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A Fiduciary Test Drive of New DOL Fee Chart Using Top 401k Funds

December 21
03:32 2010

(The following is one of a special four part series covering an analysis and review of the DOL’s new fee disclosure requirement as revealed by using Brightscope’s list of top ten most widely held 401k mutual funds.)

On October 14, 2010, the US Labor Department (DOL) issued a news release stating its final rule to “improve transparency of fees and expenses to workers with 401(k)–type retirement plans.” Assistant Secretary of Labor for EBSA Phyllis US_Department_of_Labor_300C. Borzi said of the rule, “We are giving workers the tools they need to make the best possible decision about investing the nearly $3 trillion held in their 401k type plans. Now they will have information about different investment options to help them make wise decisions.” The DOL even provided a Model Comparative Chart for fiduciaries to download (via its home page), although this chart adds a “Since Inception” column not included in the DOL’s accompanying fact sheet.

To give the 401k plan fiduciary a better sense for the table and how to use it, Fiduciary News married the DOL’s Model Comparative Chart with BrightScope’s ranking of the top ten most widely held mutual funds in 401k plans. Before we even started, we had to make two decisions. First, we decided to ignore the “Since Inception” column in the Model Comparative Chart in deference to the DOL’s fact sheet. From a practical standpoint, while inception data on individual funds is handily available (it’s required in the fund’s prospectus), finding since inception data on the associated benchmark is almost impossible without creating it by hand for every fund. In addition, it’s not clear what the value of since inception data offers, but we’re getting ahead of ourselves.

The second decision involved the choice of benchmark. The DOL has indicated the fiduciary can choose any appropriate benchmark, including, but not necessarily limited to, various indices, Lipper categories or Morningstar style boxes. We chose to use both indices and Lipper categories. The SEC requires funds to list a benchmark index in their prospectus, so it makes sense to believe some might prefer to measure a fund against an index. We didn’t necessary choose the index selected by the particular fund, but an index generally accepted and recognized by both professional and retail investors (remember, this comparison chart is intended for use by employees who tend to behave more like retail investors rather than professionals). As you’ll find out in the analysis, we found using only an index left too many questions, so we wanted to use a peer benchmark, too. We chose Lipper over Morningstar because the former contains more than nine “style” boxes, includes a more complete universe of funds and is readily available every day in the Wall Street Journal.

Finally, regarding the Model Comparative Chart, we’ll focus only on Tables I and III, since only those two Tables are relevant to mutual funds. Following the list, we’ll provide a review both of the Model Comparative Chart and a potential analysis of the top ten mutual funds based on both the Model Comparative Chart and our improved modifications to that chart. A word about the top ten mutual funds – We contacted BrightScope for specific tickers and the company told us they combined data for all share classes in their report. As a result, we’ll show multiple class shares where relevant (and omit any classes not available to retirement plans). BrightScope’s top ten ranking is parenthetically added in front of each fund.

Here’s the breakdown of our complete series on the DOL’s new disclosure requirements:

Part I: Introduction: A Fiduciary Test Drive of New DOL Fee Chart Using Top 401k Funds
Part II: DOL’s New Performance Reporting Requirements: A Boon or a Risk to the 401k Fiduciary?
Part III: Will DOL’s New Mutual Fund Fee Disclosures Mislead 401k Investors?
Part IV: DOL’s New Disclosure Requirements Reveal Most Widely Held 401k Mutual Funds Should Worry Plan Sponsors

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About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA

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