WASHINGTON (June 3, 2010) — A retirement plan fee disclosure provision that was passed in the House May 28 may clash with upcoming rules from the Department of Labor (DOL)—and could dramatically delay the implementation of any new rules governing pension plan fee disclosures.
Late last week, the House of Representatives passed the American Jobs and Closing Tax Loopholes Act, which included language that would require 401(k) service providers to provide information on fees to both plan participants and plan sponsors.
The bill goes on to the Senate. Meanwhile, many plan advisers and providers are awaiting word from the Labor Department about a new rule on fee disclosures at the plan level. The final version of that DOL rule is expected to be released this summer, followed by regulations on fee disclosures that must be made to plan participants.
Though the aim of the House bill may be similar to that of the DOL, the legislative language spells out exactly how providers are supposed to meet disclosure requirements. Since the final rule from the DOL hasn't been issued yet, the requirements in the legislation could be different from what the Labor Department had expected to publish, said Bradford P. Campbell, an attorney at Schiff Hardin L.L.P., who used to work at the DOL.
“The law trumps regulations,” he said. “The way the legislative language would require disclosure is specific and likely different from what the DOL would do in execution.”
The Labor Department may have to rewrite its rules to sync up with the legislation, a task Mr. Campbell said could take months.
Or longer. The DOL's rule was widely expected to go into effect early next year. The legislation on fee disclosure won't be effective till 2012.
In fact, Jason C. Roberts, a partner at Reish and Reicher, a firm that specializes in the Employee Retirement Income Security Act of 1974. believes the proposal may end up delaying action on 401(k) fee disclosure for three to five years.
“If you have thousands of clients who need to be re-papered and advisers and reps who need to be retrained on delivery, documentation and contractual issues related to 408(b)(2), then that's a use of significant resources,” Mr. Roberts added.
Given the potential for delay, the House's action may not sit well with the White House. The DOL—following the lead of the administration—has been fairly aggressively attempting to push through changes to fee-disclosure rules. Now, officials at the DOL may be forced to wait, at least to see if the the House proposal becomes law or not.
“The action here is a real slap in the face to the Obama administration,” Mr. Campbell noted.
Under the legislation, 401(k) service providers would need to inform plans sponsors of all fees on a participant's account, grouping them into three categories: plan administration and record-keeping fees, investment management fees and all other fees.
Likewise, providers would be required to provide participants with information on their investment options, including disclosures on risk, return and investment objectives. That information would have to be sent to an employee before he or she enrolls in a retirement plan.
In addition, service providers would have to provide plan participants with quarterly statements listing total contributions, earnings, closing account balances, net return and all fees subtracted from the account.
Since the language in the House legislation would supersede the upcoming DOL regulations, it would result in a handful of differences in how the two are enforced, according to Mr. Roberts.
For instance, the DOL regulations apply to all ERISA plans, while the legislation applies to plans with participant directions and non-ERISA 403(b) and 457 arrangements, he explained.
As for enforcement, the DOL's rules would either impose a prohibited transaction tax for those who don't comply with service provider disclosure requirements or impose fiduciary liability for those who don't adhere to the participant disclosure regulations, Mr. Roberts said. Under the legislation, both the DOL and the Internal Revenue Service would hit offending service providers with penalties.
Last month, the Investment Company Institute slammed the House bill as being “redundant and counterproductive” in light of the regulation that's nearing completion at the DOL.
This report appeared in Investment News, a New York-based sister publication of Tire Business.