Must Pensions And 401(k)s Keep Charles Schwab & Co. Secrets?

Financial firms providing services to pensions and 401(k)s are required under ERISA to disclose compensation they earn from plans. Can firms unilaterally demand pension and 401(k) sponsors keep statutorily mandated disclosures secret?  

I have been investing with Charles Schwab & Co. for decades. I have been largely satisfied with the services the company has provided. When clients ask for my advice about choosing brokerages and fund advisors, I often recommend Schwab, as well as Vanguard.  

Perhaps not surprising then, my company’s pension plan is also administered by Schwab.

As the chief fiduciary of my company pension, it is my obligation under the Employee Retirement Income Security Act of 1974 (ERISA) to consider cost, among other factors, when choosing investment options for the plan and selecting plan service providers.

Service providers to pensions and 401(k)s, such as Schwab, are required under Section 408(b)(2) of ERISA to provide plan sponsors with certain fee disclosures annually. The information Schwab discloses in its Explanation of Fees and Services is supposed to help plan sponsors, like me, understand compensation that Schwab may receive related to a pension or 401(k) and assist sponsors in making informed cost-benefit decisions with respect to their plans.     

The Schwab 2020 Explanation of Fees and Services I recently reviewed included the following disturbing statement:

“This information shall be treated as confidential, nonpublic information and shall not be disclosed by the employer (or an agent acting on its behalf with respect to this information) to any party other than the plan, plan sponsor, a party providing services to the plan or plan sponsor, or plan participant and beneficiaries, without the prior consent of Schwab.”

In short, I was being told that I had to keep secret information about Schwab which Schwab was required to disclose to me under federal pension law. As a former SEC attorney and pension expert, the notion that a pension vendor could unilaterally compel a pension fiduciary to keep statutorily mandated disclosures secret was both offensive and preposterous.  

To my knowledge, I had never agreed to keep Schwab pension and 401(k) compensation information secret from other pensions, 401(k)s, regulators or anyone. Indeed, I would never have agreed to do so because I am in the very business of advising plan sponsors and participants about retirement plan fees and expenses, as well as the conflicts of interest and potential harm related compensation arrangements between plan vendors.

I wrote to Schwab saying in an email, “I have never agreed that the 408(b)(2) fee disclosure is confidential and nonpublic information that cannot be readily shared with regulators, clients and the general public. To my knowledge, I am not bound to keep Schwab secrets. If Schwab believes I am bound to keep any of this information secret, please have your counsel provide the legal basis for such a belief.”

A few weeks later, following a friendly phone call, I received the following confirmatory message from a Schwab manager:

“I would like to confirm that you are under no obligation to treat the contents of this document as confidential. As I explained during the phone call, when the confidentiality disclosure was originally added many years ago, the idea was that the disclosure included pricing and other items that might be confidential. Since Schwab has a regulatory obligation to provide this disclosure, this matter has been brought to the attention of our legal and compliance departments, and we are re-evaluating the appropriateness of this disclosure.”

Under ERISA, pension and 401(k) plan sponsors and participants are entitled to know all compensation arrangements related to their plan assets, including the services provided by every vendor, as well as the costs and expenses of those services. After all, it’s their money. Disclosure of such information is mandated by the federal statute. Any restriction on the free and open exchange of this information serves to reduce price transparency, increasing costs and undermining the prudent administration of pensions and 401(k)s.

I very much doubt that Schwab is the only firm which includes such a unilaterally imposed confidentiality obligation in its 408(b)(2) annual disclosures to plan sponsors. I suspect it’s a longstanding, industry-wide practice. In my opinion, both the Department of Labor which enforces ERISA and the SEC which had jurisdiction over brokerages and advisers should take a hard look at such pension and 401(k) industry disclosure practices.