    [House Hearing, 110 Congress]
    [From the U.S. Government Publishing Office]

     H.R. 3185, THE 401(K) FAIR DISCLOSURE FOR RETIREMENT SECURITY ACT OF
                                      2007
    =======================================================================

                                    HEARING

                                   before the

                                  COMMITTEE ON
                              EDUCATION AND LABOR

                         U.S. House of Representatives

                           ONE HUNDRED TENTH CONGRESS

                                 FIRST SESSION

                                   __________

                HEARING HELD IN WASHINGTON, DC, OCTOBER 4, 2007

                                   __________

                               Serial No. 110-67

                                   __________

          Printed for the use of the Committee on Education and Labor

                           Available on the Internet:
          http://www.gpoaccess.gov/congress/house/education/index.html

                         U.S. GOVERNMENT PRINTING OFFICE

    38-002 PDF                 WASHINGTON DC:  2008
    ---------------------------------------------------------------------
    For sale by the Superintendent of Documents, U.S. Government Printing
    Office  Internet: bookstore.gpo.gov Phone: toll free (866)512-1800
    DC area (202)512-1800  Fax: (202) 512-2250 Mail Stop SSOP,
    Washington, DC 20402-0001

                        COMMITTEE ON EDUCATION AND LABOR

                      GEORGE MILLER, California, Chairman

    Dale E. Kildee, Michigan, Vice       Howard P. ``Buck'' McKeon,
        Chairman                             California,
    Donald M. Payne, New Jersey            Senior Republican Member
    Robert E. Andrews, New Jersey        Thomas E. Petri, Wisconsin
    Robert C. ``Bobby'' Scott, Virginia  Peter Hoekstra, Michigan
    Lynn C. Woolsey, California          Michael N. Castle, Delaware
    Ruben Hinojosa, Texas                Mark E. Souder, Indiana
    Carolyn McCarthy, New York           Vernon J. Ehlers, Michigan
    John F. Tierney, Massachusetts       Judy Biggert, Illinois
    Dennis J. Kucinich, Ohio             Todd Russell Platts, Pennsylvania
    David Wu, Oregon                     Ric Keller, Florida
    Rush D. Holt, New Jersey             Joe Wilson, South Carolina
    Susan A. Davis, California           John Kline, Minnesota
    Danny K. Davis, Illinois             Cathy McMorris Rodgers, Washington
    Raul M. Grijalva, Arizona            Kenny Marchant, Texas
    Timothy H. Bishop, New York          Tom Price, Georgia
    Linda T. Sanchez, California         Luis G. Fortuno, Puerto Rico
    John P. Sarbanes, Maryland           Charles W. Boustany, Jr.,
    Joe Sestak, Pennsylvania                 Louisiana
    David Loebsack, Iowa                 Virginia Foxx, North Carolina
    Mazie Hirono, Hawaii                 John R. ``Randy'' Kuhl, Jr., New
    Jason Altmire, Pennsylvania              York
    John A. Yarmuth, Kentucky            Rob Bishop, Utah
    Phil Hare, Illinois                  David Davis, Tennessee
    Yvette D. Clarke, New York           Timothy Walberg, Michigan
    Joe Courtney, Connecticut            Dean Heller, Nevada
    Carol Shea-Porter, New Hampshire

                         Mark Zuckerman, Staff Director
                       Vic Klatt, Minority Staff Director

                                C O N T E N T S

                                  ----------
                                                                       Page

    Hearing held on October 4, 2007..................................     1

    Statement of Members:
        Altmire, Hon. Jason, a Representative in Congress from the
          State of Pennsylvania, prepared statement of...............    56
        McKeon, Hon. Howard P. ``Buck,'' Senior Republican Member,
          Committee on Education and Labor...........................     4
            Prepared statement of....................................     5
            Additional submissions:
                American Benefits Council and American Council of
                  Life Insurers and Investment Company Institute
                  (ICI)..............................................    56
                ``A Primer on Plan Fees and an Analysis of H.R. 3185,
                  the 401(k) Fair Disclosure for Retirement Security
                  Act of 2007''......................................    70
                Fee disclosure request for information (RFI) from
                  various organizations..............................    60
                Goldbrum, Larry H., Esq., general counsel, the SPARK
                  Institute, statement of............................    64
                ICI, statement of....................................    74
                ICI Policy Statement--Retirement Plan Disclosure,
                  January 30, 2007...................................    78
                ICI ERISA advisory council, statement of.............    81
                Internet address to ICI fee disclosure RFI to U.S.
                  Department of Labor, dated July 20, 2007...........    78
        Miller, Hon. George, Chairman, Committee on Education and
          Labor......................................................     1
            Prepared statement of....................................     3

    Statement of Witnesses:
        Campbell, Bradford P., Assistant Secretary of Labor..........     7
            Prepared statement of....................................     9
        Certner, David, legislative counsel and legislative policy
          director, AARP.............................................    14
            Prepared statement of....................................    16
        Chambers, Jon C., principal with Schultz Collins Lawson
          Chambers, Inc..............................................    45
            Prepared statement of....................................    47
        Minsky, Lew, senior attorney, Florida Power and Light Co.....    38
            Prepared statement of....................................    40
        Scanlon, Matthew H., managing director, Barclays Global
          Investors..................................................    19
            Prepared statement of....................................    22
        Thomasson, Tommy, president/CEO of DailyAccess Corp., on
          behalf of ASPPA and CIKR...................................    29
            Prepared statement of....................................    31

     H.R. 3185, THE 401(k) FAIR DISCLOSURE FOR RETIREMENT SECURITY ACT OF
                                      2007

                                  ----------

                           Thursday, October 4, 2007

                         U.S. House of Representatives

                        Committee on Education and Labor

                                 Washington, DC

                                  ----------

        The committee met, pursuant to call, at 10:35 a.m., in room
    2175, Rayburn House Office Building, Hon. George Miller
    [chairman of the committee] presiding.
        Present: Representatives Miller, Andrews, McCarthy,
    Kuchinich, Holt, Grijalva, Bishop of New York, Sestak,
    Loebsack, Hare, Clarke, Courtney, Shea-Porter, McKeon, Petri,
    Castle, Ehlers, Platts, Kline, Marchant, Boustany, Foxx, and
    Davis of Tennessee.
        Staff present: Aaron Albright, Press Secretary; Tylease
    Alli, Hearing Clerk; Chris Brown, Labor Policy Advisor; Lynn
    Dondis, Policy Advisor for Subcommittee on Workforce
    Protections; Carlos Fenwick, Policy Advisor for Subcommittee on
    Health, Employment, Labor and Pensions; Michael Gaffin, Staff
    Assistant, Labor; Jeffrey Hancuff, Staff Assistant, Labor;
    Danielle Lee, Press/Outreach Assistant; Rachel Racusen, Deputy
    Communications Director; Michele Varnhagen, Labor Policy
    Director; Robert Borden, Minority General Counsel; Cameron
    Coursen, Minority Assistant Communications Director; Rob Gregg,
    Minority Legislative Assistant; Victor Klatt, Minority Staff
    Director; Alexa Marrero, Minority Communications Director; Jim
    Paretti, Minority Workforce Policy Counsel; Molly McLaughlin
    Salmi, Minority Deputy Director of Workforce Policy; Ken
    Serafin, Minority Professional Staff Member; and Linda Stevens,
    Minority Chief Clerk/Assistant to the General Counsel.
        Chairman Miller [presiding]. The Committee on Education and
    Labor will come to order to receive testimony on H.R. 3185, the
    401(K) Fair Disclosure for Retirement Security Act.
        Over the last 3 decades, the number of Americans with
    401(k)-style retirement savings plans has skyrocketed, while
    the number of Americans with traditional plans has plummeted.
    Today, 50 million workers have 401(k)-style plans. These plans
    were originally intended to help supplement workers' retirement
    income, not to become the main source of their retirement
    income. Yet nearly two-thirds of private sector workers who
    have pensions have a 401(k) plans, and only a 401(k) plan.
        The median 401(k) account balance is now $19,000. For many
    retirees, that is not enough to finance a single year of
    retirement. It is no surprise that many Americans worry about
    how they will ever have enough savings to last them throughout
    retirement.
        Given the increasingly prominent role of 401(k) plans, it
    is critical that the plans provide the best possible deals for
    their participants. Unfortunately, far too many 401(k) plan
    participants are not getting the best deals possible. Many
    401(k)-style plans charge hidden fees that can cut deeply into
    workers' retirement savings. And many plan participants do not
    have access to low-cost investment options, such as an index
    fund, that can help them boost their retirement savings.
        At a committee hearing earlier this year, the General
    Accountability Office testified about the problems posed by
    hidden 401(k) fees. Under current law, weak disclosure
    requirements mean that workers lack critical information about
    fees they are paying. According to the GAO's testimony, 80
    percent of workers did not know that fees were being taken out
    of their accounts. Without this information, workers simply
    cannot shop around for the best arrangements for their
    retirement.
        Some of these fees may be reasonable and necessary, but
    earlier this year we heard testimony about a dizzying array of
    fees: revenue sharing fees, wrap fees, finders fees, shelf
    space fees, surrender fees, and 12(b)(1) fees. I am sure many
    workers, if they knew about these fees, would not be willing to
    pay them or would look for lower fees in those same categories.
    The negative consequences of these hidden fees can be
    significant. According to GAO, a 1 percentage point increase in
    fees would cut retirement income by almost 20 percent after 20
    years and 30 percent over 30 years.
        The 401(k) Fair Disclosure Retirement Security Act would
    require 401(k) plans to disclose in clear and simple terms all
    the fees that they are charging to plan participants. The
    legislation would require that 401(k) plans provide workers
    with key information on investment options and their risk,
    returns and fees. The legislation would also require employers
    to offer at least one low-cost index fund as an investment
    option for employees participating in 401(k) plans.
        Studies have shown that index funds outperform an
    overwhelming majority of actively managed, often higher-cost
    funds. Plan participants don't have to choose to invest in the
    index fund if they don't want to, but they should be able to
    make that choice for themselves.
        Finally, the legislation will assist employers by requiring
    that plan officials know the fees that will be charged before
    they contract for investment services and disclose any
    potential conflicts of interest they may have.
        After a lifetime of hard work, retirees ought to have the
    financial security that allows them to focus on family and
    friends without sacrificing their standard of living. Helping
    workers to make better-informed decisions about their
    retirement options is a critical step toward increasing
    retirement security for America's workers.
        I would like to thank all of our witnesses today who are
    joining us. I look forward to their testimony and to hearing
    their thoughts on how we can move forward with this important
    piece of legislation.
        I would like now to recognize the senior Republican on our
    committee, Mr. Buck McKeon, from California.
        [The statement of Mr. Miller follows:]

       Prepared Statement of Hon. George Miller, Chairman, Committee on
                              Education and Labor

        Today the committee will hear testimony on H.R. 3185, the ``401(k)
    Fair Disclosure for Retirement Security Act.''
        Over the last three decades, the number of Americans with 401(k)-
    style retirement savings plans has skyrocketed, while the number of
    Americans with traditional pension plans has plummeted. Today, 50
    million workers have 401(k)-style plans.
        These plans were originally intended to help supplement workers'
    retirement income, not to become the main source of their retirement
    income. Yet nearly two-thirds of private sector workers (http://
    www.ebri.org/pdf/publications/facts/0607fact.pdf) who have a pension
    have a 401(k)--and only a 401(k).
        The median 401(k) account balance is now $19,000. For many
    retirees, that's not even enough to finance a single year of
    retirement. It's no surprise that many Americans worry about how they
    will ever have enough savings to last them throughout retirement.
        Given the increasingly prominent role of 401(k) plans, it is
    critical that the plans provide the best possible deals for their
    participants.
        Unfortunately, far too many 401(k) plan participants are not
    getting the best deals possible. Many 401(k)-style plans charge hidden
    fees that can cut deeply into workers' retirement savings. And many
    plan participants do not have access to low-cost investment options--
    index funds--that can help them boost their retirement savings.
        At a Committee hearing earlier this year, the Government
    Accountability Office testified about the problems posed by hidden
    401(k) fees. Under current law, weak disclosure requirements mean that
    workers lack critical information about fees they are paying.
        According to the GAO's testimony, 80 percent of workers did not
    know that fees were being taken out of their accounts. Without this
    information, workers simply cannot shop around for the best deals for
    their retirement.
        Some of these fees may be reasonable and necessary. But earlier
    this year, we heard testimony about a dizzying array of fees: ``Revenue
    sharing fees.'' ``Wrap fees.'' ``Finders' fees.'' ``Shelf space fees.''
    ``Surrender charges.'' ``12(b)(1) fees.''
        I'm sure that many workers, if they knew about these fees, would
    not be willing to pay them.
        The negative consequences of these hidden fees can be significant.
    According to GAO, a 1 percentage point increase in fees would cut
    retirement income by almost 20 percent after 20 years and 30 percent
    over 30 years.
        The 401(k) Fair Disclosure for Retirement Security Act would
    require 401(k) plans to disclose in clear and simple terms all the fees
    that they are charging to plan participants.
        The legislation would require that 401(k) plans provide workers
    with key information on investment options and their risk, returns, and
    fees.
        The legislation would also require employers to offer at least one
    low-cost index fund as an investment option for employees participating
    in 401(k) plans.
        Studies have shown that index funds outperform an overwhelming
    majority of actively managed, often higher-cost funds. Plan
    participants don't have to choose to invest in the index fund if they
    don't want to, but they should be able to make that choice for
    themselves.
        Finally, the legislation will assist employers by requiring that
    plan officials know the fees that will be charged before they contract
    for investment services and disclose any potential conflicts of
    interest they may have.
        After a lifetime of hard work, retirees ought to have financial
    security that allows them to focus on family and friends without
    sacrificing their standard of living.
        Helping workers to make better-informed decisions about their
    retirement options is a critical step towards increasing retirement
    security for America's workers.
        I would like to thank all of our witnesses for joining us today. I
    look forward to their testimony and to hearing their thoughts on how to
    move forward with this important legislation.
        Thank you.
                                     ______

        Mr. McKeon. Thank you, Chairman Miller, for convening this
    hearing. As you know, this committee has been at the forefront
    when it comes to ensuring retirement security. I am pleased
    that you are continuing to focus on this critical issue.
        The pension reform laws enacted last year were the most
    sweeping in a generation. I am proud that those reforms
    originated in this committee. As those changes take hold, I
    believe they will make a real difference to workers, retirees
    and employers alike.
        We are here today to examine your bill, Mr. Chairman, to
    significantly increase disclosure requirements. Let me say
    first that I appreciate the opportunity to thoroughly review
    the legislation. I think legislative hearings are a critical
    tool for lawmakers. These hearings allow us to ask important
    questions of those who would be impacted. They also allow us to
    explore the potential consequences of a proposal, both intended
    and unintended.
        On the issue of disclosure, let me be clear. I am strongly
    supportive of providing meaningful, practical information to
    retirement plan participants. However, I cannot support massive
    new disclosure requirements without a clearly identified need
    for such requirements, which I fear do more harm than good.
    Surely, that must be our first imperative, to do no harm.
        Overburdened prescriptive regulations in this area,
    especially so soon after last year's sweeping reforms, may do
    more harm than good for participants and providers alike. Too
    much information may actually prevent workers from seeing and
    understanding the information they genuinely need, and
    unmanageable requirements may force providers to pass along
    increased costs to workers or to leave the system entirely, a
    result that none of us would find acceptable.
        Anyone who has installed computer software surely
    understands the danger of excessive or impractical disclosure.
    When presented with lengthy, nearly incomprehensible disclosure
    statements on your computer screen, do you thoroughly read each
    and every word? Or do you merely check the box that says ``I
    understand'' in order to get the program you need?
        I am deeply concerned that if we are not careful, we could
    create a similar experience for employees trying to save for
    their retirement. If we provide them with volumes of
    information before we allow them to begin saving, do we run the
    risk that they merely check the box that says they understand?
    Worse, will the valuable information they need be buried within
    a document so lengthy as to be intimidating?
        At the same time, we want plan sponsors to get the
    information they need from service providers so they can
    discharge their fiduciary duties as custodians of plan assets
    reasonably and responsibly as required by law. But overwhelming
    plan sponsors or overburdening service providers with extensive
    disclosure schemes that do not produce meaningful information
    will serve only to increase costs, which will take money out of
    the pockets of retirees. Certainly, none of us support that.
        Finally, we must consider any proposed changes within the
    broader context of existing regulatory efforts. The Congress
    does not operate in a vacuum. We must bear in mind the
    implications of existing law and regulation when it comes to
    complex new mandates. In that light, I am pleased that we have
    with us today the Assistant Secretary of Labor for Employee
    Benefits and Security, who will provide information about a
    number of regulatory initiatives directly relating to these
    issues that the Department has undertaken, some of which will
    become effective in the very near future.
        If current efforts satisfy a large number of concerns
    regarding disclosure, we must ask if it is really necessary to
    proceed with legislation that may have unintended consequences.
    I believe there are a number of significant concerns in this
    arena, and I hope we explore them thoroughly today.
        At the same time, I continue to keep an open mind about the
    broader issue of enhanced disclosure because it is an issue on
    which I believe we can find common ground. In that light, I
    hope that we can work together through an inclusive process,
    along with the groups and stakeholders affected by these
    reforms to determine whether legislation is necessary and, if
    so, craft legislation that creates the right balance.
        I look forward to the testimony of today's witnesses and to
    a continued dialogue about the best way to protect and enhance
    retirement security for all Americans.
        I yield back the balance of my time.
        [The statement of Mr. McKeon follows:]

    Prepared Statement of Hon. Howard P. ``Buck'' McKeon, Senior Republican
                    Member, Committee on Education and Labor

