ShareThisBy KATHLEEN PENDER
San Francisco Chronicle
Wednesday, May 16, 2007
A rule that took effect April 1 makes it easier for investors to see what sales commissions and annual fees they are paying for mutual funds. But it's causing confusion for some 401(k) participants, who are now getting less information about their funds.
Fidelity, a major 401(k) service provider, has temporarily pulled fund-performance data from quarterly statements while it tries to comply with the new rule.
Under the National Association of Securities Dealers rule, any time a mutual fund shows any type of performance data, it also must show three things: standardized performance results that follow Securities and Exchange Commission requirements; the maximum sales charges applicable to that fund; and its annual operating expenses, known as the expense ratio. The expense ratio cannot reflect any fee waivers or reimbursements.
The rule applies to all mutual funds except money market funds and to virtually all "communications with the public," including sales brochures; fund fact sheets; Web sites; and print, radio and TV advertising. It does not apply to institutional sales material and public appearances.
The rule says the three required disclosures must be presented prominently whenever performance data is given.
In print advertising only, the required disclosures must be displayed in a prominent text box, which is why the new regulation is nicknamed the NASD text box rule.
Other types of printed material, such as sales brochures, don't have to provide a text box but do have to disclose the information prominently. On Web sites, funds can use a hyperlink to connect performance data to the required disclosures.
Under existing SEC rules, when funds show performance data, they also have to disclose sales commissions, but the commissions could show up in a footnote.
The NASD rule goes further by requiring disclosure of expense ratios and more prominent disclosure of sales commissions, says Tom Selman, an executive vice president with the NASD.
Selman says that when the stock market was hot, like in the late 1990s, many funds were advertising their knockout performance without mentioning their fees, which in many cases were far above average.
The SEC approved the final rule in July, with an April 1 effective date.
It's not clear what impact the rule will have on 401(k) plans, where fee disclosure has been woefully inadequate. Congress is looking at ways to improve disclosure but has not taken action.
Many 401(k) plans offer mutual funds that are subject to the NASD rules. But 401(k) plans themselves are regulated by the Labor Department under different rules.
If a 401(k) provides fund-performance data to participants, it's not clear whether it will have to include the disclosures required by the NASD rule.
Many firms that administer 401(k) plans also sell mutual funds. To be safe, many will provide the required disclosures if they don't already, says Mitch Nichter, a lawyer with Paul, Hastings, Janofsky & Walker.
Fidelity, which administers 401(k) plans for many employers, this year stopped including performance data for individual funds in the quarterly statements it sends to participants.
"The NASD rule change April 1 required that expense ratios be included anywhere performance data is communicated," Fidelity spokeswoman Jenny Engle says.
"We communicated with plan sponsors that we will temporarily suspend this section of the statements. We're working to incorporate the new information in a streamlined and user-friendly way."
Employers who were not providing performance data will not start doing so as a result of the new rule.
Many employees and even some employers don't know how much they are paying in 401(k) fees.
The largest expense is investment management. This cost is usually reflected in the expense ratios of the mutual funds or other investment options. Participants usually pay these fees.
Additional fees _ for record-keeping, custodial and other services _ can be paid by either the employer or the participants. These fees might be paid separately, or can be added into the mutual expense ratios.
Buying a fund based on its performance without knowing its cost is like buying a shiny new car without looking at the sticker price.
Funds should have been forced long ago to provide expense ratios alongside performance. Let's hope that 401(k) plans follow suit.
For more information on the rule, see nasd.complinet.com/nasd/display/display.html?rbid=1189&element_id=1159006088.
(E-mail Kathleen Pender at kpender(at)sfchronicle.com. To comment or for more stories visit scrippsnews.com)
