Broker-dealers up in arms 401(k) fee disclosure

Tue Jan 10, 2012 12:46pm EST

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Broker-dealers are up in arms over a little-known provision of the Department of Labor's 401(k) plan fee disclosure rules.

The issue: the proposed rules will require brokers to report how much they are paid to distribute mutual funds through brokerage windows. The trouble, brokers say, is that they offer thousands of mutual funds from hundreds of companies and often have different fee structures for each one.

The proposed rules, which are scheduled to take effect April 1, require 401(k) plan providers to provide employers with figures for the direct and indirect compensation they receive to service the plans [nN1E803045].

But the rules also cover self-directed brokerage accounts, in which employees essentially get access to trade stocks, bonds, mutual funds as well as other investment options. Twenty-nine percent of 401(k) plans offer such accounts, according to Aon Hewitt.

Each firm typically has a separate arrangement and fee structure with each fund company and sometimes a different fee for each fund offered by a firm. Broker-dealers argue that while disclosing these fees for the limited menu of funds within a 401(k) plan makes sense, doing so for the thousands of funds offered through a discount brokerage account is too arduous a task.

"You are talking about possibly hundreds of different compensation arrangements that firms will have to disclose," said Fred Reish, a partner at Drinker Biddle & Reath, who sent a letter to the Department of Labor on December 12 asking for clarification on the issue. "This is unworkable."

Brokerages also say the information will not benefit plan sponsors because of the sheer volume.

"Plan sponsors would shoot us if we sent them a prospectus for every fund a participant held," said one employee at a brokerage, who asked not to be named becuase he did not have permission to speak to the media.

The Securities Industry and Financial Markets Association and American Society of Pension Professionals and Actuaries both asked the Department of Labor for clarification about what they need to disclose. SIFMA wants guidance on the form the disclosures should take, said Lisa Bleier, managing director of SIFMA, which represents hundreds of broker-dealers, banks and asset managers.

A Labor Department spokesman declined to comment.

Some industry observers say the brokerage industry only has itself to blame for the fact that its compensation arrangements are so complicated.

"This is a reflection of the broker-dealers choosing to operate in an environment where they charge everyone differently for identical services," said Mercer Bullard, an associate professor of law at the University of Mississippi. "The industry... created the complexity and now they are complaining about having to disclose it."

Revenue sharing agreements, by which mutual funds share revenue with broker-dealers, are just a part of doing business, said Brian Graff, CEO and executive director of ASPPA.

"If everyone paid the same amount of compensation for everything, it would be less complicated but... that's now how the free market operates," Graff said.

Brokers are also reluctant to disclose how much different fund families are paying them to be on their platforms. "No one wants to air their dirty laundry," said one brokerage executive, who declined to be identified because the issue is sensitive for his firm. "There is a lot of vulnerability."

Right now, each broker-dealer is taking a different approach in its efforts to comply, officials said.

Some firms are opting for a "phone book approach" to the disclosure, which means they are listing the fee they receive for any investment option available to investors with self-directed accounts.

Other firms are disclosing a possible range of compensation for each fund the firm offers.

(Reporting by Jessica Toonkel, editing by Jennifer Merritt)

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