        Thank you, Chairman Miller, for convening this hearing. As you
    know, this Committee has been at the forefront when it comes to
    ensuring retirement security, and I'm pleased that you are continuing
    to focus on this critical issue.
        The pension reform laws enacted last year were the most sweeping in
    a generation, and I'm proud that those reforms originated in this
    Committee. As those changes take hold, I believe they will make a real
    difference to workers, retirees, and employers alike.
        We are here today to examine your bill, Mr. Chairman, to
    significantly increase disclosure requirements. Let me say first that I
    appreciate the opportunity to thoroughly review the legislation. I
    think legislative hearings are a critical tool for lawmakers. These
    hearings allow us to ask important questions of those who would be
    impacted. They also allow us to explore the potential consequences of a
    proposal, both intended and unintended.
        On the issue of disclosure, let me be clear: I am strongly
    supportive of providing meaningful, practical information to retirement
    plan participants. However, I cannot support massive new disclosure
    requirements, without a clearly identified need for such requirements,
    which I fear could do more harm than good.
        And surely, that must be our first imperative: do no harm.
        Over-burdensome or proscriptive regulation in this area, especially
    so soon after last year's sweeping reforms, may do more harm than good
    for participants and providers alike. Too much information may actually
    prevent workers from seeing and understanding the information they
    genuinely need. And unmanageable requirements may force providers to
    pass along increased costs to workers or to leave the system entirely--
    a result that none of us would find acceptable.
        Anyone who has installed computer software surely understands the
    danger of excessive or impractical disclosure. When presented with
    lengthy, nearly incomprehensible disclosure statements on your computer
    screen, do you thoroughly read each and every word? Or do you merely
    check the box that says ``I understand'' in order to get the program
    you need?
        I am deeply concerned that if we are not careful, we could create a
    similar experience for employees trying to save for their retirement.
    If we provide them with volumes of information before we allow them to
    begin saving, do we run the risk that they merely `check the box' that
    says they understand? Worse, will the valuable information they need be
    buried within a document so lengthy as to be intimidating?
        At the same time, we want plan sponsors to get the information they
    need from service providers so they can discharge their fiduciary
    duties as custodians of plan assets reasonably and responsibly, as
    required by law. But overwhelming plan sponsors or overburdening
    service providers with extensive disclosure schemes that do not produce
    meaningful information will serve only to increase costs, which will
    take money out of the pockets of retirees. Certainly none of us support
    that.
        Finally, we must consider any proposed changes within the broader
    context of existing regulatory efforts. The Congress does not operate
    in a vacuum, and we must bear in mind the implications of existing law
    and regulation when it comes to complex new mandates. In that light, I
    am pleased that we have with us today the Assistant Secretary of Labor
    for Employee Benefits and Security, who will provide information about
    a number of regulatory initiatives directly relating to these issues
    that the Department has undertaken, some of which will become effective
    in the very near future. If current efforts satisfy a large number of
    concerns regarding disclosure, we must ask if it is really necessary to
    proceed with legislation that may have unintended consequences.
        I believe there are a number of significant concerns in this arena,
    and I hope we explore them thoroughly today. At the same time, I
    continue to keep an open mind about the broader issue of enhanced
    disclosure, because it's an issue on which I believe we can find common
    ground. In that light, I hope that we can work together through an
    inclusive process, along with the groups and stakeholders affected by
    these reforms, to determine whether legislation is necessary and, if
    so, to craft legislation that strikes the right balance.
        I look forward to the testimony of today's witnesses, and to a
    continued dialogue about the best way to protect and enhance retirement
    security for all Americans. I yield back the balance of my time.
                                     ______

        Chairman Miller. I thank the gentleman for his statement.
        We are joined with an extraordinary panel of individuals
    who are very familiar with not only the legislation, but the
    underlying concerns. We are joined by Bradford P. Campbell who
    has served as Assistant Secretary of Labor for the Employee
    Benefits Security Administration since August of 2007. Mr.
    Campbell previously served a number of roles in the Department
    of Labor since 2001.
        David Certner is the director of legislative policy for
    government relations and advocacy at AARP. Mr. Certner has been
    with AARP since 1992, and he served as chairman of the 1994
    ERISA Advisory Council for the Department of Labor.
        Tommy Thomasson is the co-founder and president and CEO of
    Daily Access Corporation, as well as the founder and president
    of Interserve, LLC. He also serves as chairman of the Council
    of Independent 401(k) Recordkeepers.
        Lew Minsky is the senior attorney of employee benefit plans
    for Florida Light and Power. Mr. Minsky serves on the ERISA
    Industry Committee's Retirement Security Committee and the
    Profit-Sharing 401(k) Council of the American Board of
    Directors. I got that all out.
        Jon Chambers is a principal at Schultz Collins Lawson
    Chambers, and he specializes in the analysis and design and
    implementation of investment programs for retirement plans. Mr.
    Chambers has served on the board of the Western Pension and
    Benefits Conference.
        Welcome to all of you to the committee. Your full
    statements will be put in the record in their entirety. We will
    begin with you, Mr. Secretary. I think you know the routine
    here. There will be a green light when you start for 5 minutes,
    and then an orange light when we would like you to wrap up, and
    a red light when we would like you to finish, but we want you
    to finish your thoughts and complete thoughts.
        So thank you and welcome to the committee.

       STATEMENT OF BRADFORD P. CAMPBELL, ASSISTANT SECRETARY OF
        LABOR, EMPLOYEE BENEFITS SECURITY ADMINISTRATION, U.S.
                          DEPARTMENT OF LABOR

        Mr. Campbell. Thank you very much, Mr. Chairman, Mr. McKeon
    and the other members of the committee. I very much appreciate
    this opportunity to come and testify about the Department of
    Labor's significant progress in promulgating regulations to
    improve the disclosure of fee expense and conflict-of-interest
    information in 401(k) and other employee benefit plans. Our
    regulatory initiatives in this area are a top priority for the
    Department.
        Over the past 20 years, the retirement plan universe has
    changed in some very significant ways. They have affected both
    plan participants and plan fiduciaries. More workers now
    control the investment of their retirement savings in
    participant-directed individual account plans such as 401(k)
    plans. At the same time, the financial services marketplace has
    increased in complexity. Plan fiduciaries who are charged by
    law with the responsibility of making prudent decisions when
    hiring service providers and paying only reasonable expenses in
    doing so, have found their jobs more difficult as the number
    and types of fees proliferate and as relationships between
    financial service providers become more complex.
        All of these trends cause the Department to conclude that
    despite the success we have been having with our education and
    outreach activities to educate fiduciaries and participants,
    that a new regulatory framework was necessary to better protect
    the interests of America's workers, retirees and their
    families. That is why we initiated three major regulatory
    projects, each addressing a different aspect of this problem.
        The first regulation addresses the needs of participants
    for concise, useful, comparative information about their plan's
    investment options, to help them make informed decisions.
        The second addresses the needs of plan fiduciaries who
    require more comprehensive disclosures by service providers to
    enable them to carry out their duties under the law and assess
    whether the cost that they are paying for the services they are
    receiving are reasonable and necessary.
        The third regulation addresses disclosures made by plan
    administrators to the public and the federal regulators in the
    Form 5500, the annual report filed by pension plans.
        I think it is essential, Mr. Chairman, to understand that
    the disclosure needs of these groups are different, and that
    therefore the disclosures that we would mandate via regulatory
    process would, in turn, be quite different. Participants are
    trying to choose and investment option from a defined universe
    of options within their plan. To do this, they need concise
    summary information to allow them to compare these options in
    meaningful ways. That includes information about fees, about
    the historical rates of return, the nature of these investments
    and other relevant factors in making those decisions.
        Plan fiduciaries are trying to decide if the services that
    they are receiving and the prices they are being charged are
    reasonable and necessary. They are taking into account the
    needs of the plan as a whole. They need to know whether the
    services provided are influenced by compensation arrangements
    between the service providers and third parties. They need to
    know what services are being provided and whether those
    services are necessary, and conduct that evaluation. The
    process by which they make these prudent decisions of necessity
    requires a more comprehensive and detailed disclosure.
        In response to our request for information on participant
    disclosures, which we issued earlier this spring, there seems
    to be a basic agreement among all parties, and I believe it is
    an interest shared by the members of this committee as well,
    that participants generally are not going to benefit from
    voluminous, lengthy disclosures. As Mr. McKeon mentioned, the
    software agreement analogy is an apt one.
        Also, it is important to recognize that participants bear
    the cost of producing these materials. If we produce
    disclosures that are voluminous and ignored, we have perversely
    increased the fees that participants pay without gaining a
    material advantage.
        I want to emphasize that we are not at the beginning of
    this regulatory process. In fact, we have been working on it
    for quite some time and are well underway and quite advanced in
    it. We proposed the first regulation of these three in July of
    2006, dealing with public disclosures, and we will be
    promulgating a final regulation on this within the next few
    weeks. We have completed drafting and we have submitted into
    the regulatory clearance process within the administration a
    proposed regulation providing the comprehensive disclosures
    required for fiduciaries. This will be published within the
    next several months. As I mentioned, we concluded the RFI on
    participant disclosures, and we will be issuing a proposed
    regulation later in the winter based on the information that we
    have gathered there as we developed this regulation.
        I commend this committee for sharing our commitment and
    belief in the importance of enhanced disclosures, but I do
    think it is important to understand that it is not necessary
    from the Department's perspective to have a legislative change
    to complete the regulations we have underway. The current
    statute provides us with the authority to embark on these
    regulations and to conclude them.
        I also think that there are many technical issues presented
    in compiling these disclosures, and the regulatory process is
    well suited to resolving some of those technical concerns. It
    is deliberative, open, and inclusive, and has been working
    well. I think we have heard from many of the other witnesses on
    this panel as we have gone through our deliberations at the
    Department.
        If the committee does decide to pursue legislation,
    however, I would ask that it bear in mind the work that we have
    already done in its efforts, and that it also bear in mind the
    need for participants to receive concise disclosures and
    evaluate the legislation as introduced in that light. I am also
    somewhat concerned about the mandate of a particular type of
    investment option for 401(k) plans, as this is a departure from
    how ERISA has traditionally worked and impinges on the ability
    of participants and employers to together decide what is a
    mutually appropriate plan environment.
        But in conclusion, Mr. Chairman, I would like to thank you
    for your interest in this and for the other members of the
    committee, because this is a very important issue, and it is
    one that we take very seriously. I am committed to completing
    our regulatory projects in a timely manner.
        I would be happy to answer any questions you have.
        [The statement of Mr. Campbell follows:]

      Prepared Statement of Bradford P. Campbell, Assistant Secretary of
                                     Labor

