Fee Disclosure

 ERISA fiduciary litigation isn't calming down, it is just switching subjects. As the stock drop cases wind down, they will be replaced (in fact, are already being replaced) by hidden or excessive fee cases. This should really come as no surprise to anyone. Most of us in the industry have known about these hidden payments (commissions, shelf space fees, etc.) for years, but never mentioned them in polite society.

It took Elliott Spitzer to shine a light on these arrangements and, once he did, virtually everybody agreed that they were indefensible (not that service providers shouldn't get paid, but that their fees should be known to the payor, who would then be in a position to comparison shop). Now everybody is getting into the act. Both the SEC and DOL are acting as though they just found out that these arrangements exist and are telling plan fiduciaries to ask questions. DOL is going to require greater disclosure on Forms 5500 and is considering amending the section 408(b)(2) regs. to require knowledge of fees as a pre-condition to a determination of reasonableness.

If only it were that easy. No matter how much disclosure the government may require, people will figure out new ways to be paid. In fact, there are so many ways now, that full disclosure would probably create something as difficult to prepare and read as a prospectus. Great for the service providers who prepare them, but of little practical use to plan fiduciaries, let alone participants.

In my view, for greater disclosure to become effective, it must be accompanied by greater simplicity. I don't think either DOL or the SEC currently has the authority to dictate how fees will be paid (as long as prohibited transactions are avoided), and the chances of Congress passing an ERISA equivalent of a truth-in-lending disclosure statement appear nil. This doesn't mean that the problem won't be solved. It just means that the problem will be solved by class action litigation--a boon to the lawyers, but to no one else.

What I don't understand is why the industry groups, such as ICI or ACLI don't come forward to take the lead. This can easily be accomplished by standardized disclosure statements coupled with a commitment to receive or pay no fees not covered by those statements. This would probably be a net plus to the members of those associations, since, I assume, mutual funds and insurance companies pay more secret fees and commissions than they receive.

It seems to me the end result is both inevitable and desirable--full disclosure (in an understandable form) of all fees paid or received by a service provider in connection with a plan's business. There are four ways to get there; legislation, litigation, regulation (to the extent possible) and industy initiative. The latter, I think, is most desirable, but least likely to occur. The least desirable is litigation, and that is how I think it will happen.

Any thoughts or comments?