FiduciaryNews

Will DOL’s New Mutual Fund Fee Disclosures Mislead 401k Investors?

December 22
23:57 2010

(The following is part three of a special four part series covering an analysis and review of the DOL’s new fee disclosure requirement as revealed by using Brightscope’s list of top ten most widely held 401k mutual funds.)

In the Model Comparative Chart for its new 401k disclosure rule, the DOL’s sample Model Comparative Chart included a second part devoted solely to fee and expense information. This article will focus on this second part – Fee and Expense Information 1071061_65568695_Girl_on_Edge_of_Cliff_stock_xchng_royalty_free_300– specifically, it’s suggested layout for Table 3. We used data from the top ten most widely held mutual funds in 401k plans as identified by BrightScope to populate Table 3. Much of this data was obtained through Fidelity’s mutual fund data center. Although all the information is useful, its presentation may expose the investor to some dangerous decision making shortcuts. We’ll explain who this might increase fiduciary liability, offer some easy-to-implement alterations and point out which data points 401k plan sponsors cannot alter.

Here’s the DOL’s suggested language for this part: “Table 3 shows fee and expense information for the investment options listed in Table1 [and Table 2]. Table 3 shows the Total Annual Operating Expenses of the options in Table 1. Total Annual Operating Expenses are expenses that reduce the rate of return of the investment option. Table 3 also shows Shareholder-type Fees.  These fees are in addition to Total Annual Operating Expenses.”

Table 3—Fees and Expenses

Name /

Type of Option

Total Annual

Operating

Expenses

As a %

Per $1000

Shareholder-Type Fees

Equity Funds

(1) Growth Fund of America/Large Cap Growth

www.americanfunds.com

0.69%

$6.90

This fund has a 12(b)-1 fee of 0.25% and a front end load of 5.75%.

(3) EuroPacific Growth/ International Large Cap Growth

www.americanfunds.com

0.85%

$8.50

This fund has a 12(b)-1 fee of 0.25% and a front end load of 5.75%.

(4) SSgA S&P 500 Index/ S&P 500 Index

www.ssgafunds.com

0.18%

$1.80

This fund has a 12(b)-1 fee of 0.25% and there are no loads in this fund.

(5) Vanguard Index 500/ S&P 500 Index

www.vanguard.com

0.07%

0.18%

0.07%

$0.70

$1.80

$0.70

All the classes in this fund have no 12(b)-1 fee and no loads.

(6) Fidelity Contrafund/ Large Cap Growth

www.fidelity.com

1.01%

$10.10

This fund has no 12(b)-1 fee and no loads.

(7) Fidelity Diversified International/ International Large Cap Growth

www.Fidelity.com

0.99%

1.04%

1.31%

2.07%

2.06%

1.55%

$9.90

$10.40

$13.10

$20.70

$20.60

$15.50

Two classes of this fund have no 12(b)-1 fee and no loads; One class has a 12(b)-1 fee of 0.75% and a front end load of 5.75%; One class has a 12(b)-1 fee of 1.00% and a back end load of 5.00%.; One class has a 12(b)-1 fee of 1.00% and a back end load of 1.00%; and, One class has a 12(b)-1 fee of 0.75% and a front end load of 3.5%.

(8) Vanguard Institutional Index/ S&P 500 Index

www.vanguard.com

0.05%

0.02%

$0.50

$0.20

All the classes in this fund have no 12(b)-1 fee and no loads.

(9) Fidelity Spartan 500 Index/ S&P 500 Index

www.fidelity.com

0.07%

0.10%

$0.70

$1.00

All the classes in this fund have no 12(b)-1 fee and no loads.

(10) Dodge & Cox Stock/Large Cap Value

www.dodgeandcox.com

0.52%

$5.20

This fund have no 12(b)-1 fee and no loads.

Bond Funds

(2) Pimco Total Return/ Intermediate Bond Fund

www.pimco.com

0.50%

0.50%

0.46%

$5.00

$5.00

$4.60

All the classes in this fund have no 12(b)-1 fee and no loads.

The DOL suggests this language following Table 3: “The cumulative effect of fees and expenses can substantially reduce the growth of your retirement savings. Visit the Department of Labor’s Web site for an example showing the long-term effect of fees and expenses at http://www.dol.gov/ebsa/publications/401k employee.html. Fees and expenses are only one of many factors to consider when you decide to invest in an option. You may also want to think about whether an investment in a particular option, along with your other investments, will help you achieve your financial goals.”