        Good morning Chairman Miller, Ranking Member McKeon, and Members of
    the Committee. Thank you for inviting me to discuss 401(k) plan fees,
    the Department of Labor's role in overseeing plan fees, and proposals
    to increase transparency and disclosure of plan fee and expense
    information. I am Bradford Campbell, the Assistant Secretary of Labor
    for the Employee Benefits Security Administration (EBSA). I am proud to
    be here today representing the Department of Labor and EBSA. Our
    mission is to protect the security of retirement, health and other
    employee benefits for America's workers, retirees and their families,
    and to support the growth of our private benefits system.
        Ensuring the security of retirement benefits is a core mission of
    EBSA, and one of this Administration's highest priorities. Excessive
    fees can undermine retirement security by reducing the accumulation of
    assets. It is therefore critical that plan participants directing the
    investment of their contributions, and plan fiduciaries charged with
    the responsibility of prudently selecting service providers and paying
    only reasonable fees and expenses have the information they need to
    make appropriate decisions.
        That is why the Department began a series of regulatory initiatives
    last year to expand disclosure requirements in three distinct areas:
        1. Disclosures by plans to participants to assist in making
    investment decisions;
        2. Disclosures by service providers to plan fiduciaries to assist
    in assessing the reasonableness of provider compensation and potential
    conflicts of interest; and
        3. More efficient, expanded fee and compensation disclosures to the
    government and the public through a substantially revised,
    electronically filed Form 5500 Annual Report.
        Each of these projects addresses different disclosure needs, and
    our regulations will be tailored to ensure that appropriate disclosures
    are made in a cost effective manner. For example, participants are
    unlikely to find useful extensive disclosure documents written in
    ``legalese''--instead, it appears from comments we received thus far
    that participants want concise and readily understood comparative
    information about plan costs and their investment options. By contrast,
    plan fiduciaries want detailed disclosures in order to properly carry
    out their duties under the law, enabling them to understand the nature
    of the services being provided, all fees and expenses, any conflicts of
    interest on the part of the service provider, and indirect compensation
    providers may receive in connection with the plan's business.
        We have made significant progress on these projects. We will be
    issuing a final regulation requiring additional public disclosure of
    fee and expense information on the Form 5500 within the next few weeks.
    A proposed regulation requiring specific and comprehensive disclosures
    to plan fiduciaries by service providers is currently in the clearance
    process, and we expect this proposal to be published this year. We also
    concluded a Request for Information seeking the views of the interested
    public on issues surrounding disclosures to participants. We are
    currently evaluating the comments received from consumer groups, plan
    sponsors, service providers and others as we develop a proposed
    regulation.
        The Employee Retirement Income Security Act of 1974 (ERISA)
    provides the Secretary with broad regulatory authority, enabling the
    Department to pursue these comprehensive disclosure initiatives without
    need for a statutory amendment. The regulatory process currently
    underway ensures that all voices and points of view will be heard and
    provides an effective means of resolving the many complex and technical
    issues presented. While I am pleased that we share the common goal of
    improving fee disclosure, I am concerned by a number of provisions in
    H.R. 3185, which I fear could disrupt our ongoing efforts to provide
    these important disclosures to workers. In addition, the legislation
    would fundamentally change the nature of ERISA's fiduciary oversight by
    mandating inclusion of Department of Labor-approved investment
    products, limiting the ability of workers and employers to develop
    plans that best suit their mutual needs. I am also concerned that the
    legislation may not achieve the primary goal of participant
    disclosures--providing workers with useful and concise information--by
    mandating very detailed and costly disclosure documents. Disclosures
    intended for participants should illuminate, not confuse--excessively
    detailed disclosures are likely to be ignored by participants even as
    those participants bear the potentially significant cost of the
    preparation and distribution. In addition to these concerns, there are
    a number of issues regarding the practicality of administering the
    legislation's requirements.
        My testimony today will discuss in more detail the Department's
    activities related to plan fees. Also, I will describe the Department's
    regulatory and enforcement initiatives focused on improving the
    transparency of fee and expense information for both plan fiduciaries
    and participants.
    Background
        EBSA is responsible for administering and enforcing the fiduciary,
    reporting, and disclosure provisions of Title I of ERISA. EBSA oversees
    approximately 683,000 private pension plans, including 419,000
    participant-directed individual account plans such as 401(k) plans, and
    millions of private health and welfare plans that are subject to
    ERISA.\1\
    ---------------------------------------------------------------------------
        \1\ Based on 2004 filings of the Form 5500.
    ---------------------------------------------------------------------------
        Participant-directed individual account plans under our
    jurisdiction hold over $2.2 trillion in assets and cover more than 44.4
    million active participants. Since 401(k)-type plans began to
    proliferate in the early 1980s, the number of employees investing
    through these types of plans has grown dramatically. The number of
    active participants has risen almost 500 percent since 1984 and has
    increased by 11.4 percent since 2000. EBSA employs a comprehensive,
    integrated approach encompassing programs for enforcement, compliance
    assistance, interpretive guidance, legislation, and research to protect
    and advance the retirement security of our nation's workers and
    retirees.
        Title I of ERISA establishes standards of fiduciary conduct for
    persons who are responsible for the administration and management of
    benefit plans. It also establishes standards for the reporting of plan
    related financial and benefit information to the Department, the IRS
    and the PBGC, and the disclosure of essential plan related information
    to participants and beneficiaries.
    The Fiduciary's Role
        ERISA requires plan fiduciaries to discharge their duties solely in
    the interest of plan participants and beneficiaries, and for the
    exclusive purpose of providing benefits and defraying reasonable
    expenses of plan administration. In discharging their duties,
    fiduciaries must act prudently and in accordance with the documents
    governing the plan. If a fiduciary's conduct fails to meet ERISA's
    standards, the fiduciary is personally liable for plan losses
    attributable to such failure.
        ERISA protects participants and beneficiaries, as well as plan
    sponsors, by holding plan fiduciaries accountable for prudently
    selecting plan investments and service providers. In carrying out this
    responsibility, plan fiduciaries must take into account relevant
    information relating to the plan, the investment, and the service
    provider, and are specifically obligated to consider fees and expenses.
        ERISA prohibits the payment of fees to service providers unless the
    services are necessary, are provided pursuant to a reasonable contract,
    and the plan pays no more than reasonable compensation. Thus, plan
    fiduciaries must ensure that fees paid to service providers and other
    expenses of the plan are reasonable in light of the level and quality
    of services provided. Plan fiduciaries must also be able to assess
    whether revenue sharing or other indirect compensation arrangements
    create conflicts of interest on the part of the service provider that
    might affect the quality of the services to be performed. These
    responsibilities are ongoing. After initially selecting service
    providers and investments for their plans, fiduciaries are required to
    monitor plan fees and expenses to determine whether they continue to be
    reasonable and whether there are conflicts of interest.
    EBSA's Compliance Assistance Activities
        EBSA assists plan fiduciaries and others in understanding their
    obligations under ERISA, including the importance of understanding
    service provider fees and relationships, by providing interpretive
    guidance\2\ and making related materials available on its Web site. One
    such publication developed by EBSA is Understanding Retirement Plan
    Fees and Expenses, which provides general information about plan fees
    and expenses. In conjunction with the Securities and Exchange
    Commission, we also developed a fact sheet, ``Selecting and Monitoring
    Pension Consultants--Tips for Plan Fiduciaries.'' This fact sheet
    contains a set of questions to assist plan fiduciaries in evaluating
    the objectivity of pension consultant recommendations.
    ---------------------------------------------------------------------------
        \2\ See, e.g., Field Assistance Bulletin 2002-3 (November 5, 2002)
    and Advisory Opinions 2003-09A (June 25, 2003), 97-16A (May 22, 1997),
    and 97-15A (May 22, 1997).
    ---------------------------------------------------------------------------
        EBSA also has made available on its Web site a model ``401(k) Plan
    Fee Disclosure Form'' to assist fiduciaries of individual account
    pension plans when analyzing and comparing the costs associated with
    selecting service providers and investment products. This form is the
    product of a coordinated effort of the American Bankers Association,
    Investment Company Institute, and the American Council of Life
    Insurers.
        To help educate plan sponsors and fiduciaries about their
    obligations under ERISA, EBSA conducts numerous educational and
    outreach activities. Our campaign, ``Getting It Right--Know Your
    Fiduciary Responsibilities,'' includes nationwide educational seminars
    to help plan sponsors understand the law. The program focuses on
    fiduciary obligations, especially related to the importance of
    selecting plan service providers and the role of fee and compensation
    considerations in that selection process. EBSA has conducted 20
    fiduciary education programs since May 2004 in different cities
    throughout the United States. EBSA also has conducted 49 health
    benefits education seminars, covering nearly every state, since 2001.
    Beginning in February 2005, these seminars added a focus on fiduciary
    responsibilities. EBSA will continue to provide seminars in additional
    locations under each program.
    Disclosures to Participants under Current Law
        ERISA currently provides for a number of disclosures aimed at
    providing participants and beneficiaries information about their plans'
    investments. For example, information is provided to participants
    through summary plan descriptions and summary annual reports. Under the
    Pension Protection Act of 2006, plan administrators are required to
    automatically furnish pension benefit statements to plan participants
    and beneficiaries. The Department issued a Field Assistance Bulletin in
    December 2006 to provide initial guidance on complying with the new
    statutory requirements. Statements must be furnished at least once each
    quarter, in the case of individual account plans that permit
    participants to direct their investments, and at least once each year,
    in the case of individual account plans that do not permit participants
    to direct their investments. Other disclosures, such as copies of the
    plan documents, are available to participants on request.
        Additional disclosures are required by the Department's rules
    concerning whether a participant has ``exercised control'' over his or
    her account. ERISA section 404(c) provides that plan fiduciaries are
    not liable for investment losses which result from the participant's
    exercise of control. A number of conditions must be satisfied,
    including that specified information concerning plan investments must
    be provided to plan participants. Information fundamental to
    participants' investment decisions must be furnished automatically.
    Additional information must be provided on request.
    EBSA Participant Education and Outreach Activities
        EBSA is committed to assisting plan participants and beneficiaries
    in understanding the importance of plan fees and expenses and the
    effect of those fees and expenses on retirement savings. EBSA has
    developed educational brochures and materials available for
    distribution and through our Web site. EBSA's brochure entitled A Look
    at 401(k) Plan Fees for Employees is targeted to participants and
    beneficiaries of 401(k) plans who are responsible for directing their
    own investments. The brochure answers frequently asked questions about
    fees and highlights the most common fees, and is designed to encourage
    participants to make informed investment decisions and to consider fees
    as a factor in decision making. Last fiscal year, EBSA distributed over
    5,400 copies of this brochure and over 46,000 visitors viewed the
    brochure on our Web site.
        More general information is provided in the publications, What You
    Should Know about Your Retirement Plan and Taking the Mystery out of
    Retirement Planning. In the same period, EBSA distributed over 86,000
    copies of these two brochures and almost 102,000 visitors viewed these
    materials on our Web site. EBSA's Study of 401(k) Plan Fees and
    Expenses, which describes differences in fee structures faced by plan
    sponsors when they purchase services from outside providers, is also
    available.
    Regulatory Initiatives
        EBSA currently is pursuing three initiatives to improve the
    transparency of fee and expense information to participants, plan
    sponsors and fiduciaries, government agencies and the public. We began
    these initiatives, in part, to address concerns that participants are
    not receiving information in a format useful to them in making
    investment decisions, and that plan fiduciaries are having difficulty
    getting needed fee and compensation arrangement information from
    service providers to fully satisfy their fiduciary duties. The needs of
    participants and plan fiduciaries are growing as the financial services
    industry evolves, offering an increasingly complex array of products
    and services.
                 Disclosures to Participants
        EBSA currently is developing a proposed regulation addressing
    required disclosures to participants in participant-directed individual
    account plans. This regulation will ensure that participants have
    concise, readily understandable information they can use to make
    informed decisions about the investment and management of their
    retirement accounts. Special care must be taken to ensure that the
    benefits to participants and beneficiaries of any new requirement
    outweigh the compliance costs, given that any such costs are likely to
    be charged against the individual accounts of participants.
        On April 25, 2007, the Department published a Request for
    Information to gather data to develop the proposed regulation. The
    Request for Information invited suggestions from plan participants,
    plan sponsors, plan service providers, consumer advocates and others
    for improving the current disclosures applicable to participant-
    directed individual account plans and requesting analyses of the
    benefits and costs of implementing such suggestions. The Department
    specifically invited comment on the recommendation of the Government
    Accountability Office that plans be required to provide a summary of
    all fees that are paid out of plan assets or directly by participants,
    as well as other possible approaches to improving the disclosure of
    plan fee and expense information.
        In connection with this initiative, EBSA is also working with the
    Securities and Exchange Commission to develop a framework for
    disclosure of information about fees charged by financial service
    providers, such as mutual funds, that would be more easily understood
    by participants and beneficiaries. Improved mutual fund disclosure
    would assist plan participants and beneficiaries because a large
    proportion of 401(k) plan assets are invested in mutual fund shares. We
    are working closely with the SEC to ensure that the disclosure
    requirements under our respective laws are complementary.
        We are hopeful that improved fee disclosure will assist plan
    participants and beneficiaries in making more informed decisions about
    their investments. Better disclosure could also lead to enhanced
    competition between financial service providers which could lead to
    lower fees and enhanced services.
                 Disclosures to Plan Fiduciaries
        EBSA will shortly be issuing a proposed regulation amending its
    current regulation under section 408(b)(2) to clarify the information
    fiduciaries must receive and service providers must disclose for
    purposes of determining whether a contract or arrangement is
    ``reasonable,'' as required by ERISA's statutory exemption for service
    arrangements. Our intent is to ensure that service providers entering
    into or renewing contracts with plans disclose to plan fiduciaries
    comprehensive and accurate information concerning the providers'
    receipt of direct and indirect compensation or fees and the potential
    for conflicts of interest that may affect the provider's performance of
    services. The information provided must be sufficient for fiduciaries
    to make informed decisions about the services that will be provided,
    the costs of those services, and potential conflicts of interest. The
    Department believes that such disclosures are critical to ensuring that
    contracts and arrangements are ``reasonable'' within the meaning of the
    statute. This proposed regulation currently is under review within the
    Administration.
                 Disclosures to the Public
        EBSA will shortly promulgate a final regulation revising the Form
    5500 Annual Report filed with the Department to complement the
    information obtained by plan fiduciaries as part of the service
    provider selection or renewal process. The Form 5500 is a joint report
    for the Department of Labor, Internal Revenue Service and Pension
    Benefit Guaranty Corporation that includes information about the plan's
    operation, funding, assets, and investments. The Department collects
    information on service provider fees through the Form 5500 Schedule C.
        Consistent with recommendations of the ERISA Advisory Council
    Working Group, the Department published, for public comment, a number
    of changes to the Form 5500, including changes that would expand the
    service provider information required to be reported on the Schedule C.
    The proposed changes more specifically define the information that must
    be reported concerning the ``indirect'' compensation service providers
    received from parties other than the plan or plan sponsor, including
    revenue sharing arrangements among service providers to plans. The
    proposed changes to the Schedule C were designed to assist plan
    fiduciaries in monitoring the reasonableness of compensation service
    providers receive for services and potential conflicts of interest that
    might affect the quality of those services. EBSA has completed its
    review of public comments on the proposed Schedule C and other changes
    to the Form 5500 and expects to have a final regulation and a notice of
    form revisions published by mid-October.
        We intend that the changes to the Schedule C will work in tandem
    with our 408(b)(2) initiative. The amendment to our 408(b)(2)
    regulation will provide up front disclosures to plan fiduciaries, and
    the Schedule C revisions will reinforce the plan fiduciary's obligation
    to understand and monitor these fee disclosures. The Schedule C will
    remain a requirement for plans with 100 or more participants, which is
    consistent with long-standing Congressional direction to simplify
    reporting requirements for small plans.
    EBSA's Enforcement Efforts
        EBSA has devoted enforcement resources to this area, seeking to
    detect, correct and deter violations such as excessive fees and
    expenses, and failure by fiduciaries to monitor on-going fee structure
    arrangements. Over the past nine years, we closed 354 401(k)
    investigations involving these issues, with monetary results of over
    $64 million.
        In carrying out its enforcement responsibilities, EBSA conducts
    civil and criminal investigations to determine whether the provisions
    of ERISA or other federal laws related to employee benefit plans have
    been violated. EBSA regularly works in coordination with other federal
    and state enforcement agencies, including the Department's Office of
    the Inspector General, the Internal Revenue Service, the Department of
    Justice (including the Federal Bureau of Investigation), the Securities
    and Exchange Commission, the PBGC, the federal banking agencies, state
    insurance commissioners, and state attorneys general.
        EBSA is continuing to focus enforcement efforts on compensation
    arrangements between pension plan sponsors and service providers hired
    to assist in the investment of plan assets. EBSA's Consultant/Adviser
    Project (CAP), created in October 2006, addresses conflicts of interest
    and the receipt of indirect, undisclosed compensation by pension
    consultants and other investment advisers. Our investigations seek to
    determine whether the receipt of such compensation violates ERISA
    because the adviser or consultant used its status with respect to a
    benefit plan to generate additional fees for itself or its affiliates.
    The primary focus of CAP is on the potential civil and criminal
    violations arising from the receipt of indirect, undisclosed
    compensation. A related objective is to determine whether plan sponsors
    and fiduciaries understand the compensation and fee arrangements they
    enter into in order to prudently select, retain, and monitor pension
    consultants and investment advisers. CAP will also seek to identify
    potential criminal violations, such as kickbacks or fraud.
    Concerns Regarding H.R. 3185
        I applaud the Chairman's concern about enhancing participant
    disclosure and protection in 401(k)-type plans and his efforts to
    highlight the importance of this issue . But while H.R. 3185 and the
    Department's regulatory initiatives share the common goal of providing
    increased transparency of fee and expense information, I am concerned
    that the legislation could disrupt the Department's ongoing efforts to
    provide these important disclosures.
                 Participant Disclosure Requirements
        Unlike plan fiduciaries, who require highly detailed fee, expense
    and conflict of interest information to carry out their duties,
    participants are most likely to benefit from concise disclosures that
    allow them to meaningfully compare the investment options in their
    plans. In response to our April Request for Information, the Department
    received many comments highlighting the importance of brevity and
    relevance in disclosures to participants. For example, AARP cautioned
    that ``To be effective, investment and fee disclosures should be short,
    easy to read and provide meaningful information,'' and cited several
    studies supporting shorter, more concise disclosure materials.\3\
    ---------------------------------------------------------------------------
        \3\ Letter from David Certner, Legislative Counsel and Director of
    Legislative Policy, Government Relations and Advocacy, AARP, to the
    Employee Benefits Security Administration (July 24, 2007), at page 9,
    available at http://www.dol.gov/ebsa/pdf/Certner072407.pdf.
    ---------------------------------------------------------------------------
        The very detailed scope of H.R. 3185's disclosure requirements
    could result in many participants ignoring the complicated disclosures.
    For example, under the bill as introduced, the first of several
    disclosures participants would receive is an annual notice containing a
    list of specific disclosure items, including a ``fee menu.'' The fee
    menu, which would list all potential fees that could be assessed, would
    divide all potential fees into one of three categories, and then
    further divide the fees within each of the three categories into one of
    four subcategories. Each fee within the twelve subcategories would be
    accompanied by a ``general description of the purposes for each fee.''
    This could result in a complex disclosure that describes literally
    dozens of potential fees, regardless of their relevance to the
    participant's decision in selecting an investment option. One tool for
    plan fiduciaries developed jointly by a number of financial service
    providers lists more than 100 different kinds of fees and expenses
    common to 401(k)-type plans--categorizing and describing each of these
    fees could result in a very lengthy disclosure document. Many
    commenters, in response to our Request for Information, suggested that
    one or more methods of aggregating fee information would provide
    participants with more meaningful and useful disclosure.
                 Mandated Investment Options
        The legislation also takes an unprecedented step by requiring the
    Department of Labor to approve by regulation a mandatory investment
    option for all participant-directed individual account plans. In
    addition to limiting the ability of workers and employers to develop
    plans that best suit their mutual needs, this provision would result in
    the Labor
        Department dictating which ``nationally-recognized market-based
    index funds'' are eligible for mandatory inclusion by plans. Plan
    fiduciaries--accountable for their decisions and acting in a
    transparent, efficient marketplace--should select service providers
    rather than a Federal agency. Further, the criteria for eligible index
    funds are not defined. Funds must offer a combination of returns, risk
    and fees ``that is likely to meet retirement income needs at adequate
    levels of contribution,'' but it is not clear from this language what
    standard the Department should use in determining what ``retirement
    income needs'' or ``adequate levels of contribution'' are.
                 Provision of ``Services'' to Small Employers
        The Department of Labor is very active in providing education and
    compliance assistance to plan sponsors, and focuses specifically on the
    needs of small employers. For example, we developed publications such
    as 401(k) Plans for Small Businesses, Choosing a Retirement Solution
    for Your Small Business, SIMPLE IRA Plans for Your Small Business, and
    conduct year-round fiduciary education seminars that are particularly
    designed for small employers. However, the legislation goes beyond
    education and outreach, requiring the Department to provide ``services
    designed to assist small employers in finding * * * affordable
    investment options.'' I am concerned that this provision may well
    conflict with the Department's duty to enforce the law, as both the
    plans and the service providers could be potential targets of our
    investigations.
        While the Department has a number of concerns in addition to the
    three specific issues discussed above, such as the duplicative nature
    of the new advisory body created by the bill and the requirement to
    ``widely disseminate'' the names of certain noncompliant service
    providers to more than 400,000 plans and nearly 45 million
    participants, we will provide technical comments to the Committee
    addressing these issues at a later time.
    Conclusion
        Mr. Chairman and Members of the Committee, thank you for the
    opportunity to testify before you today. The Department is committed to
    ensuring that 401(k) plans and participants pay fair, competitive and
    transparent prices for services that benefit them--and to combating
    instances where fees are excessive or hidden. We are moving as quickly
    as possible consistent with the requirements of the regulatory process
    to complete our disclosure initiatives, and we believe they will
    improve the retirement security of America's workers, retirees and
    their families. I will be pleased to answer any questions you may have.
                                     ______

        Chairman Miller. Thank you.
        Mr. Certner?

    STATEMENT OF DAVID CERTNER, LEGISLATIVE COUNSEL AND LEGISLATIVE
                         POLICY DIRECTOR, AARP

        Mr. Certner. Thank you, Mr. Chairman and members of the
    committee. I am David Certner, the legislative counsel and
    legislative policy director at AARP. Thank you for convening
    this hearing. We appreciate the opportunity to discuss the
    important issues raised in the 401(k) Fair Disclosure for
    Retirement Security Act of 2007.
        AARP believes that all workers need access to a retirement
    plan in addition to Social Security. In 2006, there were
    approximately 50 million active participants in 401(k) plans,
    which are now the dominant employer-based pension vehicle.
    Those participating in these plans shoulder the risk and the
    responsibility for their investment choices, and ultimately
    their retirement. As a result, better plan information is
    essential.
        We all have a stake in ensuring that participants receive
    accurate and informative disclosures from their 401(k) plan,
    including expenses. However, plan expense and fee information
    is often scattered or difficult to access or nonexistent.
    Meaningful information is vital because fees significantly
    reduce the assets available for retirement. Plan fees compound
    over time and the larger the fee, the bigger the reduction.
        As you noted earlier, GAO recently estimated that $20,000
    left in a 401(k) account that had a 1 percentage point higher
    fee for 20 years would result in an over 17 percent reduction,
    or over $10,000 in the account balance. We estimate that over a
    30-year period, the account would be about 25 percent less.
    Even a difference of over 0.5 percent, 50 basis points, reduced
    the value of the account by 13 percent over 30 years.
        In short, fees and expenses can have a huge impact on the
    retirement income security levels. AARP recently surveyed
    401(k) participants to gauge their understanding of plan fees
    in investment choices. Our survey indicates that participants
    don't have a clear understanding of their investments. When
    asked if they know the names of all the funds in which they
    have money invested through the 401(k) plan, almost 65 percent
    of survey respondents said no; 27 percent didn't know whether
    their plan offered a stock fund; 29 percent didn't know if the
    plan had a bond fund.
        In addition, many 401(k) participants lack basic knowledge
    of plan fees. When asked whether they pay any fees for their
    plan, less than one-fifth said they did. Almost two-thirds
    responded that they don't pay fees, and 18 percent said they
    didn't know.
        Respondents were questioned in detail about the fees that
    may be charged for mutual funds and other types of investments.
    The answers indicate that 401(k) participants do not fully
    understand what types of fees their plans charge. For example,
    when asked whether their 401(k) plan charged an administrative
    fee, 24 percent said yes, 21 percent no, and 55 percent said
    they didn't know. Finally, when they were told that plans often
    charge fees, 83 percent said they didn't know how much they
    paid in fees.
        It is clear that better information is needed. We applaud
    the introduction of H.R. 3185, which would require greater
    transparency of fee and expense information for both
    participants and plan sponsors.
        Comprehensive information on plan fees and expenses will
    enable plan sponsors to fulfill their fiduciary responsibility
    to ensure that fees and expenses are reasonable. H.R. 3185
    would establish a solid framework for providing that
    information to them. Employers who are doing due diligence need
    to have access to costs associated with various components, not
    just total costs. Requiring service providers to give
    comprehensive information to plan sponsors is important to
    participants, since the costs are often passed directly on to
    them.
        Clear information is also necessary for participants to
    better manage their own accounts. Participants face a range of
    potential fees. And while these fees vary in scope and size,
    they have one thing in common: they all reduce the level of
    assets available for retirement. H.R. 3185 would require notice
    to participants of plan investment choices, including the risks
    and fees.
        We recommend that information on the investment fees also
    demonstrate how they impact the balance over time. We believe
    that all individual account participants need to have access to
    investment and fee information. I would also add that the
    legislation's comprehensive annual benefits statement would
    provide a more complete picture of a participant's 401(k)
    status.
        We commend you, Mr. Chairman, for introducing this bill to
    strengthen 401(k) disclosures. The significant impact of fees
    on retirement security highlights the need for clear investment
    and fee information. We think that the greater disclosure that
    is required under this legislation would help to drive down
    fees and enable plan sponsors and plan participants to be
    better consumers, and will ultimately lead to greater
    retirement income security.
        We look forward to working with this committee to ensure
    that employers and participants have the information they need.
        Thank you for the opportunity to testify.
        [The statement of Mr. Certner follows:]

         Prepared Statement of David Certner, Legislative Counsel and
                       Legislative Policy Director, AARP

