Investors Will Get 'Plain English'
By
Tom Lauricella, Wall Street Journal
October
10, 2006
The fees levied by 401(k) retirement-savings plans are coming under increased scrutiny amid allegations that investors are being overcharged.
Last month, separate lawsuits were filed against nine corporations, including Boeing Co. and Lockheed Martin Corp., in U.S. district court in Illinois, alleging that certain revenue-sharing arrangements with 401(k) providers broke the law. At the same time, the Labor Department, which regulates retirement plans, is considering a rule that could force companies that administer these plans to disclose more information about payments they receive from the mutual-fund companies whose funds they offer.
Now, in a move that could have a ripple-effect on fee and other disclosure practices, New York state's attorney general, Eliot Spitzer, is close to reaching a settlement agreement with a unit of insurance company ING Groep NV over allegations that it took undisclosed fees to promote certain funds in a retirement plan for New York State teachers, according to people familiar with the discussions. Among its businesses, ING sells and administers 401(k) retirement plans that other companies can offer to their employees.
The expected settlement breaks ground by requiring that ING provide entirely new plain-English disclosures about total fees charged investors. It also requires ING to provide new information about the payments it receives for including other companies' funds in its retirement plans. None of these disclosures are currently required.
ING didn't respond to requests for comment.
Regarding the complaint against Boeing, a spokesman for the company says they are still evaluating the complaint, but the firm believes its retirement plans are "structured appropriately and meet all legal requirements." Lockheed said it believed the suit was without merit.
While the ING settlement applies to only one company, ING has agreed to make these changes across all of its plans nationwide. Officials in Mr. Spitzer's office hope the settlement will prod other companies to follow suit with stepped-up disclosure of their own.
Without admitting or denying wrongdoing, ING is expected to agree to paying $30 million to New York state teachers who invested through ING and $3 million to New Hampshire state employees.
The expected settlement is the latest in a series of moves by Mr. Spitzer -- who is currently running for governor of New York -- where he has taken on issues that are the domain of other regulators. In this case, for example, the Labor Department is the agency charged with regulating retirement plans nationwide. Officials at the Labor Department declined to comment.
It is a tactic that has at times drawn criticism. In late 2003, Mr. Spitzer got into a war of words with the Securities and Exchange Commission for tactics used by Mr. Spitzer to urge mutual-fund companies to cut the fees they charge investors.
The expected ING settlement, which involves both New York and New Hampshire regulators, resolves an allegation that the unit of the Dutch insurer received fees to promote certain mutual funds -- known as revenue-sharing payments -- but didn't disclose those fees to retirement-plan participants. ING was also facing allegations from New Hampshire that it allowed improper trading in those funds that hurt investors' returns.
The disclosures required under the settlement include information that is typically not provided to investors. In addition, even employers (who have a legal responsibility to ensure the fees on their retirement plans are reasonable) are often kept in the dark. For example, it is a standard practice on many plans offering investments called group annuities for the employers to be given the specifics of the fees being charged their employees only after the plan is up and running. In addition, some insurance companies provide proposals suggesting fees will be waived, when in fact they are being collected directly from investors' accounts, reducing investors' returns.
Industry participants say current regulations are out of date and improvements are needed. Critics say they don't reflect the importance of self-directed retirement plans such as 401(k) plans. The Labor Department has proposed requiring additional disclosure on revenue-sharing payments, but that information would only be found on an obscure document that plans must file called a form 5500.
Employers say the status quo doesn't work. "I'm hesitant when its comes to regulations, but it needs to be an industry practice...where companies provide information about how much this is really costing me, instead of all the smoke and mirrors," says Kerry Brunner, who oversees benefits at Ministry Health Care Inc., in Milwaukee.
For retirement-plan investors, if their investments are in mutual funds, it is generally a simple matter to see the total expenses: The Securities and Exchange Commission requires that information to be disclosed. At issue, as in the ING case, is whether companies managing the plans are receiving payments in return for including certain fund companies in their plans.
The fee situation gets more complex when a retirement plan involves group annuities, which are essentially big investment pools offered by insurance company and are frequently used by small and midsize employers. With these, there aren't specific federal requirements that investors be provided information about the total fees.
Some in the industry also point to sales pitches that make it appear that group annuities don't have additional fees. Complicating matters, these types of plans are often pitched to businesses that don't have the resources or expertise to sift through the details, critics say.
"A salesman comes in, shows the brochure and says it doesn't cost anything -- they're not going to start digging," says Ken Weber of Weber Asset Management, which is in the business of offering retirement plans to corporations.
For instance, a Weber employee approached MassMutual Financial Group for a proposal to run a 401(k) plan. (Mr. Weber's company competes with MassMutual.) According to the proposal documents reviewed by The Wall Street Journal, MassMutual Financial offered a proposal for a 200-participant 401(k) plan with $6 million in assets that would carry annual administrative costs of "$0." In addition, an enclosed "'full service' projection" of the costs of the plan said that total annual administrative and participant charges would be "$0."
MassMutual says that administrative fees are typically deducted straight from participants' accounts. It declined to comment on the information it provided to Weber.
