Companies Move to Ward Off Fee Suits

By Staff Report

Jul. 5, 2007

Defined-contribution plan executives are beefing up disclosure to participants about plan fees well ahead of regulatory guidance expected by the end of the year.

Duke Energy, American Electric Power and Allete Inc. are taking steps to enhance disclosures on fees, prompted by last year’s enactment of the Pension Protection Act, which sets new disclosure and funding requirements for private plans. The Department of Labor is expected to issue guidance clarifying fee disclosure requirements later this year.

“The DOL guidance will impact all employers. Even if they’re not subject to [federal pension law], they will try to follow the guidelines. You will see changes made in the corporate and public markets ahead of the guidance,” says Bill McClain, principal at Mercer Human Resource Consulting.

Officials at Duke Energy are reviewing their 401(k) plans’ fee structure in light of the company’s April 2006 acquisition of Cinergy Energy Solutions, as well as the pension law mandates, says Sherry Love, assistant treasurer. Duke Energy has yet to decide whether it will merge Cinergy’s 401(k) plans into its own 401(k) plan.

“We knew we needed to look into [fees] after the acquisition, and with the PPA and the various lawsuits, it became a higher priority,” Love says.

In October, participants filed lawsuits against corporate sponsors of several large 401(k) plans alleging the companies failed to monitor and disclose fees under so-called revenue-sharing arrangements.

Duke Energy, which has $2.3 billion in 401(k) assets, employs a separate account structure, while Cinergy used retail mutual funds for its $1.1 billion in 401(k) assets, Love says.

Plan officials want to simplify how fees are communicated, he adds.

“We have a proposal for a new structure for investment options for all employees,” Love says. “As a result of the PPA, there’s no question that Duke will provide full disclosure of fees.”

He declined to give details on the new structure and would not disclose names of managers.

McClain said plan executives should consider incorporating education on plan fees into current communications so participants have some background on any new information that might be required by the upcoming guidance.

William Schneider, managing director of DiMeo Schneider & Associates, said plan executives have approached his firm for assistance on what to disclose. The PPA is driving plan sponsors to act now, he said.

Patrick Cutshall, retirement fund manager for Allete’s $300 million 401(k) plan, said that while the company has always tried to stay on top of fees, executives have become more aggressive because of the PPA.

“We have always known what the fees are that we pay. As for participants, we struggle to get them to participate, and that is a challenge in itself. The PPA has changed that focus,” Cutshall says.

“We’ve become really aggressive on where all the fees are paid and communicating that. It is now all put together into a report that participants can see,” he says. Allete, which offers participants 13 investment options, now includes information on operating fees as well as the previously disclosed revenue-sharing fees.

Debate regarding proper fee disclosure has stepped up in recent months.

A congressional hearing led by Rep. George Miller, D-California, chairman of the House Education and Labor Committee, resulted in calls for greater fee disclosure, while the Labor Department said it will issue guidance later this year, and the Securities and Exchange Commission said it will seek to require improved disclosure by mutual funds.

Additionally, the recent lawsuits against major employers—including Lockheed Martin, United Technologies and Northrop Grumman—allege that current fee disclosure is inadequate and that participants lack sufficient information to make appropriate investment decisions.

McClain said Mercer is working with a number of clients on improving disclosure, but he declined to provide names.

“We try to piggyback what they’re getting from their provider. We try to find ways we can help,” he says.

McClain said that despite uncertainty about the content of new fee disclosure requirements, plan executives can begin preparing now.

To start, plan executives should make sure they understand their current fee and revenue-sharing arrangements, including hard-dollar fees, asset-based fees and expenses such as trading costs, McClain said.

Plan executives should know where they stand “by documenting fees from all sources and then benchmarking those fees against the current marketplace,” he says. They should also make sure the monitoring and oversight processes of plan fees are thorough and up to date, including documentation of fees paid from plan assets and efforts to review and reduce fees, he added.

McClain said there is concern from plan sponsors that additional disclosure might deter employees from participating in defined-contribution plans, if it makes the plans look too expensive.

“The biggest challenge is two major costs—the investment costs and the administrative costs,” McClain says. “Almost all plans these days are in a bundled or quasi-bundled arrangement, and these two expenses are intertwined.”

Filed by Jenna Gottlieb of Pensions & Investments, a sister publication of Workforce Management. To comment, e-mail

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