        Mr. Chairman and members of the Committee, I am David Certner,
    Legislative Counsel and Legislative Policy Director at AARP. Thank you
    for convening this hearing on comprehensive, informative and timely
    disclosure of 401(k) plan investments and fees. AARP appreciates the
    opportunity to discuss this important issue, as well as H.R. 3185, the
    401(k) Fair Disclosure for Retirement Security Act of 2007.
        With more than 39 million members, AARP is the largest organization
    representing the interests of Americans age 50 and older and their
    families. About half of AARP members are working either full-time or
    part-time. All workers need access to a retirement plan that
    supplements Social Security's solid foundation. For those who
    participate in a defined contribution plan, such as a 401(k), better
    and easy to understand information is essential to help them make sound
    plan decisions. This is especially true for plans in which the
    participants have investment choices to make. Informed decision-making
    is key to future retirement income security.
        There were approximately 50 million active participants in 401(k)
    plans in 2006, and overall, 401(k) plans held more than $2.7 trillion
    dollars in assets.\1\ These plans have become the dominant employer-
    based pension vehicle. We all have a stake in ensuring that
    participants receive timely, accurate, and informative disclosures from
    their 401(k) plans--the better the understanding of how the plan
    operates, the better participants will be able to prepare for
    retirement. Today, it is clear that better disclosure of fee
    information is needed. The fee information participants currently
    receive about their plan is often scattered among several sources,
    difficult to access, or nonexistent. Even if it is accessible, plan
    investment and fee information is not always presented in a way that is
    meaningful to participants.
    ---------------------------------------------------------------------------
        \1\ EBRI Issue Brief No. 308, August 2007.
    ---------------------------------------------------------------------------
        Meaningful and easy to understand information is vital because the
    fees and expenses charged to participants significantly reduce the
    amount of assets available for retirement. Plan fees compound over time
    and the larger the fee, the bigger the bite that is ultimately taken
    out of the participant's retirement nest egg. Both plan sponsors and
    participants need to have the right information in order to make
    decisions that safeguard the plan's retirement income returns and
    enhance workers' retirement savings.
        Some have suggested that added focus on fees and expenses is not
    important, that such costs do not add up to a significant impact. After
    all, even an additional 1% in fees--100 basis points--is only $1.00 out
    of every hundred dollars. But this argument understates the impact that
    fees and expenses have on total return, especially compounded over long
    periods of time.
        The U.S. Government Accountability Office (GAO) recently estimated
    that $20,000 left in a 401(k) account for 20 years could grow to
    $70,555 at 7% interest return minus a 0.5 percent charge for fees (6.5%
    net return). The same $20,000 would grow to only about $58,400 if the
    annual fees are 1.5% (5.5% net return).\2\ The one percent fee
    differential has a dramatic impact--resulting in an over 17 percent
    reduction in the account balance over the 20-year period. Using GAO
    assumptions, AARP has estimated that over a longer 30-year period, the
    same $20,000 with a 0.5 percent charge would grow to $132,287, while a
    charge of 1.5 percent would reduce that growth to $99, 679--about a 25
    percent reduction in the account balance. Even a difference of only 50
    basis points, from 0.5 percent to 1.0 percent, would reduce the value
    of the account by $17,417, or a little over 13 percent over the 30-year
    period.
    ---------------------------------------------------------------------------
        \2\ Changes Needed to Provide 401(k) Plan Participants and the
    Department of Labor Better Information, GAO-07-21 (November 2006).

        The chart assumes a 7 percent rate of return before fees are
    assessed.
        Clear, usable information about plan investments and fees will help
    plan sponsors fulfill their fiduciary responsibility and avoid
    potential fiduciary concerns. It is important that there be greater
    transparency of fees and other expense information in order for plan
    sponsors to make prudent choices. Employers are obligated to ensure
    that fees paid to service providers and other plan expenses are
    reasonable, and they are required to monitor these expenses over time.
    Employers doing due diligence need to have access to costs associated
    with various components, not just total costs. This responsibility is
    of great importance for participants, since costs are often passed
    directly on to them.
        In order to better manage their own accounts, individuals also need
    greater disclosure to better understand the numerous fees and expenses
    in the plan. Participants face a range of potential fees, including
    plan administration fees, investment fees and fees for individual plan
    services. Within these categories are a range of potential fees. For
    example, plan investment choices may include sales charges and
    investment advisory fees. The level of these fees can vary greatly
    depending on plan size and service provided. But these fees all have
    one thing in common--they will reduce the level of assets available for
    retirement.
        Sound information can also provide participants with better tools
    to enforce their rights under the plan, including recovering lost
    benefits as a result of a breach of fiduciary duty. At least a dozen
    cases involving 401(k) fees have been filed in federal district courts,
    claiming fiduciary violations with respect to plan administration. The
    complaints center on allegations that 401(k) plans incurred
    unreasonable and excessive fees that were not adequately disclosed to
    participants.
        Given the importance of fee information to both plan sponsors and
    plan participants, we applaud introduction of the 401(k) Fair
    Disclosure for Retirement Security Act of 2007 (H.R. 3185) by Chairman
    Miller. The legislation would require greater transparency of fee and
    expense information for both plan sponsors and plan participants. The
    greater disclosure required under this legislation will help drive down
    fees in the marketplace, will enable plan sponsors and plan
    participants to be better consumers, and will ultimately lead to
    greater retirement income security.
    AARP's Survey Results: Participants' Understanding of Fees
        While plan participants have been asked to take on more risk and
    responsibility for their 401(k) plan, they often find the plan
    investment choices, as well as their associated fees and expenses, a
    mystery. AARP recently surveyed 1,584 401(k) participants to gauge
    their understanding of the fees they pay and the factors they consider
    in selecting the investments offered by their plans. ``401(k)
    Participants' Awareness and Understanding of Fees, July 2007''
    indicates that participants do not always have a clear grasp of the
    investment options offered by their plans or what they are invested in.
    When asked if they know the names of all the funds in which they have
    money invested through the 401(k) plan, almost 65% of survey
    respondents said no. And, when types of investments were described,
    survey respondents did not always know whether they had money in that
    investment. For example, 27% did not know whether their plan offered a
    stock fund and about as many, 29%, did not know whether their plan had
    a bond fund. 401(k) participants would benefit from additional
    information about the investment options in the plan.
        When asked about the sources of information used to make investment
    decisions, 57% of respondents who make investment decisions for their
    401(k) plan indicate they refer to a summary of the plan's investment
    choices. Other sources include prospectuses (34%), research analysts'
    recommendations (22%), financial articles (17%), and televised
    financial broadcasts (14%). The fact that more than half of the
    respondents consulted the plan's summary of investment materials helps
    emphasize the importance of plan-provided summary information.
        In addition, many 401(k) participants lack basic knowledge of the
    fees associated with their plan. When asked whether they pay any fees
    for their 401(k) plan, less than one-fifth (17%) said they do pay fees.
    Almost two-thirds responded that they do not pay fees (65%) and 18%
    stated that they do not know.
        When told that 401(k) providers often charge fees for administering
    the plans and that the fees may be paid by the employer as a sponsor or
    by the participants in the plan, 83% of those surveyed acknowledged
    that they do not know how much they pay in fees, while 17% said they
    did.
        Respondents were questioned in some detail about the kinds of fees
    that may be charged for mutual funds and other types of investments.
    The answers indicate that 401(k) participants do not necessarily
    understand what types of fees their plans are charging. For example,
    when asked whether their 401(k) plan charged an administrative fee, 24%
    said yes, 21% said no, and 55% replied that they did not know. A
    similar question was posed about redemption fees. Seven percent of the
    survey respondents said they were charged a redemption fee, but 27%
    replied that they were not and 65% did not know.
        When participants were provided possible definitions of an
    administrative and a redemption fee, 51% of the respondents correctly
    identified the administrative fee and 38% correctly identified the
    redemption fee. Approximately one third (37%) stated they did not know
    which statement correctly identified an administrative fee and more
    than half (55%) said they did not know which statement correctly
    identified a redemption fee.
    The 401(k) Fair Disclosure for Retirement Security Act of 2007
        The 401(k) Fair Disclosure for Retirement Security Act of 2007
    (H.R. 3185) would ensure that 401(k) service providers provide plan
    sponsors with comprehensive information on service fee and expense
    information. The bill would also require notice to participants of
    investment option information, including risk and fees to the
    participant. It would create a new annual benefit statement and require
    that at least one plan investment option be a nationally recognized
    market-based index fund.
        H.R. 3185 would establish a solid framework for providing
    comprehensive information to plan sponsors that could then be
    synthesized and given to participants along with required investment
    option information. In establishing itemization of different categories
    of fees, bundled service arrangements would essentially have to be un-
    bundled for clearer presentation of the costs. Requiring that plan
    service providers give comprehensive information to plan sponsors will
    provide the plan sponsors with the resources they need to fulfill their
    fiduciary duties.
        H.R. 3185 would not extend disclosure requirements to all
    individual account plans, just 401(k) plans. Participants in other
    individual account plans, such as ERISA-covered 403(b) plans, are also
    subject to investment costs or administrative fees, and those
    participants have a right to know what is being charged to their
    accounts. AARP urges that all individual account plan participants have
    access to investment and fee information.
        The provision establishing a new annual benefit statement would
    provide a comprehensive picture of a participant's status in the 401(k)
    plan. This provision will need to be coordinated with the new Pension
    Protection Act requirements for a quarterly benefit statement in order
    to enhance consistency and effectiveness of the information.
        AARP supports the bill's requirement that the plan investment
    options include a nationally recognized market-based index fund. This
    option would ensure that all plans provide participants with access to
    the market at the generally lower expense levels associated with index
    funds.
        AARP recommends that information on an investment's fees
    demonstrate how they will affect the participant's account balance over
    time. Participants need to know how fees and expenses of an investment
    compare with others offered by the plan as well as similar investments
    in the market. GAO recently suggested that participants be provided the
    expense ratio for each investment as an effective way to compare fees,
    especially within the context of the investment's risk and historical
    performance.\3\
    ---------------------------------------------------------------------------
        \3\ Changes Needed to Provide 401(k) Plan Participants and the
    Department of Labor Better Information, GAO-07-21 (November 2006).
    ---------------------------------------------------------------------------
        AARP also recommends including in the information furnished to
    participants whether employer stock is an investment option because the
    plan terms so provide. Too many employees continue to hold excessively
    large amounts of employer stock in their 401(k) plans. Clarifying why
    employer stock is among the available choices may help participants
    choose investments that reflect their personal goals, rather than
    reflect a value judgment about the return or risk associated with the
    employer stock. H.R. 3185 already includes a provision requiring that
    employer stock fees be included in the disclosure to participants. This
    information, which would complement the Pension Protection Act's
    provisions on disclosure and diversification, would add additional
    context to the information about employer stock that would help
    participants make a more informed decision.
    Conclusion
        AARP commends Congressman Miller for introducing H.R. 3185 to
    strengthen investment and fee disclosures to 401(k) sponsors and
    participants. The legislation represents an important step to require
    necessary information and ensure that it is effectively communicated.
    The significant impact of fees on retirement security, as well as the
    results of AARP's survey of 401(k) participants, highlights the need
    for clear investment and fee information. We look forward to working
    with this Committee to ensure that both employers and participants have
    the information they need to best ensure an adequate retirement income
    level.
        Thank you for the opportunity to testify today.
                                     ______

        Chairman Miller. Thank you very much for your testimony.
        In the introductions, I skipped over Mr. Scanlon. My
    apologies to you, Mr. Scanlon. Mr. Scanlon is the head of
    Americas Institutional Business for Barclays Global Investors.
    He also serves on the finance board of City College of San
    Francisco and he received his master's in accounting from
    Northwestern University. Welcome to the committee. Thank you.

     STATEMENT OF MATTHEW H. SCANLON, MANAGING DIRECTOR, BARCLAYS
                            GLOBAL INVESTORS

        Mr. Scanlon. Chairman Miller, Ranking Member McKeon and
    members of the committee, on behalf of Barclays Global
    Investors, I appreciate the opportunity to testify today
    regarding the 401(k) Fair Disclosure for Retirement Security
    Act of 2007.
        Headquartered in San Francisco, BGI is one of the world's
    largest institutional asset managers. We have approximately $2
    trillion in assets under management, including hundreds of
    billions of dollars of ERISA plan assets. BGI's services to its
    clients are focused on investment management. We do not provide
    other services such as recordkeeping.
        An increasing number of Americans rely on employer-
    sponsored defined-contribution plans to help them accumulate
    the savings they need for retirement, but far too many 401(k)
    plans fail to achieve their purpose if they are meant to
    provide worker security in retirement. There are three main
    reasons for this: inadequate or no contributions into the plan;
    low investment returns with high fees; and a lack of
    distribution strategies to fund consumption in retirement.
        The technology for saving and investing today to receive a
    benefit far in the future is already in use by well-managed
    defined benefit plans. We need to bring some of these practices
    into the DC marketplace and the bill under discussion today
    would take an important step in this direction.
        I think we can all agree that the goal of any disclosure
    framework should be to provide relevant information in a cost-
    effective manner to enable the best possible decisions. Plan
    sponsors need adequate information about investment options,
    including their fees and expenses, so that they can exercise
    their fiduciary responsibility to choose the investment options
    available under the plan.
        Plan sponsors also have the fiduciary obligation to choose
    other plan service providers and to understand the cost of
    those services. Today, the information the plan sponsor needs
    is sometimes difficult to obtain and difficult to compare. BGI
    supports legislative efforts to require service providers to
    provide specific disclosures by fee category so as to make plan
    sponsors' decision-making less burdensome.
        Defined contribution plan service arrangements generally
    fall into two principal categories. The arrangements may be
    bundled, that is recordkeeping combined with asset management
    services together; or unbundled, where the plan sponsor selects
    its investment options separately from its recordkeeper and
    other service providers. Bundled service arrangements may be
    appropriate for some plans, particularly smaller ones, but even
    then the fee components of both recordkeeping and asset
    management must separately and clearly be disclosed.
        Clear, comparable and fully disclosed information about
    these changes and these charges will allow the plan sponsor to
    more easily and adequately meets its fiduciary responsibility
    under ERISA to determine that the fees and expenses are
    reasonable. The most fundamental decisions that plan
    participants need to make are whether and at what level to
    participate in the plan; which investment options to choose;
    whether and when to change their investment allocations; and
    when to take distributions from the plan.
        The bill requires plan sponsors to list every service fee
    assessed against the participant's account. We believe that the
    average participant might be better served with a summary of
    these charges grouped into categories with the additional
    detail available upon request or on the plan's website.
    Participant disclosures should provide a consistent, comparable
    measure of fee and expense information and should allow plan
    participants to easily understand investment performance after
    all fees and expenses are paid by the participant.
        In addition, again in a comparable format, these
    disclosures should include the investment objective and
    strategy, key investment risks, and historical performance for
    each investment option.
        We support the adoption by the Department of Labor of
    standardized fund fact sheets as the form of disclosure for
    plan participants. There are a broad variety of investment
    types that can be offered to plan participants in 401(k) plans,
    and they are subject to a variety of different regulatory
    regimes. We know of no regulatory impediment, however, to
    providing comparable disclosure to participants across all such
    investment types, regardless of legal structure.
        We support the bill's conflict-of-interest disclosure
    requirements and urge that this provision be clarified to
    ensure that plan sponsors receive information that is specific
    to the plan sponsor and the particular service provider.
        In conclusion, many DC plans currently have challenges with
    all three of the major components: the contribution or savings
    component; the investment performance component; and the
    retirement distribution component. By promoting such features
    as auto-enrollment and automatic contribution escalation, the
    Pension Protection Act of 2006 has already focused on the first
    challenge.
        By promoting more effective disclosure of fees and expenses
    to plan sponsors and plan participants, the 401(k) Fair
    Disclosure for Retirement Security Act of 2007 would improve
    the second component. Transparency can be an important catalyst
    for making DC plans perform more like DB plans in the balance
    of costs and investment performance, and thereby improving the
    future income of all retirees.
        I will welcome your questions. Thank you.
        [The statement of Mr. Scanlon follows:]

                                    ------

        Chairman Miller. Thank you.
        Mr. Thomasson?

