements. Also, impacts to marketplacerecordkeeping services fees will be measured to determine whether fees are being lowered as a resultof the disclosure requirements.While it is far too early to make conclusions as to ultimate participant level impact, the Profit SharingCouncil of America (PSCA) recently published an October, 2012 survey indicating that the feedisclosure rules have inspired underwhelming action among surveyed 403(b) plan sponsors andparticipants. According to the PSCA survey, 64.3% of plans made no changes, 33.6% of plansponsors used fee disclosure information to benchmark their plan, 19.4% reviewed fees with theirprovider, 16.3% changed their participant education programs, 14.3% changed investment options,and 6.1% issued requests for proposals. A staggering 95.9% of plan sponsors surveyed reported nochanges in the behavior of participants as a result of the participant disclosure regulations. Surveyedplan sponsors reported that only 2.3% of participants asked questions about the fee disclosureinformation they received.Encouraging news on the fee compression front has started to emerge. Using a year-over-yearcomparison of data collected from Schedule C of a plan’s Form 5500, the DOL will be able to measurefee compression in some meaningful way. While data is still being collected, unofficial statements fromthe DOL and others would anecdotally indicate that the objective of fee compression has beensomewhat successful early in the game.Multnomah Group, Inc.Phone: (888) 559-0159Fax: (800) 997-3010www.multnomahgroup.com