Washington Prepares to Push through Fee Disclosure Regs, Financial Reform Legislation

While there are many legislative and regulatory proposals that could affect retirement plans, the financial reform bill and fee disclosure regulations are two actions to watch for next.

Speaking on a conference call sponsored by Nationwide today, Kent Mason, partner at Davis & Harman, LLP, pointed out that Washington will focus more on regulatory reform for the rest of the year rather than legislation, particularly because it’s an election year, when the focus tends to be on politics. However, two pieces of legislation lawmakers are trying to nail down by the end of this month could have ramifications for retirement plans. One bill is the extender’s bill, which renew expiring tax provisions, including defined contribution fund relief.

The other is the much-talked-about financial reform bill. Mason noted that there are two things to watch in that bill for retirement plans. For one, as the bill stands now, if passed, it could inadvertently ban stable value funds. Provisions in the bill place “onerous regulation” on swaps—a type of derivative that is so broadly defined in the bill as to include stable value guaranteed products. The bill could preclude firms from selling stable value funds to retirement plans, Mason said (see “BlackRock and Lobby Groups Fight Swaps Fiduciary Rule”).

The bill also aims to establish a Bureau of Consumer Financial Protection, which “would have the ability to regulate service providers to retirement plans,” Mason said. Though the bureau wouldn’t regulate retirement plans or plan sponsors, it could impose new rules on service providers, which affects plans. “Because the plans pay for the service providers, any burden on the service provider would translate to an additional cost to the plan,” said Mason.

Fee Disclosure

On the regulatory front, the Department of Labor (DoL) is focusing on promoting participant rights and protecting retirement plans, Mason noted. The long-awaited fee disclosure regulations seem to be the first order of business (see “Retirement Industry Should Get Ready for Fee Disclosure”). Mason said he expects to see final interim regulations in June for rules about fee disclosure from service providers to plan sponsors, with an effective date of next year. However, the DoL will still be soliciting comments, which he expects to lead to some revisions and a delayed effective date. Similarly, he said, the disclosure rules for the plan sponsor to the participant will be out later this year for comment.

What will the DoL regulations look like?  “We’re expecting the disclosure to be in the form of basis points as opposed to dollars,” Mason said. He also noted that service providers will likely have to disclose revenue-sharing arrangements and unbundle their services. There has been a lot of public policy discussion about whether service providers should unbundle their fees. While the first regulations did not require unbundling, “we expect those interim regulations to require unbundling,” he said. Essentially, that would require service providers to break out fees about what components are recordkeeping and administration and what components are investment management.

The unbundling provision would be the only addition that would be more burdensome on service providers than the first version, he noted. Mason said the regulations are mostly improved and while they will take work, it shouldn’t be “overwhelming” on service providers. “We don’t have a full picture of everything that needs to be done, but I think they’ve made a lot of progress from the original regulations to make it more workable,” he said.

Fee-disclosure legislation has also been brewing in both the House and Senate; it’s “unlikely but not of the realm of possibility” that legislation will come through before the regulation, Mason said. However, if that happened, the regulations would also be changed to accommodate the legislation.