       STATEMENT OF TOMMY THOMASSON, PRESIDENT-CEO, DAILY ACCESS
       CORP., CHAIR, COUNCIL OF INDEPENDENT 401(K) RECORDKEEPERS

        Mr. Thomasson. Thank you, Mr. Chairman, Ranking Member
    McKeon and members of the committee. My name is Tommy
    Thomasson, and I am the CEO of Daily Access Corporation in
    Mobile, Alabama. My firm is a leading provider of retirement
    plan services to small businesses throughout the country.
        I currently serve as the chair of the Council of
    Independent 401(k) Recordkeepers, or CIKR. The members of CIKR
    provide services for over 70,000 retirement plans covering
    three million participants, with approximately $130 billion in
    retirement assets. CIKR is a subsidiary of the American Society
    of Pension Professionals and Actuaries, which has thousands of
    members nationwide. As independent service providers, we
    support and actively practice full fee disclosure.
        I want to thank Chairman Miller for his leadership in
    shining the light on 401(k) fees. We believe this bill would
    help American workers increase their retirement savings.
        The 401(k) plan industry delivers investments and services
    to plan sponsors and their participants using two primary
    business models, commonly known as bundled and unbundled.
    Generally, bundled providers are large financial service
    companies whose primary business is selling investments. They
    bundle their proprietary investment products with affiliate-
    provided plan services into a package that is sold to plan
    sponsors.
        By contrast, unbundled or independent providers are
    primarily in the business of offering retirement plan services.
    They will couple such services with a universe of unaffiliated,
    nonproprietary investment alternatives. The business model of
    the provider determines the approach to selling and charging
    for plan services, although the scope of plan services under
    either model is relatively the same.
        Plan fiduciaries must follow prudent practices and
    procedures when they are evaluating service providers and
    investment options. This prudent evaluation should include an
    apples-to-apples comparison of services provided and the costs
    associated with those services. The only way to determine
    whether a fee for a service is reasonable is to compare it to a
    competitor's fee for that service.
        It is important to recognize that employees are totally
    dependent upon the employer's decision-making process and have
    to manage their retirement assets based upon the plan that has
    been chosen for them. If the fees are unnecessarily high, the
    worker will ultimately pay the price. That is why the
    disclosure made to plan fiduciaries is so critically important.
        The Department of Labor has proposed rules that would
    require enhanced disclosures on unbundled or independent
    service providers, while exempting the bundled providers from
    doing so. While we applaud the DOL's interest in addressing fee
    disclosure, we do not believe that any exemption for a specific
    business model is in the best interest of plan sponsors and
    their participants.
        Without uniform fee disclosure, fiduciaries will have to
    choose between a single-price business model and a fully
    disclosed business model that will not permit them to
    appropriately evaluate competing provider services and fees.
    Knowing only the total cost will not allow fiduciaries,
    particularly less sophisticated small business owners, to
    evaluate whether certain plan services are sensible and
    reasonably priced.
        In addition, if a reasonable breakdown of fees is not
    disclosed initially and over time, fiduciaries will not be able
    to evaluate cost for services as participant account balances
    grow. Take a $1 million plan serviced by a bundled provider
    that is only required to disclose a total fee of 125 basis
    points, or $12,500. If that plan grows to $2 million in assets,
    the fee doubles to $25,000, although the level of plan services
    and the costs of providing such services has generally remained
    the same.
        The bundled providers want an exemption, while demanding
    that unbundled providers be forced to adhere to disclosure
    rules and regulations. Simply put, they want to be able to tell
    plan sponsors that they can offer retirement plan services for
    free, while independents are required to disclose the fees for
    the same services.
        Of course, there is no free lunch and there are no free
    services provided in the 401(k) market. In reality, the costs
    of these free plan services are being shifted to participants,
    in many cases without their knowledge. The uniform disclosure
    of fees is the only way that fiduciaries can effectively
    evaluate the retirement plan they will offer to their workers.
    To show it can be done, attached to my written testimony is a
    sample of how uniform plan fiduciary disclosure would look. By
    breaking down plan fees in only three simple categories--
    investment management, recordkeeping and administration, and
    selling costs and advisory fees--we believe plan fiduciaries
    will have the information they need to satisfy their ERISA
    duties.
        The retirement system in our country is the best in the
    world when competition is fostered in innovations in
    investments and service delivery. However, the spirit of
    Chairman Miller's bill recognizes that important changes are
    needed to ensure that the retirement system in America remains
    robust and effective into the future. By enabling fair
    competition and supporting plan fiduciaries through uniformity
    of disclosure of fees and services, American workers will have
    a better chance of building retirement assets and living the
    American dream.
        Thank you, and I welcome your questions.
        [The statement of Mr. Thomasson follows:]

      Prepared Statement of Tommy Thomasson, President/CEO of DailyAccess
                       Corp., on behalf of ASPPA and CIKR

        Chairman Miller, Ranking Member McKeon, and distinguished members
    of the Committee, my name is Tommy Thomasson, President/CEO of
    DailyAccess Corporation. My company, based in Mobile, Alabama, provides
    retirement plan recordkeeping and administration services to thousands
    of small and medium-sized 401(k) plans throughout the country. I am
    here today on behalf of the American Society of Pension Professionals &
    Actuaries (ASPPA) and the Council of Independent 401(k) Recordkeepers
    (CIKR), for which I currently serve as Chair, to testify on important
    issues relating to 401(k) plan fee disclosures addressed in Chairman
    Miller's legislation, the ``401(k) Fair Disclosure for Retirement
    Security Act of 2007'' (H.R. 3185).
        ASPPA is a national organization of more than 6,000 retirement plan
    professionals who provide consulting and administrative services for
    qualified retirement plans covering millions of American workers. ASPPA
    members are retirement professionals of all disciplines, including
    consultants, administrators, actuaries, accountants and attorneys.
    ASPPA's large and broad-based membership gives ASPPA unusual insight
    into current practical problems with ERISA and qualified retirement
    plans, with a particular focus on the issues faced by small to medium-
    sized employers. ASPPA's membership is diverse, but united by a common
    dedication to the private retirement plan system.
        CIKR is a national organization of 401(k) plan service providers.
    CIKR members are unique in that they are primarily in the business of
    providing retirement plan services as compared to larger financial
    services companies that are primarily in the business of selling
    investments and investment products. As a consequence, the independent
    members of CIKR, many of whom are small businesses, make available to
    plan sponsors and participants a wide variety of investment
    alternatives from various financial services companies without bias or
    inherent conflicts of interest. By focusing their businesses on
    efficient retirement plan operations and innovative plan sponsor and
    participant services, CIKR members are a significant and important
    segment of the retirement plan service provider marketplace.
    Collectively, the members of CIKR provide services to approximately
    70,000 plans covering three million participants holding in excess of
    $130 billion in assets.
        ASPPA and CIKR applaud Chairman Miller's leadership and strongly
    support his efforts to improve the transparency of 401(k) fee and
    expense information at both the plan fiduciary and plan participant
    levels. ASPPA and CIKR share Chairman Miller's concern about making
    sure plans and plan participants have the information they need--in a
    form that is both uniform and useful--to make informed decisions about
    how to invest their retirement savings plan contributions. This
    information is critical to millions of Americans' ability to invest in
    a way that will maximize their retirement savings so that they can
    achieve adequate retirement security.
        While both 401(k) plan fiduciaries and participants need clear and
    consistent information to assess the reasonableness of fees charged for
    various plan services, the degree of detail that could be required in
    these disclosures could differ significantly. My testimony will discuss
    ASPPA's and CIKR's views on the need for uniform disclosure
    requirements from service providers to plan fiduciaries, regardless of
    how plan services are delivered, along with our suggested
    simplifications to the new plan service provider disclosure
    requirements in H.R. 3185. We will follow this up with our views on the
    need for sensible and understandable 401(k) plan participant
    disclosures, along with our suggested modifications to the participant
    disclosure requirements in H.R. 3185.
    Need for Uniform Disclosure to Plan Fiduciaries
                Overview of the 401(k) Plan Marketplace
        There are currently no rules governing the disclosure of fees
    charged by plan service providers, and thus disclosure is generally
    inconsistent and too often nonexistent. ASPPA and CIKR generally
    support requiring plan service providers to disclose fees that will be
    charged to assist plan fiduciaries in fulfilling their responsibility
    to assess the reasonableness of such fees. Such a requirement is
    included in H.R. 3185. Specifically, the disclosure to plan fiduciaries
    in H.R. 3185 would require a description of the plan services to be
    provided, the expected costs of various categories of services, the
    identity of the service provider and potential conflicts of interest.
        ASPPA and CIKR strongly believe that any disclosures required of
    service provider fees to a plan fiduciary must be provided in a uniform
    manner, regardless of how plan services are delivered. There are
    generally two main methods for delivering retirement plan services--
    ``bundled'' and ``unbundled.''
         Bundled providers are primarily in the business of selling
    investments and package their own proprietary investments with
    recordkeeping, administration and other retirement plan services. They
    typically are large financial services companies like mutual funds and
    insurers.
         Unbundled providers are primarily in the business of
    providing retirement plan operations and services and will offer such
    services along with a menu of independent, unaffiliated investment
    options, often referred to as an ``open architecture'' platform of
    investments. Although there are some larger unbundled providers, the
    vast majority of them are smaller businesses serving the unique needs
    of their small business clients.
        Although they use very different business models, both bundled and
    unbundled providers deliver the same kind of plan services to plan
    sponsors and participants.
        Bundled and unbundled providers, however, do collect their fees in
    different ways. In general, a bundled provider collects its fees from
    plan assets. In the case of a mutual fund, for example, that would be
    in the form of the ``expense ratio'' assessed against the particular
    investment options chosen by participants, reducing their rate of
    return for the year.\1\ In the case of an insurance company, the fee
    can also be in the form of a percentage fee assessed against total plan
    assets referred to in the industry as a ``wrap fee.'' In either case,
    fees collected by bundled providers are generally always charged
    against participants' accounts. Because the plan sponsor is not paying
    a fee for services directly to the service provider, bundled providers
    will present the plan to the plan sponsor as having ``free''
    recordkeeping and administration. There is currently little to no
    disclosure of this to either plan sponsors or plan participants. There
    are literally tens of thousands of 401(k) plans that report zero costs
    for recordkeeping and administration on their annual report (Form 5500)
    filed with the Department of Labor. In actuality, participant accounts
    are being charged for these ``free'' plan services in the form of
    investment fees assessed against their accounts.
        Unbundled providers, by contrast, generally collect fees for the
    services they provide in two ways--revenue sharing from the company
    providing the plan's investment options and by a direct charge to the
    plan and/or plan sponsor, depending on the willingness of the plan
    sponsor to bear such costs. A portion of the expense ratios for the
    plan's investment options includes a component for recordkeeping and
    administration.\2\ Since an unbundled provider, not an investment
    company, is performing recordkeeping and administration, the investment
    company will typically pass on a portion of the expense ratio to the
    unbundled provider to compensate them for performing such services.
    This is commonly known in the industry as revenue sharing. Depending on
    the size of the plan and the willingness of the plan sponsor to pay
    directly for retirement plan services, the amount of revenue sharing
    may be used to offset what would otherwise be charged directly to the
    plan and/or plan sponsor for recordkeeping and administration. Since
    the unbundled provider usually receives revenue sharing from an
    investment company on an omnibus basis (for all plans serviced by the
    provider but not on a per plan basis), the unbundled provider must
    employ a reasonable method, usually based on plan assets, for
    allocating the revenue sharing it receives to each plan for which it
    provides services.
    Complete and Uniform Disclosure is Necessary to Determine
            ``Reasonableness'' of Fees
        A central point of contention is the position the Department of
    Labor (DOL) took in proposed Form 5500 regulations, which would exempt
    bundled service providers from certain fee disclosure requirements
    applicable to unbundled/independent service providers. Specifically, in
    the proposed 2008 Form 5500, payments received by service providers
    from third parties (even though not from plan assets) would need to be
    disclosed. So, for example, allocable revenue sharing payments received
    by a third party administrator (TPA) for recordkeeping and
    administration in connection with the plan would need to be disclosed
    on the form. However, the regulation would exempt bundled providers
    from this disclosure requirement, with the result being that bundled
    providers would not have to disclose comparable internal revenue
    sharing payments to the affiliated entity or division providing
    recordkeeping and administration services.\3\
        To satisfy their ERISA-imposed fiduciary duty, plan fiduciaries
    must determine that the fees charged for recordkeeping, administration
    and other plan services are ``reasonable,'' requiring a comparison to
    fees charged by other providers, both bundled and unbundled.
    Inconsistent disclosure requirements between bundled versus unbundled
    providers will lead to a distorted analysis by plan fiduciaries as they
    review 401(k) plan fees. For instance, it will be virtually impossible
    for plan fiduciaries to determine the true costs for plan services
    provided through a bundled arrangement, which, as noted earlier, are
    often presented as having no cost. Uniform fee disclosures are needed
    for plan fiduciaries to make an ``apples to apples'' comparison of fees
    for various plan services offered by competing providers.
        A breakdown of fees for various plan services will also allow plan
    fiduciaries to evaluate whether all the various plan services are
    really needed. The fee assessed by a bundled provider is akin to a
    ``prix fixe'' menu at a restaurant. There is only one price for the
    package and usually no choice about which services are included.
    Without any reasonable segregation of the costs for plan services, less
    sophisticated plan fiduciaries, such as small business owners, may not
    appreciate the fact that the bundled package includes services they may
    not want or need yet--services they may be paying for under a single
    ``bundled'' price arrangement. With this information, plan fiduciaries
    will be in the position to question the necessity and cost of some of
    the services, potentially leading to lower costs to the plan and
    participants.
        Plan fiduciaries also need a reasonable breakdown of fees for
    various services so they can continue to monitor the reasonableness of
    fees as a plan grows and costs increase. For example, assume a plan
    with assets valued at $1 million being service by a bundled provider
    for an ``all-in'' price of 125 basis points or $12,500. If, through
    growth of the company and increases in the market value of assets, plan
    assets grew to $2 million, the fee would be $25,000. However, without
    any reasonable allocation of fees to services, such as recordkeeping
    and administration, the plan fiduciary will not be in a position to ask
    why the fee has doubled even though the level of services has remained
    essentially the same.
        As provided for in H.R. 3185, disclosure of conflicts of interest
    is also critical. It should not be presumed that plan fiduciaries and
    participants, particularly those at small businesses, recognize and
    understand inherent conflicts of interest and their potential impact. A
    bundled provider will naturally prefer to sell a packaged 401(k) plan
    with only its own proprietary investments, as opposed to one with
    investments provided by other financial services companies, since in
    the former case it will retain all the fees.
        Exempting bundled providers from 401(k) plan fee disclosure rules
    will also greatly interfere with an extremely competitive 401(k) plan
    marketplace. Enhanced transparency requirements that only apply to
    unbundled arrangements may make them appear to have higher fees even
    though the total fees to the plan may in fact be similar, or perhaps
    even less. Similarly, a provider that has the ability to offer both
    proprietary investments and investments managed by unrelated investment
    managers will have an even greater advantage marketing its proprietary
    investments, because the cost of an arrangement of primarily
    proprietary investments will appear to be lower than that of an
    arrangement comprised of primarily independent investments. Small
    business plan sponsors with less sophistication will be more
    susceptible to these misperceptions in fee disclosure. Not only does
    this have the potential for creating a competitive imbalance in the
    service provider marketplace; even worse, it sets up the possibility
    that small business plan sponsors will lose an opportunity to choose a
    plan that will better serve their workers' retirement planning needs.
        The bundled providers specifically argue against being subject to a
    uniform set of disclosure requirements by stating that it would be too
    expensive to break down the internal or affiliate-provided service
    costs. They further suggest that any such breakdown would be inherently
    artificial since any internal cost allocations are merely for budgeting
    and accounting purposes. The bundled providers also argue that any
    conflicts of interest between a service provider and its affiliates
    should be readily apparent to the plan fiduciary.
        ASPPA and CIKR respectfully disagree with the position of the
    bundled providers. We believe it is possible with very little cost to
    develop an allocation methodology to provide a reasonable breakdown of
    fees for plan services. We discuss in more detail below how such a
    simplified breakdown of plan fees could be presented to plan
    fiduciaries. We note that it is the position of the bundled providers
    that unbundled providers, their competitors, should disclose such a
    breakdown of fees along with their allocation methodology, while they
    should be exempt.\4\ As noted earlier, since unbundled providers
    received revenue sharing on an omnibus basis, not on a per plan basis,
    such an allocation will be necessary and we believe can be reasonably
    accomplished.\5\ We find it ironic that the bundled providers, all
    large financial institutions, suggest that unbundled providers, mostly
    small businesses, be required to do something that they apparently are
    incapable of doing. Fundamentally, we believe the position of the
    bundled providers is an attempt to get a competitive advantage through
    law and/or regulation. Simply put, they want to be able to tell plan
    sponsors that they can offer retirement plan services for free while
    unbundled providers are required to disclose the fees for the same
    services.
        The disclosure requirements in H.R. 3185 uniformly apply to all
    service providers, and ASPPA and CIKR strongly support H.R. 3185 in
    this respect. The breakdown of fees required in the Miller bill will
    allow plan fiduciaries to assess the reasonableness of fees by
    comparison to other providers and will also allow fiduciaries to
    determine whether certain services are needed, leading to potentially
    even lower fees.
        It is also worthy of note that bundled service providers do provide
    a breakdown of fees for various plan services to their larger plan
    clients--clients who have the negotiating power to ask for this
    detailed cost information. Less sophisticated small businesses without
    access to this information will not appreciate the conflicts of
    interest and will be steered toward ``prix fixe'' packages that include
    services that they may not need to pay for. Uniform and consistent
    disclosure, regardless of how plan services are delivered, is necessary
    to ensure a level playing field and an efficient marketplace,
    ultimately leading to more competitive fees benefiting both plan
    sponsors and participants.
    Plan Fiduciary Disclosure Proposal
        H.R. 3185 would add new ERISA Sec. 111(a) to require an annual
    disclosure from service providers of all fees and conflicts of interest
    to employers sponsoring 401(k) plans. Plan fiduciaries would not be
    allowed to enter into a contract with a service provider unless the
    service provider provides a written annual statement identifying who
    will be performing services for the plan, a description of each service
    and the expected annual costs of each service, including any amounts to
    be paid to affiliated or other third party service providers under the
    contract. In other words, the rules of disclosure would be the same
    regardless of whether the services are provided on a ``bundled'' or
    ``unbundled'' basis.
        ASPPA and CIKR strongly support the goals of H.R. 3185, and
    particularly applaud the bill's even, equitable application of its
    disclosure rules to all plan service providers, regardless of their
    business structure (i.e., whether bundled or unbundled). The bill's
    requirement that service providers disclose to plan sponsors all direct
    and indirect charges against participants' accounts will ensure a level
    playing field in an extremely competitive marketplace. That is good
    news for plan participants' retirement asset accumulation needs and
    goals.
        However, we recommend that the disclosure requirements be clarified
    to provide a more simplified service provider fee disclosure that will
    break down the fees for all services under the following components:
    (1) Investment Management Expenses; (2) Administrative and
    Recordkeeping Fees; and (3) Selling Costs and Advisory Fees. All fees
    charged to 401(k) plans can be allocated to one of these components,
    and we would suggest that any further breakdown would be unnecessarily
    confusing to plan fiduciaries. These component expenses would be
    disclosed under three categories based on how they are collected--as
    fees on investments, fees on total plan assets and fees paid directly
    by the plan sponsor. We would also support the H.R. 3185 requirement
    that there be a conflicts of interest statement disclosing any
    conflicts. To demonstrate that a simplified disclosure form can be
    accomplished, we have attached to this testimony a sample form for the
    Committee to review and consider.
    Need for Sensible and Understandable Disclosure to Plan Participants
                Overview
        The level of detail in the information needed by 401(k) plan
    participants differs considerably than that needed by plan fiduciaries.
    Plan participants need clear and complete information on the investment
    choices available to them through their 401(k) plan, and other factors
    that will affect their account balance. In particular, participants who
    self-direct their 401(k) investments must be able to view and
    understand the investment performance and fee information charged
    directly to their 401(k) accounts in order to evaluate the investments
    offered by the plan and decide whether they want to engage in certain
    plan transactions.
        The disclosure of investment fee information is particularly
    important because of the significant impact these fees have on the
    adequacy of the participant's retirement savings. In general,
    investment management fees (which can include investment-specific wrap
    fees, redemption fees and redemption charges) constitute the majority
    of fees charged to 401(k) participants' accounts and therefore have a
    significant impact on a participant's retirement security.\6\ For
    example, over a 25-year period, a participant paying only 0.5% per year
    in plan expenses will net an additional 28% in retirement plan income
    over a participant in a similar plan bearing 1.5% in participant plan
    expenses per year. ASPPA and CIKR strongly support a requirement that
    plan sponsors disclose to plan participants, in a uniform, readily
    understandable format, all the information that the participant needs
    to make an informed choice among the investment options offered to
    them.
        There are currently no uniform rules on how this information is
    disclosed to plan participants by the various service providers. As
    stated in GAO Report 07-21, this is in large part due to the fact that
    ERISA requires limited disclosure by plan sponsors and does not require
    disclosure in a uniform way, which does not foster an easy comparison
    of investment options. Furthermore, the various types of investments
    offered in a 401(k) plan (e.g., mutual funds, annuities, brokerage
    windows, pooled separate accounts, collective trusts, etc.) are
    directly regulated by separate Federal and State agencies and are not
    likely to have uniform disclosure rules anytime soon.
        401(k) plan participants--as lay investors--generally do not have
    easy access to fee and expense information about their 401(k)
    investment options outside of the information that is provided by their
    plan sponsor and service provider. Further, while the existence of
    disclosure materials is a significant issue, accessibility and clarity
    of disclosure are equally compelling concerns. If the information is
    buried within page upon page of technical language, it is effectively
    unavailable to participants. If it is provided in an obvious manner,
    but the structure of the information is such that a participant cannot
    understand it or compare it to similar information for an alternate
    investment, it is also effectively unavailable. Therefore, insufficient
    or overly complicated information will often result in delayed or
    permanently deferred enrollment, investment inertia and irrational
    allocations.
        It is all too easy to overwhelm plan participants with details they
    simply do not need, and in many cases do not want. And an overwhelmed
    participant is more likely to simply ignore all the basic and necessary
    information that he or she does need to make a wise investment
    decision, or worse, to simply decline to participate in the plan. Thus,
    it is critical that the amount and format of information required to be
    disclosed to plan participants be well balanced to include all the
    information participants need, but no more than the information they
    need. To do otherwise risks putting participants in a position of
    simply declining to participate in the retirement plan, or making
    arbitrary--and potentially adverse--allocations of their retirement
    contributions.
        Further, there is a cost to any disclosure. And that cost is most
    often borne by the plan participants themselves. To incur costs of
    disclosure of information that will not be relevant to most
    participants will unnecessarily depress the participants' ability to
    accumulate retirement savings within their 401(k) plans. Thus,
    appropriate disclosure must be cost-effective, too. The result of
    mandatory disclosure should be the provision of all the information the
    plan participant needs, and no more. To require otherwise would
    unjustifiably, through increased costs, reduce participants' retirement
    savings. Those participants who want to delve further into the
    mechanics and mathematics of the fees associated with their investment
    choices and other potential account fees should have the absolute right
    to request additional information--it should be readily available on a
    Web site, or upon participant request. This will take care of those
    participants who feel they need more detailed information.
        Accordingly, ASPPA and CIKR recommend that plan sponsors provide to
    plan participants upon enrollment and annually thereafter information
    about direct fees and expenses related to investment options under
    their 401(k) plan as well as other charges that could be assessed
    against their account. This mandatory disclosure must be in an
    understandable format that includes sufficient flexibility to enable
    various types of potential fees to be disclosed within the context of
    uniform rules. This simple, uniform, carefully crafted disclosure would
    allow participants to make more informed decisions regarding their
    401(k) accounts by allowing them to simply compare the various fees and
    expenses charged for each investment option, and by making them aware
    of the possible other fees they can occur depending on the decisions
    they make.
        To accomplish this objective, ASPPA and CIKR strongly support the
    requirement in the Miller bill that an exemplary ``fee menu'' be
    provided to plan participants upon enrollment, and annually thereafter,
    that would provide a snapshot of the direct fees and expenses that
    could potentially be charged against a participant's account (discussed
    further below). The plan fiduciary would be responsible for ensuring
    that the fee disclosure document is made available to the participants,
    but generally would obtain the necessary fee data (and in most cases,
    the disclosure form itself) from the plan's service provider.
    Participant Fee Disclosure Proposal
        H.R. 3185 would add new ERISA Sec. Sec. 111(b) and (c) to require
    two separate disclosure requirements to 401(k) plan participants: (1)
    an advance notice to 401(k) plan participants of investment election
    information, which would include a plan-level forward-looking ``fee
    menu'' that would provide participants at the beginning of the year a
    summary of all the fees (including investment specific fees, account-
    based fees and transaction costs) that could be assessed against the
    account; and (2) an ``after-the-fact'' participant-specific fee
    statement that would detail all the various fees assessed against the
    account of the participant during the past year.
        For the reasons below, ASPPA and CIKR fully support the forward-
    looking ``fee menu'' participant-specific fee statement. We further
    support the goal of the ``after-the-fact'' participant-specific
    disclosure so that participants will have sufficient information on
    investment fees so they can assess whether their investment options
    continue to be appropriate. Given that participants will be receiving a
    ``forward-looking'' fee menu setting forth detailed information of any
    potential fees and expenses for each investment alternative in their
    plan, we believe that the ``after-the-fact'' information should be
    limited to reflect the gross return and net return after fees on each
    investment alternative available (as discussed below).
    Forward-looking ``Fee Menu'' Notice Requirement
        New ERISA Sec. 111(b) would require plan administrators to provide
    an advance notice to plan participants with specific information for
    each investment option 15 days prior either to the beginning of the
    plan year and/or any effective date of any material change in
    investment options. The notice must contain the name of the option,
    investment objectives, level of risk, historical return and percentage
    fee assessed against amounts, an explanation of differences between
    asset-based fees and annual fees and how additional plan-specific
    information may be obtained.
        Along with this notice, ERISA Sec. 111(b) would require an annual
    ``fee menu'' be provided to participants listing all potential service
    fees that could be assessed against their account in any given plan
    year. It is to be written in a manner easily understood by the average
    participant. The ``fee menu'' would disclose fees in the following
    three categories: (1) fees depending on a specific investment option
    (including expense ratio, participant-specific asset-based fees,
    possible redemption fees and possible surrender charges); (2) fees
    assessed as a percentage of total assets; and (3) administrative and
    transaction-based fees. The fee menu must also include any potential
    conflicts of interest that may exist with service providers or parties
    in interest, as determined by DOL.
        ASPPA and CIKR support the requirement that an advance, annual
    notice be provided to participants that would incorporate a forward-
    looking annual ``fee menu,'' which would provide sufficient information
    to plan participants to make an informed evaluation of all the
    potential fees that could affect their accounts. This fee menu
    requirement is consistent with the recommendations ASPPA and CIKR
    provided to the DOL on July 20, 2007, in response to their request for
    information (RFI) regarding fee and expense to disclosures in
    individual account plans. Attached to this testimony is the sample one-
    page fee menu submitted to DOL along with our response to the RFI.
    ``After-the-fact'' Notice Requirement of Plan Expenses
        New ERISA Sec. 111(c) also requires an additional ``after-the-
    fact'' participant-specific fee statement that would detail all the
    various fees assessed against the account of the participant during the
    past year. The annual participant benefit statement would require a
    high level of detail to be provided 90 days after the close of each
    plan.
        Specifically, the following specific information would be required:
    (1) starting balance, vesting status, employer/employee contributions,
    earnings, fees, ending balance and asset allocation by investment
    option from the preceding plan year; (2) an extensive list of fees
    charged against each participant's account for each investment option
    from the preceding plan year; and (3) historical return and risk level
    information of each investment option and the estimated amount a
    participant needs to save each month to retire at age 65.
        ASPPA and CIKR support the concept of providing ``after-the-fact''
    information on the investment alternatives so that plan participants
    can consider the relevant investment return information, along with the
    effect of fees on each investment, to make a truly informed decision as
    to whether the options they have selected remain appropriate. Since the
    proposed fee menu would provide participants with detailed information
    of any potential fees that could be charged to their accounts, the
    ``after-the-fact'' information should be limited to gross return and
    net return after fees on each investment alternative. Providing
    information in this manner would reduce costs and provide participants
    with relevant and understandable information that would allow them to
    make an informed comparison of each investment option, without
    overwhelming them with too much detail that they do not need.
        Accordingly, ASPPA and CIKR recommend that the ``after-the-fact''
    disclosure be limited to the gross and net return of each investment
    alternative, to be provided in conjunction with the annual ``fee menu''
    of potential fees for each investment option. We believe these
    disclosures will provide participants with well-balanced and
    understandable information to decide on the investments appropriate for
    them, while helping to ultimately reduce costs for the plan
    participants who will likely pay for these additional disclosures.
    DOL Regulatory Initiatives
        It has been suggested by some that Congress should wait until the
    DOL concludes its currently ongoing regulatory project on new fee
    disclosure requirements. These initiatives include: (1) a modification
    to Schedule C of the 2008 Form 5500; (2) guidance on what constitutes
    ``reasonable'' compensation under ERISA Sec. 408(b)(2) between service
    providers and plan fiduciaries; and (3) increased disclosure
    requirements under ERISA Sec. 404(c). ASPPA and CIKR believe that while
    the DOL guidance on this issue is a very important factor in Congress'
    decision on 401(k) fee disclosure requirements, it is ultimately the
    right and responsibility of the Congress to make the determination
    whether more fee disclosure is required, and if so, its appropriate
    scope and frequency.
        Further, the DOL's jurisdiction over fee disclosure issues may be
    limited to the voluntary ERISA Sec. 404(c) plans that are subject to
    DOL's disclosure rule-making. Arguably, plans that are not operating
    under the voluntary 404(c) liability protections would also not be
    subject to DOL's fee disclosure requirements. Guidance applicable only
    to 404(c) plans would be an unfortunate result that could harm those
    participants whose employers sponsor non-404(c) plans.
        ASPPA and CIKR recommend that the Education and Labor Committee
    proceed with this inquiry, and with appropriate legislation, regardless
    of the current status of the DOL regulatory effort. It will not be too
    late to modify either the legislation or the regulatory guidance if and
    when either initiative reaches a stage in the process where it would be
    appropriate to defer one to the other.
    Summary
        In summary, ASPPA and CIKR applaud this committee, and in
    particular, Chairman Miller, for his leadership on the important issue
    of required 401(k) fee/expense disclosure. We support complete and
    consistent disclosure requirements to both plan fiduciaries and plan
    participants. We believe that any new disclosure requirements to plan
    fiduciaries should apply uniformly to all service providers, regardless
    of the form of their business structure (i.e., ``bundled'' or
    ``unbundled''). Respecting plan participant disclosures, ASPPA and CIKR
    fully support a forward-looking annual ``fee menu'' being provided
    annually to plan participants in a simple, concise format so that they
    can make an informed evaluation of all the potential fees that could
    affect their accounts. Both of these disclosure requirements are
    included in H.R. 3185, and we commend Chairman Miller for his insight
    and efforts into these issues.
        Again, thank you for this opportunity to testify on these important
    issues. ASPPA and CIKR pledge to you our full support in creating the
    best possible fee disclosure rules. I will be happy to answer any
    questions you may have.
                                    endnotes
        \1\ A mutual fund prospectus provides more detail of what is
    contained in an expense ratio, which includes the cost for
    recordkeeping as well as promotional costs (i.e., Rule 12b-1 fees).
        \2\ As discussed earlier, this will be explained in more detail in
    the investment prospectus.
        \3\ DOL will also soon propose regulations under ERISA
    Sec. 408(b)(2) to resume the requirement of retirement plan service
    providers to disclose expected fees to plan fiduciaries at ``point of
    sale.'' It is expected that the rules will be comparable to the
    disclosures required in the Form 5500 when finalized.
        \4\ See Testimony of Mary Podesta on behalf of the Investment
    Company Institute before the ERISA Advisory Council Working Group on
    Fiduciary Responsibilities and Revenue Sharing Practices (Sept. 20,
    2007).
        \5\ An allocation on the basis of the value of plan assets is one
    possible allocation method.
        \6\ GAO Report 07-21 cited a 2005 industry survey estimating that
    investment fees made up about 80 to 99 percent of plan fees, depending
    on the number of participants in the plan.
                                     ______

