Oct 8, 2007

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Fee Disclosure Legislation = Increased Fees

[ed. note: Chad DeGroot is our employee benefits editor. Please be nice to him, because none of the rest of us understand or want to write about this crap.]

On October 4th, Representative George Miller (D-California) introduced a bill in the House seeking to increase transparency with respect to participant-directed defined contribution plan fees charged to participants. The bill essentially requires plans to disclose to each participant every fee charged to their accounts. Failure to properly inform participants would result in a $100 fee per participant, per day of noncompliance for the plan. Not only will this effort not result in a reduction or limitation on the fees participants incur, but it may result in an increase in those fees that were previously seen as unreasonable, or force those plans with relatively high fees to maintain that level.

Because of the increased administrative costs associated with an increase in disclosure, plans will be able to justify current or increased fees. One such administrative cost is going to be borne by HR departments trying to justify the fees to aggravated, uninformed participant-investors.

You think fee litigation has been on the rise as of late? Watch out.

If participants are going to see a reconciliation of the fees charged their accounts, and can understand such disclosure, there is inevitably going to be an increase in the already-saturated field of fee litigation. Much of this new litigation is going to be frivolous, and accomplish nothing but the clogging of overburdened courts and, of course, greater fees. The increase in potential liability and litigation is just going to act as another point on which a plan can justify not only leaving fees at their current levels, but may, in fact, require an increase.

Furthermore, not only will this legislation have no affect on the current fees, unless it provides grounds for an increase, but that which must be included in the disclosure is going to be complicated and convoluted to a point where the average participant will not even read it, or if they do decide to attempt the impossible, not understand it. A similar loophole has been exploited by companies in issuing proxy statements.

Many fees may currently be at inappropriate levels, but increasing the required amount of disclosure to participants is not the answer.