Obama’s 401(k) rule up in the air after House measure

Advisers and broker-dealers who have been racing to prepare for 401(k) fee disclosure rules from the Labor Department are now scratching their heads as to when, or if, such rules will take effect.

At issue is a retirement plan fee disclosure provision that was passed in the House this month which may clash with the Labor Department’s rules — and could dramatically delay the implementation of any new rules governing pension plan fee disclosures.

The Labor Department was expected to release a new regulation — referred to as the 408(b)(2) rule after a section in the Employee Retirement Income Security Act of 1974 — on plan fee disclosure as early as this month. That rule would require registered representatives, investment advisers and others working with 401(k) plan sponsors to provide detailed overviews of their services and compensation, as well as to declare whether they were acting as fiduciaries.

“We all have to wait until this washes out, and for the Labor Department to write regulations,” said Bo Bohanan, director of retirement plan consulting at Raymond James Financial Inc.

The bill the House of Representatives passed, the American Jobs and Closing Tax Loopholes Act, includes language that would require 401(k) service providers to provide information on fees both to plan participants and plan sponsors. That bill may go to the Senate as soon as this week.

Last month, the Investment Company Institute slammed the House bill as being “redundant and counterproductive” in light of the Labor Department’s planned regulation.

Though the aim of the House bill may be similar to that of the Labor Department’s, the legislative language spells out exactly how providers would be expected to meet disclosure requirements. Since the final rule from the department hasn’t been issued yet, the requirements in the legislation could be different from what the Labor Department expects to publish, said Bradford P. Campbell, an attorney at Schiff Hardin LLP, who used to work at the Labor Department.

“The law trumps regulations,” he said. “The way the legislative language would require disclosure is specific and likely different from what the [Labor Department] would do in execution.”

The Labor Department’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 & Reicher, a firm that specializes in ERISA, believes that if the bill is enacted, it may push back the implementation of the Labor Department’s final regulation by three to five years.

Meanwhile, broker-dealers and plan providers are in wait-and-see mode, and say that they will be ready for whatever changes come down the pike.

“I wouldn’t say that [preparation] has been a waste of time on our part,” said Kathleen Roche, manager of Commonwealth Financial Network’s retirement-consulting program. “We’re well-positioned regardless of what the DOL does in the long run.”

ING spokesman Joe Loparco said that his firm is holding off on making radical changes.

“We need to have some level of confidence that the standard we’re building to is a reasonably settled one. We would prefer this to be a “one-time’ build and to respond accordingly,” Mr. Loparco said.

Plan providers added that they will have more work ahead if the House legislation becomes a reality.

For instance, the legislation calls for a chart that would compare the service and investment fees that could be charged against participants’ accounts. That chart would also include the investment options’ historical returns, net of fees and expenses, for the last one-year, five-year and 10-year periods.

“I think it’s a lot of work to pull it all together,” said Beth McHugh, vice president of market insights at Fidelity Investments.

Under the legislation, 401(k) 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 enrolled in a retirement plan.

In addition, providers would have to provide plan participants with quarterly statements listing total contributions, earnings, closing account balances, net returns and all fees subtracted from the account.

E-mail Darla Mercado at [email protected].