Since the DOL released its fiduciary proposal, I’ve been trying to digest it so I can provide any concerns to the DOL during their comment period. This has not been an easy task. The DOL’s proposal is complex. My review got me thinking about DOL regulations in general – why aren’t they less complicated? I think they can be, being more effective in the process.
The DOL has made it a priority to stamp out conflicted investment advice in the retirement plan market. This is a commendable goal. Conflicted advice is an insidious problem that robs 401(k) savers of investment returns. According to a White House Council of Economic Advisers analysis, conflicts of interest cost retirement plan investors $17 billion per year.
A couple of months ago, the DOL proposed a fiduciary rule that would make all financial advisors serving retirement plans subject to the ERISA standard of fiduciary conduct. Currently, brokers and insurance agents are not ERISA fiduciaries. This is a problem because non-ERISA fiduciaries can give conflicted investment advice without penalty.
The DOL proposal contains complicated carve-outs and exemptions. The most notable being a "Best Interest Contract Exemption" (BICE) that allows brokers and insurance agents to provide fiduciary investment advice, while receiving commissions and revenue sharing, provided they commit to putting the clients' best interests first and disclose conflicts that prevent them from doing so.
The problem with the BICE is that it fails to disincentivize financial advisors from including high-cost, actively managed funds in a retirement plan – in other words, the types of funds that get challenged in excessive 401(k) fee lawsuits. That make the BICE a dangerous proposition for plan sponsors who have personal liability in these lawsuits.
I wish the DOL would have proposed a simple, “clean” fiduciary rule without carve-outs and exemptions. A clean rule would make it easier for 401(k) sponsors to select and monitor financial advisors obligated to put the interests of their participants first.
Unfortunately, the DOL’s proposed fiduciary rule is not their first overwrought regulation. In fact, it’s par of the course. And that’s too bad. When regulations are complex, compliance costs increase, and 401k services become more expensive.
Some examples of DOL regulations I think can be improved through simplification include:
404a-5 Participant Fee Disclosures – Under current rules, fees paid from plan investments do not need to be disclosed – they can be buried in fund investment expenses. It’s unrealistic to expect participants to understand the concepts of revenue sharing and share classes well enough to tease plan fees from an expense ratio. All fees, even those paid from plan investments, should be explicitly reported on participant fee disclosures. This reporting could be done efficiently in a table.
408b-2 Service Provider Fee Disclosures – The DOL’s 2012 regulation did not mandate a standard format for service provider fee disclosures. Some providers took advantage by burying their fees in lengthy and technical disclosures that easily overwhelm most plan sponsors. The lack of a standard also makes it difficult to compare provider fees apples-to-apples.
To their credit, the DOL understands this issue and recently asked for comments to reform the 408b-2 regulation. In response, we suggested a standard, one page summary that clearly states services provided, assumptions, and all-in dollars charged.
Form 5500 – In a 2014 study, GAO found “problems with the usefulness, reliability, and comparability of data from the Form 5500” and recommended “modifying Form 5500 plan investment and service provider fee information.” I couldn’t agree more. In most cases, fees paid from plan investments are not reported on a Form 5500. How can the DOL regulate 401(k) fees if they do not know how much plans are paying?
I think the DOL needs to make efficiency a greater priority when writing retirement plan regulations. There is a cost for complex regulations and any regulation should add more value than cost for 401(k) participants. As new regulations are needed, they should be coordinated with existing regulations to maximize overall system efficiency.
Also, plan sponsors have an incredibly important job as fiduciaries – protecting the best interests of plan participants. Regulations should make that job easier and not harder. Otherwise, plan sponsors might decide offering a 401(k) plan is not worth the trouble.