 |
|
Posted November 9, 2007 The full Governing Management Letter | Subscribe to The Governing Management Letter Bonus columns: GIRARD MILLER’S BENEFITS BEAT Fees in Your Face Will Congress force fee disclosures? Questions, success stories or anecdotes about benefit issues in government? The lack of "fee transparency" in 401(k) plans has caught the attention of some in Congress. Rep. George Miller has introduced a bill to require defined-contribution plan providers to disclose all service fees. The bill has stirred up a hornet's nest. Consumer advocates are supportive of the idea of improved disclosure — especially if it's done in a way that ordinary people can actually understand. Opponents include the usual suspects, such as the Chamber of Commerce, the Profit-Sharing/401k Council and the ERISA Industry Committee, all representing business interests. They contend that such a law will increase costs and confuse investors. 
Will it include public plans? It's not clear yet whether the final bill's scope will include public-sector retirement plans like (IRS Section) 457 deferred-compensation plans, 401(a) defined-contribution plans, and 115 retirement health savings plans. Typically, the public-sector advocacy groups oppose congressional intervention in state and local government finances. But with this issue they don't have a leg to stand upon, because there does not appear to be any constitutional protection if Congress takes the high road to protect all consumers. The Supreme Court decision on fair labor standards in San Antonio 30 years ago set a strong precedent of upholding general labor laws. Congress has clear authority over financial services firms. It can mandate the SEC to step in over the National Association of Securities Dealers on disclosure practices that would affect virtually everybody in the industry. Why would this matter? Fees in defined-contribution plans are much higher than the fees that public pension funds pay, and they are seldom presented clearly for investors. Almost all plans start with retail-priced mutual funds which charge investment advisory fees, distribution (marketing) fees, shareholder recordkeeping fees, and other expenses. Although some plans have successfully negotiated institutional index funds into their menus to keep expenses low, those are the exceptions rather than the rule. Insurance companies serving as a record-keeper sometimes also require annuity product fees — for which there is very little benefit since the assets are tax-deferred anyway. For smaller governments in particular, there may also be a "plan administration" or "plan recordkeeping" fee built into the cost structure.
Fees are a drag on the compounding of investment income, which is the magic that makes retirement savings plans work. If you hobble investment returns with high fees, the investment returns will fall short. Many defined contribution retirement plans in the public sector have combined fee ratios above 1 percent of plan assets. In a world of 4 percent Treasury bond yields, 5 percent corporate bond yields, and fully diversified portfolio returns of 7-8 percent, a 1 percent fee takes a huge bite out of the compounded income. Over a lifetime, it can make the difference between retiring in comfort and running out of money. By definition, most public employees are not MBAs. Their life energy is devoted to public service, not high finance. Workplace savings is the single largest financial asset of most public employees. They need simple, understandable financial information on which to base their most important investment decisions of their lifetime. Unfortunately, most employees and public officials are in the dark about what they pay. A Government Accountability Office report cited one outside study showing that more than 80 percent of participants don't know how much they're paying in fees. Further, the committees that make decisions on which vendor to hire to run the recordkeeping are often hornswoggled about fees. Their decisions usually control the choices available to individuals, so it's essential that they monitor all expenses borne by participants. Can industry do this? Yes. Despite all the yammering in Congress, and the knee-jerk reactions of the vested business interests in keeping employees in the dark, it's not that hard. The trick is setting concise guidelines that are sensible and improve employee understanding — and not dozens of pages of legalese that nobody can understand. Fortunately, there is now a precedent for this. The securities regulators at the New York state attorney general's office entered into settlement agreements with numerous mutual fund companies involved in the 2003-4 "market timing" controversy that require them to make full disclosure of fees and expenses to their clientele. By individual! Based on their actual investments! Not hypothetical gibberish in a prospectus that nobody ever reads, but in a personalized statement that goes to each investor annually. Sure, it cost the offending companies some money to re-write their computer programs to achieve this, but that one-time cost is a drop in the bucket compared to the fees people are paying now. The most important single number for consumer-investors is the Total Fee number in percentage and dollar terms. Every defined-contribution provider should produce an annual statement to its plan participants that shows each one the total expenses charged during the year, based on average quarterly balances and average quarterly fees. Ideally, the statement would provide a breakdown for investment management fees (how much for portfolio management and related expenses), marketing expenses, and plan administration and recordkeeping. It should also express the fees as a percentage of a participant's investment income. This information would be illuminating to both the individuals and the oversight committees that make decisions about which investment funds and which plan administrators to use. Nothing would get their attention more than a report showing that 10-20 percent of their investment income is consumed by fees — and even more when their funds underperform. Is legislation necessary? In a perfect world, the defined-contribution industry would self-regulate. The trouble is that the high-fee players in this marketplace don't want to change their lucrative ways. And some of them dominate their industry groups, so I won't hold my breath waiting for them to act on their own. The two professional groups most relevant to this discussion are the Society of Professional Asset Managers and Record Keepers (SPARK, the successor of the National Defined Contribution Council), which represents the major industry players, and the National Association of Government Defined Contribution Administrators (NAGDCA), which represents the governmental plans but includes a very heavy industry affiliate group. There is no reason that these two associations could not develop effective industry best practices and avoid congressional legislation, and I would encourage them to do so. NAGDCA recently testified before Congress on a membership survey on fees that it recently completed. Their work thus far is informational and falls short of "best practices." The dirty nest. The other groups with a vested interest are, shamefully, several of the state and local government professional associations themselves. As I pointed out in my previous column on retirement vendor kickbacks, there are several such groups that receive undisclosed marketing payments from retirement plan administrators in exchange for endorsements and privileged partnerships. When Congress gets around to holding hearings about whether to include state and local governments in the proposed fee-disclosure legislation, I wonder how many of these organizations will dare to step up and claim exemption on "federalism" grounds — and risk the embarrassment of being called upon to disclose whether they are receiving a cut of participants' fees and how much. By taking money on the sly, they have put themselves into an untenable position of being unable to properly represent the interests of state and local governments before Congress. If they don't clean up their nest, Congress has every right to step in. Governmental association boards should take their executives to task for hiding any marketing fees they receive. Industry groups should hustle and get a best practices fee disclosure guideline out before the snow melts in Washington. Employers and plan oversight committees should ask hard questions, now, and put this information on their Web sites pronto. As I've said before, sunshine is the best antiseptic. Last month: Girard Miller, an analyst of benefits and investments with 30 years of experience in the public, private and nonprofit sectors, can be reached at Girardinmalibu@charter.net. © 2007, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
