Labor Shifts Fee-Disclosure Burden
Good news for plan sponsors; new demands on fund companies
February 11, 2008
In a pair of interrelated rulings affecting pension plans under the Employee Retirement Income Security Act (Erisa) of 1974, the U.S. Department of Labor (DOL) appears to have reduced some of the administrative burdens of pension plan sponsors, but may be putting additional strain on investment fund companies.
In a final rule published in November, the DOL backed down from its mandate that plan sponsors report in Schedule C of Form 5500 "indirect compensation" paid to asset managers receiving more than $5,000 annually, as long as the investment adviser provides the sponsor with "specific written disclosures." Included in indirect compensation are commissions spent by investment managers on proprietary and third-party research as well as 12-b1 fees and float income.
Form 5500--plan sponsors' version of an annual report--is reviewed not only by the DOL but also by the Internal Revenue Service and the Pension Benefit Guaranty Corp. to ensure that sponsors retain their tax-exempt status and are financially sound.
The bad news for investment fund companies is that the DOL also wants to change Rule 408(b)2 to require that service providers make additional disclosures on fees and conflicts of interest before a plan sponsor signs a contract with them. The department issued the proposal on Dec. 13.
While it was initially believed that only fund companies offering recordkeeping services to 401k plans would be affected by the Rule 408(b)2 revisions, industry sources said that the DOL told plan sponsor and mutual fund lobbyists that it also wants investment fund advisers to make the disclosures. Many of the advisers providing investment-only services are mutual fund companies.
The Form 5500 changes are effective July 2009, while the revisions to 408(b)2 would take effect 60 days after the final rule is published in the Federal Register. The comment period for the 408(b)2 revisions ends today.
The Investment Company Institute, the trade group for mutual funds and other associations representing plan sponsors, declined to comment on the DOL initiatives, as did several mutual fund companies contacted by Securities Industry News.
DOL officials were unavailable for comment, but sources in Washington, D.C. said that the changes to Form 5500 and Rule 408(b)2 were drafted with a common goal in mind. The DOL wants plan fiduciaries to more clearly understand--and in some cases disclose--how the fees they pay service providers are being spent. Such fees, even if not taken against a plan's assets, can reduce its return.
Too Much Transparency?
However, the question of how much transparency is feasible--and who should provide it--has stirred debate. Investment fund companies aren't keen to comply with any policy that asks them to compile more information than is indicated on their prospectuses.
Under the DOL's initial proposal on Form 5500, issued in 2006, plan sponsors would have needed to break out the "hard dollar" value of the research received for each underlying plan in its payments to advisers. Such a task, said sponsors, investment advisers and broker-dealers, would be a major operational burden and conflict with the Securities and Exchange Commission's soft-dollar disclosure requirements for investment managers.
Adopted in 1975, Section 28(e) of the Securities Exchange Act of 1934 requires that an investment adviser make a "good faith" determination that the total commission payment is reasonable in relation to the value of execution services and investment research received. Though the SEC in 2006 clarified the types of services that can be "softed"--through the so-called safe-harbor provision--it did not ask that fund managers unbundle trade commissions. The agency also did not differentiate between the research that is typically provided by bulge-bracket brokerages and bundled with commissions and third-party or independent research.