        Chairman Miller. Thank you very much.
        Mr. Minsky?

      STATEMENT OF LEW MINSKY, SENIOR ATTORNEY, FLORIDA POWER AND
                               LIGHT CO.

        Mr. Minsky. Thank you, Mr. Chairman.
        I would like to make several points today. First, the vast
    majority of 401(k) participants pay substantially lower fees
    than they would pay as individual retail investors.
        Second, we believe that legislative action should be
    deferred until the Department of Labor promulgates its new
    rules so that Congress can assess the impact of fee disclosure
    regulations.
        Third, we are concerned that H.R. 3185 goes too far.
    Compliance costs and litigation threats will increase as a
    result of added complexity and new requirements, most of which
    are not necessary to enhance the ability of plan participants
    to make sound investment choices or to enhance the ability of
    plan sponsors to select the best service provider.
        Recent studies of defined contribution plans have found
    that total plan costs average between 6 and 159 basis points,
    depending largely on plan size, participant account balances,
    asset mix, the type of investments, and the level of services
    being provided. While we feel that fee costs overall are
    reasonable, we all agree that continuing improvement is both
    obtainable and desirable.
        I want to take a moment to explain our desire that Congress
    wait for the DOL to complete its work before proceeding. Major
    substantive changes in fee disclosure to both plan sponsors and
    plan participants are expected to result from the DOL fee
    initiatives. We believe that the regulatory process of
    soliciting input and issuing proposed rules and final rules
    based on comments from all affected parties will result in a
    more responsive rule and will avoid unintended consequences.
        Moreover, regulatory guidance is dynamic. It can be
    clarified and amended to adapt to changing conditions.
    Legislation, on the other hand, is cast in stone until changed,
    and change can be very difficult to enact for reasons often
    totally unrelated to the core issues. One need look no further
    than the uncertain future of the technical changes to last
    year's Pension Protection Act for clarification and
    confirmation of this point.
        The bill creates a new set of complex rules and sanctions
    regarding service provider disclosures to plan participants.
    The DOL's expected approach, on the other hand, builds upon
    existing well-established fiduciary and prohibited transaction
    rules and sanctions. We prefer the DOL's approach.
        The bill also requires that information received by the
    plan sponsor be made available to plan participants. We believe
    that such disclosure is unlikely to provide information that is
    meaningful to participants, and we fear that it will be used to
    spur frivolous litigation that will result in fewer plans
    ultimately being offered to workers.
        This bill requires the unbundling of fees in a bundled
    service arrangement. Many sponsors, especially small
    businesses, prefer a bundled arrangement with one overall cost.
    As long as sponsors are fully informed of the services being
    provided and the total cost, we believe that they can evaluate
    whether the overall fees are reasonable without being required
    to analyze each fee on an itemized basis.
        The participant fee disclosures in the bill are unlikely to
    provide information that is meaningful to them. We believe that
    plan participants need to know what fees are that impact their
    decision to participate in the plan and the specific fees
    associated with their investment allocation decision.
    Meaningful disclosure should be relatively simple: the
    aggregate fee that is paid from a participant's account, rather
    than the components of that fee. To do otherwise will result in
    a lengthy and confusing disclosure.
        The bill requires plans to include a nationally recognized
    market-based index fund. We strongly believe that the law
    should not mandate specific investment options. Such a
    requirement would set a precedent for further mandates
    regarding the investment of plan assets which is counter to
    ERISA's focus on a prudent process and would preempt the
    judgment of plan investment fiduciaries.
        In conclusion, we support enhanced fee disclosure. However,
    H.R. 3185 as presently drafted is flawed in many regards. We
    strongly believe that the additional flexibility inherent in
    the regulatory process makes the DOL initiatives the
    appropriate vehicle for new disclosure requirements. Any new
    legislative requirements would only delay those efforts,
    resulting in delayed reforms. If the committee proceeds with
    H.R. 3185, we recommend a comprehensive rewrite that ensures a
    more streamlined regime.
        We appreciate the opportunity to appear before you today
    and to testify on this very important matter. Thank you.
        [The statement of Mr. Minsky follows:]

     Prepared Statement of Lew Minsky, Senior Attorney, Florida Power and
                                   Light Co.

