Mutual fund companies have become major players in the defined-contribution market, accounting for about one-third of total assets, yet fund industry officials express frustration over lax disclosure rules in the 401(k) arena.
"Common sense and fairness tell us that employees are entitled to complete information about their investment choices and full information about fees and expenses," said Investment Company Institute (ICI) President Matthew Fink in a recent talk to more than 1,500 fund industry accountants, attorneys and administrators in Orlando, Fla. "But many employers simply do not provide employees with this basic information."
While the Department of Labor does require prospectuses to be distributed, if available, there's no such disclosure requirement for various non-fund investment options. Similarly, companies don't have to divulge plan administration costs.
"The regulations only require disclosure to employees of transaction fees, but do not require disclosure of account maintenance fees," Fink said, speaking at the Mutual Funds and Investment Management Conference sponsored by the ICI and the Federal Bar.
Barry Barbash, director of the SEC's division of investment management, noted that 401(k) trustees have a fiduciary obligation under ERISA to get reasonable services for reasonable prices. But he questioned how widely that's happening in the defined-contribution market.
"Mutual funds have always had fee disclosure," Barbash said. "It's time for the others to follow suit."
The Orlando conference was held in the wake of some important prospectus simplification rules recently approved by the SEC. For starters, the agency will require fund companies to write their disclosure documents in plain English, including active-voice sentences and a lack of legal and financial jargon.
Also, the agency approved the so-called "profile" prospectus, designed to highlight key information about a fund. It supplements rather than replaces the full prospectus, which also is getting a makeover with supposedly user-friendly features such as a standard summary of risk-return aspects and a consolidation of discussions about sales charges, 12b-1 fees and other costs in one place.
Such revisions haven't been universally applauded. Prospectuses traditionally have been written not just to inform investors but to protect a fund's directors, money managers and marketers from liability, said Richard Zack, associate general counsel at OppenheimerFunds in New York.
Another regulatory issue up for discussion at the Orlando conference involved "related performance information."
The NASDR in February asked the SEC to let new mutual funds, under certain circumstances, use the track records of related portfolios--not just in prospectuses but in sales material and advertisements. Such permission has been granted in only a piecemeal manner in the past.
If approved, the following types of related performance information would be allowed:
* For "clone" funds sharing similar managers and investment objectives, such as an institutional and retail fund.
* For "predecessor" portfolios, such as bank trust funds, insurance company separate accounts or private investment companies that become mutual funds.
* For "comparison" portfolios, such as private accounts managed by the same firm in a similar manner.
Proponents say related performance information will provide insights to investors on how a new fund that lacks a track record might fare. Yet the proposal raises the possibility for misleading comparisons, since clone, predecessor and comparison portfolios, after all, aren't identical to the fund under discussion. And the portfolio manager or managers may not be the same.
Notably, the NASDR's proposal wouldn't allow fund managers to jump ship and take their track records with them. Elizabeth Bramwell, former manager of the Gabelli Growth Fund, garnered rare approval from the SEC a few years ago when she struck out to start her own fund company--with the use of the Gabelli fund's record.
Bramwell argued successfully that she built the fund's track record single-handedly, without significant influence from traders, analysts and the like.
The NASDR is now proposing to put a stop to track record portability for individual managers. NASD members, many of whom run fund companies, generally support the rule, which would make it easier to spin off new products while at the same time create hurdles for defecting portfolio managers.
"It's relatively infrequent that you could say a portfolio manager was solely responsible" for a fund's performance, said Thomas Selman, a vice president at the NASDR, at the conference.
Selman and the NASDR did not respond to follow-up questions about whether or not the NASD feels a management company is solely responsible for performance, regardless of portfolio managers.
Bramwell, who was not at the conference, declined to comment about the NASD's proposal. But she did say that managers who played a dominant role in directing a fund's fortunes "should be able to refer to what they've done in the last few years" in terms of using those performance numbers.
And she added that managers like herself who might be able to transport their fund records could add a healthy dose of competition to the business.