Once again, the lack of tickers stands out. It’s also immediately clear the DOL should have included columns for 12b-1 fees, front-end loads and back-end loads rather than relying on text. In addition, it’s unclear why the DOL decided to separate the fee information from the performance information. “The lack of a comparison of applicable fund averages, or a notation explaining the relationship between investment type and fees (for example, international equity options tend to be more expensive than short-term bond options), may result in a participant making an inappropriate decision,” says William A. Noyes, Vice President at Diversified Investment Advisors. Noyes adds, “The concern is how much will a participant understand? The Fees and Expenses table includes operating expenses in a percentile format as well as per a $1,000 investment. This may be difficult for some investors to understand. The additional shareholder-type information – while important – will likely further confuse some participants. A primary concern is participants may elect to utilize the investment option with the highest historical performance or, alternatively, the lowest fees only because they don’t fully understand the relationships or impact of either. As a result, what is intended to help participants, may hurt them as their decisions are driven by confusion and data overload.”

Jeffrey M. Siegel, Vice President, United Wealth Management Group, likes the table because “wrap fees are now going to be much more clearly indicated, which may give independents a better chance at attacking cases that were solely the province of big wire houses or large plan administrators.” However, Siegel feels “it should be clearly disclosed in if there are no fees to move within funds in a family. Sometimes the simplest answer is to buy into a family of funds that let you move around within at no additional fee rather than have a different family for each class of fund.”

Ary Rosenbaum, Managing Partner at The Rosenbaum Law Firm P.C. wonders if the table contains too much information to be digested. He also offers this insight: “In light of the Edison case, it would be nice if the fund expenses chart would note the other share classes and whether there is an institutional share class available for the plan at a lower cost. It’s great for plan sponsors to know about the share class fees, but it is almost useless if they don’t know if there is a cheaper share class of the same fund that the Plan may be qualified for.”

We’ve tried to put these ideas together to create a modified table. The only piece of data we couldn’t easily find was an important one – Siegel’s transaction fee data. That information depends on the platform and service vendor; therefore, we cannot display it in a generalized example like the one we’re using. Here’s what the new table looks like.

Modified Table 3—Fees and Expenses

Name /

Type of Option

Fund

Ticker

Total Annual

Operating

Expenses

As a %

Per $1000

[Lipper Peer Group Average]

Shareholder-Type Fees

12(b)-1 Fees

Front End Load

Back End Load

[Lipper Peer Group Average] (where relevant)

Equity Funds

(1) Growth Fund of America/Large Cap Growth

www.americanfunds.com

AGTHX

0.69%

[0.89%]

$6.90

[8.90%]

0.25%

[0.19%]

5.75%

[1.42%]

(3) EuroPacific Growth/ International Large Cap Growth

www.americanfunds.com

AEPGX

0.85%

[0.92%]

$8.50

[$9.20]

0.25%

[0.17%]

5.75%

[1.12%]

(4) SSgA S&P 500 Index/ S&P 500 Index

www.ssgafunds.com

SVSPX

0.18%

[0.14%]

$1.80

[$1.40]

0.25%

[0.01%]

(5) Vanguard Index 500/ S&P 500 Index

www.vanguard.com

VFIAX

VFINX

VIFSX

0.07%

0.18%

0.07%

[0.14%]

$0.70

$1.80

$0.70

[$1.40]

(6) Fidelity Contrafund/ Large Cap Growth

www.fidelity.com

FCNTX

1.01%

[0.89%]

$10.10

[$8.90]

(7) Fidelity Diversified International/ International Large Cap Growth

www.Fidelity.com

FDIVX

FDVIX

FDVAX

FDIBX

FADCX

FADIX

0.99%

1.04%

1.31%

2.07%

2.06%

1.55%

[0.89%]

$9.90

$10.40

$13.10

$20.70

$20.60

$15.50

[$8.90]

0.75%

1.00%

1.00%

0.75%

[0.19%

5.75%

3.75%

[1.42%]

5.00%

1.00%

[0.05%]

(8) Vanguard Institutional Index/ S&P 500 Index

www.vanguard.com

VINIX

VIIIX

0.05%

0.02%

[0.14%]

$0.50

$0.20

[$1.40]

(9) Fidelity Spartan 500 Index/ S&P 500 Index

www.fidelity.com

FUSVX

FUSEX

0.07%

0.10%

[0.14%]

$0.70

$1.00

[$1.40]

