Balancing Acts

Balancing Disclosure Considerations

Arguably fueled by high-profile newspaper stories on hidden fees and revenue sharing, and by a spate of class-action litigation, the recent participant-directed disclosure push is highly focused and is in high gear. The proposed disclosure rules under 408(b)(2) and the new 5500 rules, on the disclosure-to-fiduciaries side, would work with the new 404(a)/404(c) rules, on the disclosure-to-participants side. The two sets of rules cover opposite sides of the coin, as the fiduciary rules are there at least in part to give the fiduciaries tools to negotiate and evaluate the characteristics of plan investments, and the participant rules look to give participants the bottom line so that they can make an informed investment choice.

On the fiduciary side, a central hot-button issue is the extent to which information regarding indirect compensation, and even compensation for indirect services, needs to be obtained by or otherwise available to fiduciaries. I've heard some wonder why fiduciaries need this kind of detailed information. Putting aside the question of just what is the right scope of the applicable information, I think the questioning of the need for any of this information misses the distinction of the value of information to fiduciaries, on the one hand, and participants, on the other.

Take the following hypothetical. I hire a contractor to build an extension. He wants $100K. I'm willing to give him that. He subcontracts out the bathroom plumbing. He gives the bathroom plumber $85K. It turns out that, unbeknownst to me, a reasonable fee for the bathroom plumber is around $20K.

Had I known all of this, I would might gone to the contractor with a bid of $35K, on the basis that the contractor only (by hypothesis) needed to retain $15K, and the plumber needed $20K. You might say that I was willing to pay $100K, so why shouldn't I do so? However, armed with the more detailed information of who gets what, I'm in a different negotiating position. Maybe now I'm indeed not willing to pay $100K anymore. Maybe I don't get all the way down to $35K, but maybe I don't go all the way up to $100K either. So perhaps this kind of information will help fiduciaries negotiate better deals.

From the participant's point of view, the context is different, as, regardless of the extent of the participant's knowledge, the participant won't be able to re negotiate fund fees as a condition to investing. From the participant's vantage point, arguably it is the bottom line that matters. But the stakes are different for the fiduciary, if the information is relevant to the fiduciary's ability to get the participants their best deal. I'm not suggesting that all the balances that have been struck by the DOL in its reporting and disclosure authority in all respects are coming out right on the nose (as just one example, I think there are basic analytical infirmities regarding how far they tried to push the reach of the 406(a)/408(b)(2) regime) - but I am suggesting that the debate may well have been appropriately framed as a general matter.

Taking it a step further, the new PPA investment-advice exemptions as practically interpreted and applied by the DOL, may be the next piece of the puzzle. It is possible that participants will now have access to real professional advice, allowing improved bottom-line information to be put to better use. Connecting the dots - from (i) information regarding the fiduciaries' choice, to (i) the fiduciaries' selection of a menu, to (iii) information provided to participants, and finally to (iv) the participants' ultimate investment choice - it will be interesting to see if what has arguably been one of the largest and most important pool of unmanaged assets will start to become more properly caretaken.

And there is another factor making it in everyone's interest that the DOL strike an effective balance here that works for constituents in the market on all sides (employers, participants, fund families, administrative providers, etc.). If the DOL's action is perceived as inadequate, Congressional action, the process for which is chugging along, becomes more likely. I would suggest that Congressional action on this point would not (ahem) necessarily come out in the right place, and would surely be difficult to fix if they don't get it right. So everyone should want to work with the DOL at finding the right balance.

Work/Life Balance

While we're on the topic of balance, I thought I would relay an anecdote regarding work/life balance. To me, a (the?) critical thing about moderating between personal life and work is never forgetting that family is paramount. This is not to say that work sublimates to personal life in a way that makes work secondary; rather, it is to say that one should focus on family as The most important thing, while at the same time doing so in a way that ensures that work responsibilities are met. Maybe you'll stay late every night but make sure you keep your mornings. Maybe you'll give up your weekdays but preserve your weekends. Maybe you'll have dinner at home, but then work afterwards into the wee hours. Whatever, you should be cutting some deal with yourself that sets up a structure where your personal life is addressed. If you're at least focusing on your family as the driving force of your behavior, at least you're in the game. Too often, I think, people lose focus and try to fit the personal into whatever happens to be left after work responsibilities are handled - to me, this is a mistake.

One of the most useful pieces of advice I ever got was from my mentor, when he said that, on one pre-set day each week, I should be sure to have dinner at home with my wife. Sometimes we get so wrapped up in what we're doing we forget the little things. Short of a crazy transaction one might be working on, there really was nothing that should have prevented me from being able to structure the week so that my mentor's directive could be met. In my case, I chose Thursday, so that (i) I would have the bulk of the week to plan for an early departure Thursday, (ii) I could work extra late on Wednesday to loosen up Thursday if necessary, (iii) I would've left myself Friday to do double duty if it turned out that leaving on Thursday left work undone, and (iv) on the off-chance something went wrong on Thursday and required me to stay, I could still try to save Friday for dinner with my wife.

As it turned out, I was able to have dinner at home on the overwhelming majority of Thursdays, and, while one can argue whether the change should really have been such a big deal, it made a huge difference in our lives. I think that people should focus on cutting their best deal with themselves, rather than just letting the chips fall where they may. We may not always indeed cut the best deal, but having an eye on the ball at least gives us a fighting chance.