When it is all said and done, what will be the real outcome of participant disclosure? Not Much, other than the estimated $375 million that it will cost private industry to comply.

In the opinion of the author, these regulations will generate practices by the financial community exactly opposite to the intended results. The regulation requires extensive notification to participants detailing fees deducted directly from their accounts for administration. It also reiterates the requirement that participants be informed of gross expense ratios of the underlying investments available. What it does not address is the specific amount of revenue sharing that a provider receives for administration of the plan. This will lead to increases in operating expense ratios and new share classes devised to further hide actual expenses.

First, there has been much written and even more commented upon by individuals and firms that have not really focused on the potential outcomes but have rather focused on the intent of the legislation. As we all know, legislative intent rarely equates to reality in practice.

Let us start with the stated purpose of the regulation as published in the the Federal Register/Vol. 75, No. 202/Wednesday, October 20, 2010 as DOL 29 CFR Part 2550:

• "This regulation is intended to ensure that all participants and beneficiaries in participant-directed individual account plans have the information they need to make informed decisions about the management of their individual accounts and the investment of their retirement savings.
• "that participants and beneficiaries be provided an explanation of any fees and expenses for general plan administrative services (e.g., legal, accounting, recordkeeping) that may be charged against their individual accounts (whether by liquidating shares or deducting dollars), and the basis on which such charges will be allocated (pro rata, per capita).
• "in addition to the expenses reported on the statement, some of the plan's administrative expenses for the preceding quarter were paid from the annual operating expenses of one or more of the plan's designated investment alternatives (e.g., through revenue sharing arrangements, Rule 12b-1 fees, sub-transfer agent fees).

It is this last paragraph that will virtually debunk the notion of some that the new fee disclosure rules will have a dramatic effect on how plan sponsors choose their providers. Many companies offering retirement plans today do so under the condition that the plans are "free". That is to say that there are no separate administrative expenses billed to the company. Other companies assume they are sharing a major portion of the administrative burden by paying a per participant expense of $15 to $30 per year. In either case, the participants in the plan are paying the bulk of plan administrative expenses through asset based fees deducted from their accounts in the form of "operating expense ratios" or "contract management fees".

During the request for comments period, prior to adoption of the final regulation, some well known bundled providers made the point that breaking out the portion of the investment related expense that is allocated to plan administration would be a burden and that the cost to do so would be "significant and vastly outweigh any potential benefit to participants and beneficiaries". The DOL was persuaded by these comments and the requirement to generally footnote revenue sharing was adopted.

This in my opinion, will allow fully bundled providers to continue to collect escalated fees and will put the aforementioned passive alternative full disclosure providers at peril. Allow me to explain.

The following is a general fund disclosure as required by the regulations. Note that if expenses are paid from revenue sharing, the disclosure needs only to mention that fact on the participant statement.

*Plan administrative and investment expenses were paid from the annual operating expense ratio.

In its simplest form, a participant will see that investing in the ABC Index fund has the lowest cost at $6.80 per $1,000 invested. The regulation provides, however, that any fee actually deducted from a participant’s account be explicitly shown on the participant statement. The following compares the disclosure requirements of the bundled “free” plan (Plan A) vs. the fully disclosed approach (Plan B) for two different participants with a $10,000 and $200,000 balance assuming asset based pricing.

*Plan administrative and investment expenses were paid from the annual operating expense ratio.

In my opinion, the individual with the $200,000 account balance will immediately ask the following questions:

• What do you mean it costs $400 to give me a statement of my account
• Custody? I am in a mutual fund, they don’t charge custody
• Investment advisor for $500? I make my own decisions

The reality of course, is that an individual participant will never see the above alternatives listed side by side in a single plan. The investment and pricing decision will be made by the Company sponsoring the plan, prior to the actual disclosure to the participants.

Based on these new disclosure requirements, those in charge of the decision making process for selecting providers and platforms for retirement plan administration have one more “feature and benefit” to add to their list of RFP criteria. The request to the provider should include, “based on the fees and expenses outlined in the proposal, please provide a sample of a quarterly statement complete with fee disclosures for a participant with an account balance of $10,000, $20,000, $100,000 etc.”

Dealing with the coming disclosure requirements will be an art form in and of itself for many Plan providers. In Part II, we will discuss more on the inequities of participant plan expenses and how new fee disclosure may consume the human resource department with questions and comments.