(10) Dodge & Cox Stock/Large Cap Value

www.dodgeandcox.com

DODGX

0.52%

[0.72%]

$5.20

[$7.20]

Bond Funds

(2) Pimco Total Return/ Intermediate Bond Fund

www.pimco.com

PMBIX

PTSAX

PTTRX

0.50%

0.50%

0.46%

[0.52%]

$5.00

$5.00

$4.60

[5.20%]

As Noyes suggest, ideally this information would appear side-by-side with the performance information in Table I. Rosenbaum sums up the thinking of many experienced professionals when he says “The DOL fee disclosures are good for the industry. However, how long and how much will it cost plan providers to provide this information and will plan sponsors actually take the time to read these disclosures? It’s been my view that fee disclosure will actually create more fiduciary liability because plan sponsors who ignore fees in breaching their fiduciary role now have no excuse not to know about fees since the information will be provided.”

Here’s the breakdown of our complete series on the DOL’s new disclosure requirements:

Part I: Introduction: A Fiduciary Test Drive of New DOL Fee Chart Using Top 401k Funds
Part II: DOL’s New Performance Reporting Requirements: A Boon or a Risk to the 401k Fiduciary?
Part III: Will DOL’s New Mutual Fund Fee Disclosures Mislead 401k Investors?
Part IV: DOL’s New Disclosure Requirements Reveal Most Widely Held 401k Mutual Funds Should Worry Plan Sponsors

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA

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2 Comments

  1. BenefitJack
    BenefitJack December 24, 13:57

    Chris, thank you so much for this article.

    I can confirm, without question, that the chart you showed in Part III would overwhelm most plan participants. So, for example, my plan once had 47 different investment choices, requiring perhaps 20 different benchmarks. While we had a simple chart showing performance against benchmarks on two pages (quarter, year-to-date, annual, 3 year and five year), it did not include all of the fee disclosure information but showed net net against the net net of the benchmarks. Adding the fee information for both the funds and the benchmarks would have pushed that to maybe 3 or 4 pages – even in summary form.

    Today, the plan is down to 13 investment choices, but also 10 target maturity models and a directed brokerage. So, while I think plans like mine will be able to keep the fee exhibit to one or two pages, no one will use this document to make investment decisions … because it so intensely focuses on fees, out of context and to the exclusion of other important investment info. Many will want to offer a separate chart for fees, a completely separate document, versus placing it in a larger context relative to returns, for compliance purposes – because merging in what some would argue is pertinent investment information might give cause to claims that the final document was designed to divert attention from fees.

    So, I expect many plan sponsors will continue the investment performance information they already have, or if they are not providing benchmarks, adding benchmarks, and simply adding a new, separate exhibit to comply with fee disclosure requirements. So, more work, more cost, to manage your plan.

    What bothers me is that the DOL projects these regulations will have a 10 year cost (2012 – 2021) of $14.9B (range of $7.2B – $29.9B). In the preamble, the DOL estimates the regs generate a net savings of $12.3B! because the “… regulation’s disclosure requirements are expected to reduce participants’ time otherwise used for searching for fee and other investment information. The Department expects the regulation to produce substantial additional benefits, in the form of improved investment decisions, but the Department was not able to quantify this effect. …”

    My experience is that participants tend not to read required disclosures (SPD, SAR, Annual Funding Notice, etc.). For example, my phone number was on over two hundred thousand required disclosures/notices of various forms each year at my former employer and maybe I averaged 30 phone calls a year from former employees who had forgotten about their benefit plan participation; or those who called to let me know that they no longer worked at my company. So, I’m not so sure there is all that much participant searching for data on fees – at least not $27B worth! And, how many actually read the notice, and then take time to analyze and discuss the information, and then take action in reliance on that data? In fact, way too many participants don’t read much more than the bottom line at the end of each calendar quarter’s statement – let alone analyze investment performance. While it is a study almost 10 years old, an ICI study confirmed, of those surveyed, that almost 40% had not changed their initial investment and contribution elections.

    Finally, while the fee notice is required before participation begins, and annually thereafter, many investment option fees change from time to time. Perhaps I missed it, but, I don’t think the regs require notification to participants when fees change, nor the publication of historical (as well as cumulative) fee information.

    Any bets on the percentage, 0% – 100%, of the cost of this new disclosure that makes its way into an increase in fees ultimately paid by participants?

    Bottom line, I am concerned the constant push for more and more and more required disclosure is perceived by Congress and the regulators as an effective solution to EVERY problem.

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