        Chairman Miller, Ranking Member McKeon, and Members of the
    Committee, thank you for the opportunity to appear before you today to
    discuss H.R. 3185, the 401(k) Fair Disclosure for Retirement Security
    Act of 2007. My name is Lew Minsky and I am a Senior Attorney at
    Florida Power and Light Company. I am responsible for the legal issues
    relating to FPL's employee benefit plans and executive compensation
    arrangements. We currently offer two defined contribution plans
    covering 15,000 participants. I am testifying today on behalf of The
    ERISA Industry Committee (ERIC), the Society for Human Resources
    Management, the National Association of Manufacturers (NAM), The United
    States Chamber of Commerce, and the Profit Sharing/401k Council of
    America (PSCA).
        ERIC is a nonprofit association committed to the advancement of
    America's major employer's retirement, health, incentive, and
    compensation plans. ERIC's members' plans are the benchmarks against
    which industry, third-party providers, consultants, and policy makers
    measure the design and effectiveness of other plans. These plans affect
    millions of Americans and the American economy. ERIC has a strong
    interest in protecting its members' ability to provide the best
    employee benefit, incentive, and compensation plans in the most cost
    effective manor.
        The Society for Human Resource Management (SHRM) is the world's
    largest association devoted to human resource management. The Society
    serves the needs of HR professionals and advances the interests of the
    HR profession. Founded in 1948, SHRM has more than 225,000 members in
    over 125 countries, and more than 575 affiliated chapters.
        The NAM is the nation's largest industrial trade association,
    representing small and large manufacturers in every industrial sector
    and in all 50 states. The vast majority of NAM members provide 401(k)
    plans for their employees and thus have a significant interest in this
    legislation.
        The U.S. Chamber of Commerce is the world's largest business
    federation, representing more than three million businesses and
    organizations of every size, sector, and region. The Chamber represents
    a wide management spectrum by type of business and location. Each major
    classification of American business--manufacturing, retailing,
    services, construction, wholesaling, and finance--is represented. Also,
    the Chamber has substantial membership in all 50 states, as well as 105
    American Chambers of Commerce abroad. Positions on national issues are
    developed by a cross-section of Chamber members serving on committees,
    subcommittees, and task forces. More than 1,000 business people
    participate in this process.
        Established in 1947, PSCA is a national, non-profit association of
    1,200 companies and their 6 million plan participants. PSCA represents
    its members' interests to federal policymakers and offers practical,
    cost-effective assistance with profit sharing and 401(k) plan design,
    administration, investment, compliance and communication. PSCA's
    services are tailored to meet the needs of both large and small
    companies. Members range in size from Fortune 100 firms to small,
    entrepreneurial businesses.
        Let me begin by saying that we all strongly support concise,
    effective, and efficient fee disclosure to participants. We support
    increased transparency between service providers and plan sponsors, and
    between plan sponsors and participants. We all share strong concerns
    that H.R. 3185 would sharply increase compliance costs and litigation
    threats by adding complexity and new requirements well beyond what is
    necessary to enhance the ability of plan participants to make good
    investment choices or the ability of plan sponsors to select the best
    service provider.
    The Current System
        Numerous aspects of ERISA already safeguard participants' interests
    and 401(k) assets. Plan assets must be held in a trust that is separate
    from the employer's assets. The fiduciary of the trust (normally the
    employer or committee within the employer) must operate the trust for
    the exclusive purpose of providing benefits to participants and their
    beneficiaries and defraying reasonable expenses of administering the
    plan. In other words, the fiduciary has a duty under ERISA to ensure
    that any expenses of operating the plan, to the extent they are paid
    with plan assets, are reasonable.
        It is important that as it considers new legislation, Congress
    fully understand the realities of fees in 401(k) plans. The vast
    majority of participants in ERISA plans have access to capital markets
    at lower cost through their plans than the participants could obtain in
    the retail markets because of economies of scale and the fiduciary's
    role in selecting investments and monitoring fees. The level of fees
    paid among all ERISA plan participants will vary considerably, however,
    based on variables that include plan size (in dollars and/or number of
    participants), participant account balances, asset mix, and the types
    of investments and the level of services being provided. Larger, older
    plans typically experience the lowest cost.
        A study by CEM Benchmarking Inc. of 88 US defined contribution
    plans with total assets of $512 billion (ranging from $4 million to
    over $10 billion per plan) and 8.3 million participants (ranging from
    fewer than 1,000 to over 100,000 per plan) found that total costs
    ranged from 6 to 154 basis points (bps) or 0.06 to 1.54 percent of plan
    assets in 2005. Total costs varied with overall plan size. Plans with
    assets in excess of $10 billion averaged 28 bps while plans between
    $0.5 billion and $2.0 billion averaged 52 bps. In a separate analysis
    conducted for PSCA, CEM reported that, in 2005, its private sector
    corporate plans had total average costs of 33.4 bps and median costs of
    29.8 bps.
        Other surveys have found similar costs. HR Investment Consultants
    is a consulting firm providing a wide range of services to employers
    offering participant-directed retirement plans. It publishes the 401(k)
    Averages Book that contains plan fee benchmarking data. The 2007
    edition of the book reveals that average total plan costs ranged from
    159 bps for plans with 25 participants to 107 bps for plans with 5,000
    participants. The Committee on the Investment of Employee Benefit
    Assets (CEIBA), whose more than 115 members manage $1.4 trillion in
    defined benefit and defined contribution plan assets on behalf of 16
    million (defined benefit and defined contribution) plan participants
    and beneficiaries, found in a 2005 survey of members that plan costs
    paid by defined contribution plan participants averaged 22 bps.
        It is important that before Congress consider any legislation in an
    effort to enhance disclosure of these fees, that they fully understand
    the great deal many employees are already enjoying in their 401(k)
    plans.
    Current Regulatory Action on Fees
        Fee disclosure and transparency present complex issues. Amending
    ERISA through legislation to prescribe specific fee disclosure will
    lock in disclosure standards built around today's practices and could
    discourage product and service innovation. The Department of Labor
    (DOL) has announced a series of regulatory initiatives that will make
    significant improvements to fee disclosure and transparency. We support
    the DOL's efforts and have been active participants in them. While
    legislative oversight of DOL's disclosure efforts is appropriate, we
    believe that this is the best approach to enhance fee transparency in a
    measured and balanced manner and we urge Congress to delay taking
    legislative action until the Department has completed its work.
        Among DOL's fee disclosure efforts are revised annual reporting
    requirements for plan sponsors. We expect DOL to release finalized
    modifications to the Form 5500 and the accompanying Schedule C, on
    which sponsors report compensation paid to plan service providers,
    within the next few weeks. The modifications will expand the number of
    service providers that must be listed and impose new requirements to
    report service provider revenue-sharing. The final regulations
    implementing the new Form 5500 are expected to first be applicable to
    the 2009 plan year.
        DOL also intends later this year to issue a revised regulation
    under ERISA Section 408(b)(2), which is a statutory rule dictating that
    a plan may pay no more than reasonable compensation to plan service
    providers. The expected proposal is designed to ensure that plan
    fiduciaries have access to information about all forms and sources of
    compensation that service providers receive (including revenue-
    sharing). Both sponsors and providers will be subject to new legal
    requirements under these proposed rules, including an anticipated
    requirement that all third party compensation be disclosed in contracts
    or other service provider agreements with the plan sponsor.
        The DOL's remaining initiative focuses on revamping participant-
    level disclosure of defined contribution plan fees. DOL issued a
    Request for Information (``RFI'') in April 2007 seeking comment on the
    current state of fee disclosure, the existing legal requirements, and
    possible new disclosure rules. Several of us filed individual comments
    and we all issued a joint response with seven other trade associations.
    DOL has indicated that it intends to propose new participant disclosure
    rules early in 2008 that will likely apply to all participant-directed
    individual account retirement plans.
    Principles of Reform
        As I said earlier, we do not oppose effective and efficient
    disclosure efforts. Working together with seven other trade
    associations, we developed a comprehensive set of principles that
    should be embodied in any efforts to enhance participant fee
    disclosure.
         Sponsors and Participants' Information Needs Are Markedly
    Different. Any new disclosure regime must recognize that plan sponsors
    (employers) and plan participants (employees) have markedly different
    disclosure needs.
         Overloading Participants with Unduly Detailed Information
    Can Be Counterproductive. Overly detailed and voluminous information
    may impair rather than enhance a participant's decision-making.
         New Disclosure Requirements Will Carry Costs for
    Participants and So Must Be Fully Justified. Participants will likely
    bear the costs of any new disclosure requirements so such new
    requirements must be justified in terms of providing a material benefit
    to plan participants' participation and investment decisions.
         Information About Fees Must Be Provided Along with Other
    Information Participants Need to Make Sound Investment Decisions.
    Participants need to know about fees and other costs associated with
    investing in the plan, but not in isolation. Fee information should
    appear in context with other key facts that participants should
    consider in making sound investment decisions. These facts include each
    plan investment option's historical performance, relative risks,
    investment objectives, and the identity of its adviser or manager.
         Disclosure Should Facilitate Comparison But Sponsors Need
    Flexibility Regarding Format. Disclosure should facilitate comparison
    among investment options, although employers should retain flexibility
    as to the appropriate format for workers.
         Participants Should Receive Information at Enrollment and
    Have Ongoing Access Annually. Participants should receive fee and other
    key investment option information at enrollment and be notified
    annually where they can find or how they can request updated
    information.
        We strongly urge that the requirements of H.R. 3185 be measured
    against these background principles.
    H.R. 3185's Service Disclosure Statement
        H.R. 3185 would require plan service providers to provide a
    ``service disclosure statement'' that describes all plan fees, in
    twelve specific detailed categories, as a condition of entering into a
    contract. The proposal would also require that this information be
    broken down by each cost component or be ``unbundled.'' The statement
    must describe the nature of any ``conflicts of interests,'' the impact
    of mutual fund share class if other than ``retail'' shares are offered
    and if revenue sharing is used to pay for ``free'' services.
        In general, we are concerned that the bill effectively makes plan
    sponsors liable for the actions of service providers. Such a structure
    would create an endless opportunity for litigation as lawyers seek to
    make plan sponsors guarantors of investment success. This would likely
    lead some plan sponsors to drop or curtail their plans to avoid the
    liability created by the bill.
    Disclosure Provisions
        We also have several concerns with the specific disclosure
    provisions included in this section of the bill. First, the
    requirements of H.R. 3185 are duplicative with the existing fiduciary
    requirement that fees paid with plan assets be reasonable. The DOL's
    pending proposed regulatory changes under section 408(b)(2) likely will
    result in similar disclosures, provided at the same general point in
    time, as this new provision. Under the DOL's approach, the disclosures
    will be incorporated into fiduciary requirements regarding plan fees,
    making noncompliance a prohibited transaction.
        Second, we believe that the requirement to ``unbundled'' bundled
    services and provide individual costs in many detailed categories is
    not particularly helpful and would lead to information that is not
    meaningful. It also raises significant concerns as to how a service
    provider would disclose component costs for services that are not
    offered outside a bundled contract. Any such unbundling would be
    subject to a great deal of arbitrariness. The posting of detailed
    unbundled services information could also force the public disclosure
    of proprietary information regarding contracts between service
    providers and plan sponsors. Compliance with this provision will
    require a substantial expenditure of time and effort to generate
    numbers that currently do not exist, are at best gross approximations,
    and are of extremely little practical value. These costs will
    ultimately be passed on to plan participants through higher
    administrative fees.
        ERISA currently requires plan administrators to ensure that the
    aggregate price of all services in a bundled arrangement is reasonable
    at the time the plan contracts for the services and that the aggregate
    price for those services continues to be reasonable over time. For
    example, asset-based fees should be monitored as plan assets grow to
    ensure that fee levels continue to be reasonable for services with
    relatively fixed costs such as plan administration and per-participant
    recordkeeping. The plan administrator should be fully informed of all
    the services included in a bundled arrangement to make this assessment.
    Many plan administrators, however, may prefer reviewing costs in an
    aggregate manner and, as long as they are fully informed of the
    services being provided, they can compare and evaluate whether the
    overall fees are reasonable without being required to analyze each fee
    on an itemized basis.
    Conflict of Interest Provisions
        We also have concerns regarding the ``conflicts of interest''
    provisions. ERISA already prescribes strict rules for prohibited
    activities for service providers who are parties-in-interest or
    fiduciaries to a plan. While disclosure of conflicts is important, the
    provision goes much further by requiring the disclosure of
    relationships and affiliations between different providers, regardless
    of whether these relationships involve a conflict of interest. Plan
    sponsors are expected to be provided with considerably expanded
    disclosures in the near future as the result of the DOL initiatives (in
    all likelihood sooner than if new legislation is enacted).
        We are concerned that these provisions might be seen as creating a
    new set of fiduciary obligations on plan administrators and increase
    the likelihood of litigation. We are concerned that a plan sponsor
    fiduciary might find itself challenged for retaining a service provider
    after having a financial or personal relationship disclosed to it
    because the proposed legislation labeled the relationship as one
    involving a conflict of interest. It should be clear that this section
    does not create any new conflict-of-interest definitions and mirrors
    the prohibited transactions in ERISA.
    Share Class Disclosure
        The purpose of the share class disclosure requirement is not clear.
    Depending on the size of a plan and its service needs, participants may
    pay fees that are lower, higher, or the same as ``retail'' prices.
    There are myriad costs associated with administering a 401(k) plan that
    do not apply to individual ownership of a mutual fund and, for this
    reason, participants in some plans, particularly new small business
    plans, may pay additional costs. A comparison with an ``institutional''
    share in this situation could result in an incorrect conclusion that
    the plan is paying more than reasonable expenses.
    Estimates
        While we appreciate the attempt to ease the burden of calculating
    numbers which are not known and in many cases unknowable and/or
    unobtainable from a practical perspective by allowing for the use of
    some estimates, this section would create substantial potential
    liability for plan sponsors. This section's language would result in
    plan sponsors litigating whether it had ``known'' such information (the
    scope of which is very unclear) and whether its estimate of expenses
    was ``reasonable.'' Additionally litigation could arise regarding
    whether estimates were ``materially incorrect.'' The substantial risk
    of litigation would ultimately lead many, especially small and mid-
    size, plan sponsors to discontinue or substantially curtail their
    retirement programs--a result that is in no one's best interest.
    H.R. 3185's Plan Participant Disclosure
        The requirements of H.R. 3185 for participant fee disclosure are
    numerous, burdensome, complex, and likely to increase participant
    confusion rather than enhance participant knowledge. Under H.R. 3185,
    plan administrators must provide an advance notice of investment
    election information to participants and beneficiaries, generally 15
    days prior to the beginning of the plan year. The notice must include
    the name of the option; investment objectives; risk level; whether the
    option is a ``comprehensive investment designed to achieve long-term
    retirement security or should be combined with other options in order
    to achieve such security''; historical return and percentage fee
    assessment; explanation of differences between asset-based and other
    annual fees; benchmarking against a nationally recognized market-based
    index or other benchmark retirement plan investment; and where and how
    additional plan-specific and generally available investment information
    regarding the option can be obtained.
        The notice must include a statement explaining that investment
    selection should not be based solely on fees but on other factors such
    as risk and historical returns. The notice must include a fee menu of
    the potential service fees that could be assessed against the account
    in the plan year. Fees must be categorized as, 1) varying by investment
    option (including expense ratios, investment fees, redemption fees,
    surrender charges); 2) asset-based fees assessed regardless of
    investment option selected; and 3) administration and transaction fees,
    including plan loan fees, that are either automatically deducted each
    year or result from certain transactions. The fee menu shall include a
    general description of the purpose of each fee, i.e., investment
    management, commissions, administration, recordkeeping. The menu will
    also include disclosure of potential conflicts of interest that may
    exist with service providers or parties in interest, as directed by the
    Secretary of Labor.
        Again, we support disclosure of relevant fee information, but
    flexibility should be provided to ensure that the plan administrator
    can tailor the disclosure to meet the needs of plan participants. The
    participant disclosure requirements as presently drafted will likely
    result in lengthy ``legalese'' documents that would confuse most
    participants and possibly hinder rather than help them make investment
    decisions. The scope and detail of the disclosure might well result in
    a document that, at best, is ignored and, at worst, deters
    participation in the plan.
        We agree that fee information should not be provided in a vacuum.
    Doing so would lead some participants to merely select the lowest cost
    option without regard to whether the risk and return of that option are
    appropriate for the participant. Some of the required data elements and
    comparisons in the legislation use confusing terminology, have
    overlapping requirements, or are excessively detailed. For example, a
    ``benchmark retirement plan investment'' does not currently exist and
    no single benchmark is appropriate for every kind of investment. In
    many cases the required participant disclosure item would apply to some
    products and not others, and could be difficult to calculate,
    especially by the plan administrator.
    H.R. 3185's Annual Benefit Statement
        H.R. 3185 would also require plan administrators to provide a
    detailed annual benefits statement that is impractical and costly. It
    includes starting balance; vesting status; contributions by employer
    and employee during the plan year; earnings during the plan year; fees
    assessed in the plan year; ending balance; asset allocation by
    investment option, including current balance, annual change, net return
    as an amount and a percentage; service fees charged in the year for
    each investment, including, separately, investment fees (expense ratios
    and trading costs), load fees, total asset based fees (including
    variable annuity charges), mortality and expense charges, guaranteed
    investment contract (GIC) fees, employer stock fees, directed brokerage
    charges, administrative fees, participant transaction fees, total fees,
    and total fees as a percent of current assets; and the annual
    performance of the investment options selected by the participant as
    compared to a nationally recognized market based index.
        Recordkeeping systems are not currently able to meet all the
    requirements of the annual benefit statement in H.R. 3185. Additional
    costs to participants will result from the significant system changes
    needed to comply and simpler disclosure would provide much of the same
    benefits to participants. Much of the required data about the plan and
    the participant's account that can be ascertained by the plan
    administrator is already required to be disclosed in the new benefit
    statement mandated under the Pension Protection Act, yet there is no
    coordination of the two requirements.
    H.R. 3185's Index Fund Mandate
        H.R. 3185 would mandate that plans include at least one investment
    option which is a nationally recognized market-based index fund that,
    as determined by the DOL, offers a combination of historical returns,
    risks, and fees that is likely to meet retirement income needs at
    adequate levels of contribution.
        We strongly believe that specific investment options should not be
    mandated by law (with resulting fiduciary liability if the investment
    is found not to meet statutory and regulatory requirements). The
    provision would override a plan's ability to select and monitor plan
    investments by reaching a values conclusion that this investment is
    appropriate for all plans. It sets a precedent for further mandates
    regarding the investment of plan assets which is counter to ERISA's
    focus on a prudent process and would preempt the judgment of investment
    professionals. It is unlikely that any one ``market-based index'' alone
    is ``* * * likely to meet retirement income needs.'' Further, embedding
    a particular investment option in law may lead participants to believe
    that this is either the ``best'' option or the government-sanctioned
    option, thereby steering plan participants into the investment which
    may not be appropriate for the individual participant.
    H.R. 3185's Effective Date
        The effective date of H.R. 3185 is unrealistic. Numerous changes to
    recordkeeping systems would be required to meet the bill's various
    provisions. In addition, the bill includes no transition period for
    plan administrators who currently have contracts with service providers
    and would seem to endanger to the contractual relationships that exist
    between those parties.
    Conclusion
        We support effective fee disclosure. However, H.R. 3185 is flawed
    in many regards. We strongly believe that the additional flexibility
    inherent in the regulatory system make DOL a more appropriate place for
    new disclosure requirements. DOL already has numerous initiatives
    underway to enhance disclosure between plan sponsors and participants
    and between plan sponsors and service providers. Any new legislative
    requirements would likely only slow those efforts resulting in delayed
    reforms.
        Plan sponsors and service providers alike are committed to creating
    new investment options and administrative techniques to improve
    retirement security. Automatic enrollment, automatic contribution step-
    ups, target-date and lifecycle funds, managed accounts are just some of
    the numerous innovations that have benefited 401(k) participants--
    indeed some of them may not even have been participants if not for such
    products--and enhanced their retirement security. Statutory
    requirements for fee disclosure would freeze disclosure in the present,
    making enhancements and innovations more difficult in the future.
        If the Committee proceeds with H.R. 3185, we recommend a
    comprehensive rewrite than ensures it comports with the principles we
    have outlined in our testimony. Any other result could jeopardize the
    future of the defined contribution system at a time when it is
    increasingly critical for American workers. We appreciate the
    opportunity to appear before you today and testify on this very
    important matter.
                                     ______

        Chairman Miller. Thank you.
        Mr. Chambers?

