The Department of Labor (DOL) last week announced plans to expand the requirements for fee disclosure to 401(k) participants.  The details of the plans were widely reported in the media (see, for example, the Wall Street Journal).  In general, the plans call for clearer disclosure of 401(k) fees and expenses, investment options, and performance against benchmark indices.  Disclosure must be on a regular basis, as well as when a participant enrolls in a plan.

The DOL’s proposed regulations are now open for comment, with a target implementation date of January 1, 2009.

We spoke with David Loeper, President of Financeware, to understand the impact of these new requirements on the 401(k) industry and on financial advisors.  Loeper has been an outspoken advocate for broader disclosure of 401(k) fees, through his www.401kripoff.com web site and his book, Stop the 401(k) Rip-off.

Loeper believes the DOL has done an excellent job tackling a very important issue, but he also fears that the industry may ultimately squash the progress being made.  “I hope these regulations become law and are actually enforced,” said Loeper.  But he added “the danger exists that they won’t become law or that they won’t be enforced.”

Earlier this year, the Supreme Court decision in LaRue v. DeWolff, Boberg & Associates, Inc. established that plan participants can sue plan fiduciaries if fiduciaries “impair the value of plan assets in a participant’s individual account.”  Loeper thinks this ruling will evolve into a new standard under which plan fiduciaries must operate, and holds them legally (and financially) responsible if they fail to meet these standards. 

“The combination of the new DOL rules and the LaRue ruling may create an army of lawyers going after plan sponsors, advisors and investment providers,” says Loeper.  There are approximately 65 million participants in 401(k) plans currently, and the number is growing.  The challenge for plan fiduciaries is in the broader issue raised through the LaRue case.  If the fiduciary makes a bet against the investment policy market benchmark for an investment option, even if just for one year, and that results in an impairment of an individual’s plan assets, then a legal threat arises.  If plan assets are not prudently diversified, the fiduciary could be at risk.  ERISA requires diversification “unless it is clearly prudent to do otherwise.”

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