What I Learned After Reading 103 Pages: DOL Proposed-Fee Disclosure Requirements

I just got done reading the Department of Labor’s (DOL) new proposed regulations of fee disclosures. If you haven’t read them, I think you should.  After all, they’re only 103 pages long.  I guess they’re a start at disclosure, but I can’t say that I think they’re a very good start. 

The regulations require some annual disclosures and some quarterly disclosures: administrative expenses, individual expenses, and investment-related expenses.

1. Administrative expenses: are the expenses like legal, accounting, and recordkeeping expenses that can be charged against participant accounts.  Annually, you must disclose what you might charge, and how you’ll end up charging it.  Quarterly, you must disclose the amount that was charged, and what that charge was for.
2. Individual expenses: are those expenses that are specific to the individual participant, like a loan fee or investment advisory fees.  Annually, you must disclose what the participant could get charged for, and how much that would be.  Quarterly, you must disclose the dollar amount he was charged, and for what he was charged.
3. Investment-related expenses: I anticipate that most of the criticisms will come from this area. Information must be disclosed to participants that can be found elsewhere such as fund performance, expense ratios and benchmarking data.  The DOL provided a model disclosure chart; I predict that most everyone will use it because no one will want to go beyond what the chart discloses, or do something different from what’s been pre-approved.

Why do I think the DOL missed the boat?
First, because I don’t believe the annual notices are going to be read, except by very few participants.  We already have to swamp them with notices and reports, and most participants don’t read them. 

Yes, this may be seen as having a more direct impact than, say, a Summary Annual Report; but I’ll be surprised if it significantly modifies their behavior. 

Second, if you tell the average participant that their Midcap growth fund has an expense ratio of 75 basis points, they have no idea whether that’s good, bad, or indifferent, because there is no basis for comparison (yes, I realize some participants know, but most don’t).

It can have the impact of driving participants to the lowest cost fund, without considering whether that fund is the right one for them.  Also, the participant will have no idea whether the fund lineup is overall more expensive than it ought to be.  If the least expensive fund has a 150 basis-point expense ratio, how does the participant know that all the funds are way too expensive?

There is another part of the regulations that I find laughable; and it takes up a large chunk of the regulations—the justification that this is good public policy.  The regulations assert that the estimated cost of complying with this regulation over the next 10 years will be $759 million.  The $759 million is assuming that an attorney will only need to spend 30 minutes to review and implement this regulation.  I don’t know about you, but I don’t know many attorneys who will only charge me one hour of time to read 103 pages of regulations.  They also estimate the cost of the disclosure will be 14 cents per person.  I guess they forgot that the postage alone would be 42 cents.

I’m sure there are some who think that this is better than nothing.  I’m saying, I don’t think so.

I just got done reading the Department of Labor’s new proposed regulations of fee disclosures.