    STATEMENT OF JON CHAMBERS, PRINCIPAL, SCHULTZ, COLLINS, LAWSON,
                           AND CHAMBERS, INC.

        Mr. Chambers. Chairman Miller, Ranking Member McKeon and
    distinguished members of the committee, thank you for the
    opportunity to present my views on 401(k) fee disclosure to
    this committee.
        As an investment consultant to defined contribution plans,
    I focus a significant portion of my practice on helping plan
    sponsors and other fiduciaries to quantify and understand the
    fees incurred in relation to their plans. For our clients, we
    typically review fee structures once a year. Additionally, we
    are regularly engaged in managing more formal requests for
    proposal or RFP processes intended to help plan fiduciaries
    select a new plan provider or to validate the retention of an
    existing provider.
        Since we examine 401(k) fees for a broad cross-section of
    plans, we are well positioned to see a variety of fee
    arrangements. I would like to share some real-world examples
    from our practice that will highlight how H.R. 3185 would help
    plan fiduciaries make better decisions.
        As the committee has heard, one of the more contentious
    elements of 401(k) fee structures is revenue sharing, which
    essentially is the transfer of investment fees to cover
    administrative costs. I would like to share a few examples
    about revenue sharing and how it can be used positively or
    negatively, and how even the largest employers frequently
    misunderstand it.
        Recently, we were engaged by a large 401(k) plan sponsor to
    help with investment issues related to a fund mapping. This
    particular plan sponsor hadn't worked with an investment
    consultant in the past. Fiduciary reviews were conducted by the
    financial firm that served as the plan recordkeeper, working
    with the company's own treasury staff.
        The company would not have engaged an independent
    consultant if it hadn't been for these mapping issues. That
    didn't mean that they didn't provide regular fiduciary reviews
    of the choices, but they did it working with the financial
    services firm, rather than with an independent consultant. The
    company's contract with the financial firm provided for no
    explicit fee payments. Recordkeeping and compliance services
    were covered by profit margins on the financial firm's
    proprietary funds, as well as revenue sharing payments from
    nonproprietary funds that were offered through the plan.
        The plan sponsor thought the plan fees must be reasonable
    because as they reviewed each investment option, each
    investment option had reasonable fees. Now, as we worked on the
    mapping project, we also did a fee reasonableness study. We
    demonstrated that the total fees being generated by the
    financial firm were approximately $1 million higher than were
    necessary in an unbundled arrangement. This company was able to
    negotiate share class changes with their financial services
    provider and save plan participants approximately $1 million a
    year.
        I would like to stop and highlight here that one of the
    important elements of H.R. 3185 is the need to disclose
    different share class availability. That is something that most
    plan sponsors wouldn't know about unless they either worked
    with an independent consultant or there were a requirement that
    it be disclosed to them.
        As an investment consultant, we work with large plans
    primarily. We don't get an opportunity to work with smaller
    clients most of the time. They can't afford our services. We
    believe that H.R. 3185 would bring the type of information that
    we provide to larger plans to bear for smaller plans.
        Third, briefly I would like to talk about an RFP that we
    manage for a smaller plan, a plan with about $15 million in
    assets. When we run an RFP, we typically include proposals from
    both bundled and unbundled service providers. We ask both the
    bundled and unbundled providers to separately propose fees for
    administrative and investment management services. This helps
    the fiduciaries make an informed decision about the cost and
    quality of each service element.
        A recent proposal that we ran for this regional bank
    solicited five proposals--two from insurance companies, two
    from mutual fund companies, and one from an unbundled TPA
    provider. One of the insurance companies refused to propose
    unbundled services and we neglected to consider their proposal
    further. Another insurance company said, ``Yes, we will
    unbundle services,'' and they actually had the highest fees.
    However, they said zero fees were available if their fixed
    account were used as an option.
        The two fund companies had mostly unbundled arrangements.
    One fund company had higher management fees and lower direct
    fees. The other had lower fund fees and higher administrative
    fees. And finally, the TPA had the lowest overall costs.
        Our client chose to go with the relatively low-cost mutual
    fund company because they had the information to make an
    informed decision. We believe that H.R. 3185 would provide the
    opportunity for plan sponsors to get enough information to make
    informed decisions, thereby driving down total costs of plan
    administration for all Americans.
        Thanks for the opportunity to testify.
        [The statement of Mr. Chambers follows:]

     Prepared Statement of Jon C. Chambers, Principal With Schultz Collins
                             Lawson Chambers, Inc.

        Chairman Miller, Ranking Member McKeon and distinguished members of
    the Committee, my name is Jon C. Chambers and I am a principal in the
    San Francisco, California investment consulting firm of Schultz Collins
    Lawson Chambers, Inc. Since 1995, our firm has provided a broad range
    of investment consulting services to defined contribution plan
    sponsors. My client base is primarily comprised of 401(k) plans. I
    consult to plans sponsored by approximately 30 employers on a recurring
    basis, and also serve other clients on a one-time project basis. My
    clients include a mixture of publicly traded and privately held
    companies, as well as not-for-profit organizations and governmental
    entities. Prior to joining Schultz Collins Lawson Chambers, Inc., I
    spent ten years as a retirement plan consultant with the accounting
    firm Coopers & Lybrand.
        As an investment consultant to defined contribution plans, I focus
    a significant portion of my practice on helping plan sponsors and other
    fiduciaries to quantify and understand the fees incurred in relation to
    their plans. For our recurring clients, we typically review fee
    structures at least once a year. Additionally, we are regularly engaged
    to manage a more formal Request for Proposal (RFP) process intended to
    help plan fiduciaries select a new plan provider, or to validate the
    retention of an existing provider. We generally manage between two and
    six RFP projects each year, although with the recent heightened
    attention on 401(k) fees, we have been seeing an increased demand for
    our RFP services. Since we examine 401(k) fees for a broad cross-
    section of plans, we are well positioned to see a variety of fee
    arrangements.
        I am actively involved in the retirement plan consulting community.
    I am a member of the Profit Sharing/401(k) Council of America (PSCA),
    the American Society of Pension Professionals & Actuaries (ASPPA) and a
    member and past president of the San Francisco Chapter of the Western
    Pension & Benefits Conference (WP&BC). However, it's important to note
    that my testimony today is my own, and is not intended to reflect the
    views of any of these organizations. Over the past year, I've spoken on
    401(k) fees at conferences sponsored by WP&BC and ASPPA. During this
    period, I have met with officials from the Securities and Exchange
    Commission (SEC), the Government Accountability Office (GAO) and the
    Department of Labor's Employee Benefit Security Administration (EBSA)
    to discuss the issue of improving disclosure of 401(k) fees.
        I very much appreciate the opportunity to present my views on
    401(k) fee disclosure to this Committee. The issues being discussed are
    challenging and technical, yet a reasonably successful resolution of
    the problem would go a long way towards improving the retirement
    security of millions of Americans. I commend Chairman Miller and this
    Committee for tackling such an important topic.
    Background on the 401(k) Fee Issue
        401(k) fees have been a predominant discussion topic in the
    retirement plan consulting community over the past five years. There
    are several reasons why 401(k) fees have recently become a critical
    issue:
         The 2000-2002 stock market plunge reminded 401(k) plan
    participants that investment returns could be negative, and that fund
    expenses compound losses. While participants arguably should have been
    equally sensitive to fund expenses during the bull market of the late
    1990s, participants seeing losses in their 401(k) accounts focus
    greater attention on fees.
         With many companies freezing or terminating their defined
    benefit plans, 401(k) plans are transitioning from being a supplemental
    savings vehicle to the primary retirement plan for many Americans.
         Outreach by the Department of Labor has encouraged both
    plan sponsors and participants to pay greater attention to 401(k) fees.
         Numerous stories in the popular media, including such
    diverse venues as PBS' Frontline, the Los Angeles Times, and Money
    magazine have highlighted 401(k) fee issues, with particular attention
    focused on egregious examples of excessive fees.
         Litigation (seeking class action status) has been filed
    against many of the largest companies in America, claiming that 401(k)
    fees were excessive and not properly disclosed.
         Congressional activities, including hearings held by this
    Committee, have focused national attention on the 401(k) fee issue.
         Following up on results from hearings and an independent
    study also published in 1997, as well as on recommendations published
    in 2004 by the ERISA Advisory Council's Working Group on Plan Fees and
    Reporting on Form 5500, the Department of Labor has announced a series
    of regulatory initiatives to improve disclosure of 401(k) fees.
        Despite all this attention, the way that most 401(k) service
    providers charge for fees hasn't changed much over the past decade. As
    this Committee heard in March, more than 90% of 401(k) fees are
    investment based. Generally, investment based fees are paid by plan
    participants, and are not typically disclosed to participants, at least
    not, in my view, in a clear and obvious manner. While speakers at the
    March 6 hearings disagreed about whether the aggregate level of 401(k)
    fees was excessive, there was general consensus that at least some fee
    arrangements are excessive, and that more rigorous and comprehensive
    disclosure standards are necessary. The debate is not about whether
    more disclosure is desirable, but rather, it is about what type of
    disclosure should be made, to whom, in what form, and who should bear
    the cost of that disclosure. Much of the debate centers around whether
    new disclosure requirements should be imposed by statute or by
    regulation.
    Statutory Changes are Necessary to Resolve the 401(k) Fee Disclosure
            Problem
        I personally believe that we need a material change in the
    statutory framework governing how 401(k) plans must disclose fees. To
    understand why this is so requires a brief review of the legislative
    history of ERISA, and the development of the modern 401(k) plan.
    ERISA--the Employee Retirement Income Security Act of 1974--was enacted
    when defined benefit plans were the nation's predominant retirement
    plan. The tax code changes permitting 401(k) plans were not enacted
    until 1978, and 401(k)s weren't broadly adopted and did not enter the
    mainstream vernacular until the 1980s. ERISA could not have
    contemplated disclosure rules for 401(k)s because 401(k)s did not exist
    when ERISA was enacted.
        One question that can be asked is if ERISA sets general standards
    for retirement plans, why should the rules that apply to 401(k)s be any
    different? There were certainly defined contribution plans operating in
    the 1970s. Why can't the general ERISA disclosure rules be sufficient
    for 401(k)s? The answer to this question turns on the unique
    environment in which the modern 401(k) operates. Today, most 401(k)
    plans are:
         Participant directed (which means that participants choose
    their own investment approach from a menu of funds selected, directly
    or indirectly, by their employer);
         Invested (either directly or indirectly) in mutual funds;
         Valued daily, with daily trading; and
         Administered by financial services firms.
        While the typical 401(k) plan's daily valued, participant directed
    structure provides significant investment flexibility for participants,
    it also introduces numerous administrative costs. Participants must be
    educated about the funds on the menu, and how to make rational asset
    allocation decisions. Call centers and Web sites must be established
    and maintained to provide participants with information about their
    accounts, and to permit participants to initiate daily trades. Accounts
    must be balanced and reconciled daily. And of course, since 401(k)
    plans operate through payroll deduction, the process of converting
    salary deferrals into fund purchases on each and every pay date makes
    401(k) administration transactionally intensive.
    Cost Sharing Arrangements and Employer Conflicts of Interest
        Fees for 401(k) plans are generally shared between participants and
    the employer, with the participants paying investment costs, and the
    employer paying for the costs of plan administration, to the extent
    that revenue sharing payments from the plan's investments are not
    available to offset administrative costs. Various surveys indicate
    that, on average, more than 90% of 401(k) fees are investment related.
        As I mentioned earlier, we manage the RFP process for many 401(k)
    plans. In our experience, when a mid-sized or larger plan (typically,
    at least $10 million in total plan assets), with average participant
    account balances of at least $50,000, sends out an RFP, the most
    typically quoted price for administrative and compliance services
    necessary to run the plan is ``zero.'' Of course, the true cost of
    providing these services is not zero. Investment expenses may have been
    increased to generate additional revenues, which are then used to cover
    the costs of the administrative services. But an unsophisticated
    employer conducting an RFP for 401(k) services that sees a zero fee
    quote for the administrative component from the majority of the
    respondents very quickly concludes that zero is the right price for
    these services. Most employers don't worry too much about why the
    explicit fee is zero. They don't realize that their employees must be
    implicitly paying for plan administration through higher than necessary
    investment fees. They don't know to ask whether the increased
    investment fees are more costly to participants than would be the case
    if the investment and administrative services were engaged separately.
    They usually choose one of the zero cost fee providers, and move
    forward.
        Unlike the modern employer offering a 401(k) as its primary
    retirement plan, defined benefit plan sponsors have always had a vested
    interest in minimizing investment expenses incurred by their plans.
    Since a defined benefit plan's funding requirements are at least
    partially determined by the plan's net investment returns, cutting
    investment expenses has the direct effect of reducing required
    contributions from the plan sponsor. When ERISA was drafted, employers
    were presumed to have the same objective as employees--to minimize
    investment fees, to the extent practical. But under a modern 401(k)
    plan, an employer has an understandable incentive to select funds with
    investment fees that are high enough that the employer incurs no
    administrative costs. Worse yet for the plan participants, under
    existing ERISA rules, there is no requirement that they receive any
    disclosure about fees that may be applied to their account. And
    finally, unless the employer is savvy enough to press the proposing
    vendor about fee transfers and revenue sharing arrangements, there is
    no current requirement for fee disclosure from the plan provider to the
    employer. A federal district court ruling dismissing all claims in one
    of the recently filed 401(k) excessive fee lawsuits highlighted this
    point. In support of his decision to dismiss the case, Judge John C.
    Shabaz notes:
        A review of the report [the ERISA Advisory Counsel Report of the
    Working Group on Plan Fees and Reporting on Form 5500] confirms that
    the revenue sharing issue raised by plaintiffs' complaint is a matter
    of policy concern within the Department of Labor. It also unequivocally
    confirms that present regulations do not require disclosure of the
    information. See particularly the report's Recommendations for
    Regulatory Change at p. 8. Whether, as a policy matter, additional
    reporting of revenue sharing arrangements should be required, it is not
    presently required and failure to include such information does not
    violate existing ERISA standards for disclosure. Accordingly,
    defendants' failure to so disclose is not a violation of the present
    statute of [sic] regulations and does not state a claim for breach of
    the duty of disclosure. (emphasis added) Hecker v. Deere & Co., No. 06-
    C-719-S (W.D.Wis. June 21, 2007)
        In my experience, employers aren't actively pushing for a transfer
    of plan costs from employer to employee, they are simply reacting
    rationally to how the financial services industry presents plan fees
    today. Most employers with whom we work seek to pay a fair fee for plan
    services, without causing their employees to pay excessive fees. But
    when employers are presented with a range of proposals for 401(k)
    services, all of which provide for zero explicit fees, they presume
    that zero fees are standard practice for the industry, without
    understanding the impact of implicit, fund based fees on their
    employees. One of the key benefits of H.R. 3185 is that employers would
    be able to make informed decisions about how plan administrative costs
    would be shared between plan participants and the employer. Employers
    that choose to pass through all plan costs to participants would still
    be permitted to do so, either through implicit revenue sharing
    payments, or through explicit allocation of hard dollar costs
    (provided, of course, that such plan costs could properly be charged to
    the plan under ERISA).
        Under current law, employers face potential liability if they do
    not satisfy their fiduciary duty to ensure that 401(k) plan fees are
    reasonable. This potential liability has recently been made manifest in
    very real litigation. However, in many cases, employers lack the
    information necessary to prudently evaluate fee structures.
    Furthermore, financial firms regularly price their 401(k) services in a
    manner that causes employers to focus less on fees paid by participants
    and more on fees paid (or avoided) by the employer. Larger employers
    have the financial resources and perspective necessary to engage
    consulting firms such as ours to help them make reasonable and prudent
    fiduciary decisions. While I believe that employers should continue to
    play a fiduciary oversight role with respect to their retirement
    programs, I also believe that we need a statutory solution that
    requires that financial firms provide employers with sufficient
    disclosures and other information so that the employers are able to
    make an informed decision before selecting a 401(k) provider. I also
    believe that participant disclosures should be enhanced, such that
    participants better understand the true cost of investing through a
    401(k) plan. With better informed employers, and better informed 401(k)
    participants, over time, competitive market pressures will reduce the
    cost of 401(k) investing, thereby improving retirement security for all
    Americans.
    Stories From the Trenches: Real World Examples of How Fiduciaries
            Currently Evaluate 401(k) Fees and Revenue Sharing Arrangements
        I'd like to share a few examples about revenue sharing, and how it
    can be used positively or negatively, and how even the largest
    employers frequently misunderstand it.
    Large Plan Uses Information About Revenue Sharing to Reduce Participant
            Costs
        Recently we were engaged by a large 401(k) plan sponsor to help
    with investment issues relating to a fund mapping. This particular plan
    sponsor did not work with an investment consultant on a regular basis.
    Fiduciary investment reviews for this plan were conducted by the
    financial firm serving as the plan recordkeeper, in conjunction with
    the sponsor's own treasury staff. Since treasury staff also managed
    investment manager reviews for the company's defined benefit pension
    plan, they felt that they did not need an independent review of their
    401(k) plan. In fact, this company would not have engaged an
    independent investment consultant had it not been for the need to do a
    mapping study. The company's contract with the financial firm serving
    as the plan recordkeeper provided for no explicit fee payments--
    recordkeeping and compliance services were covered by profit margins on
    the financial firm's proprietary funds, as well as revenue sharing
    payments from non-proprietary funds that were offered through the plan.
    The plan sponsor presumed that the plan fees must be reasonable,
    because the expense ratio on each fund offered through the plan, when
    considered in isolation, seemed reasonable.
        As a tangential element of the mapping project for which we were
    engaged, we were able to demonstrate to this company that the total
    explicit and implicit revenue sharing used to support plan
    administration generated more revenue than the approximate ``market
    rate'' for the recordkeeping and compliance functions provided by the
    financial firm. Based on the information we presented, the company
    negotiated share class transitions that saved participants more than $1
    million per year. We considered this a huge success. But the main point
    that I want to emphasize to this Committee is that, in this particular
    fact pattern, we were able to improve the 401(k) fee structure for a
    large group of plan participants that already benefited from low cost
    investment options, and from relatively sophisticated fiduciary
    oversight. This large employer simply did not understand revenue
    sharing arrangements well enough to negotiate further improvements
    without getting information from an independent investment consultant.
    Better disclosure of 401(k) fees could help many plans whose assets
    measure in the millions (or even in the hundreds of thousands), and not
    in the billions, to negotiate more favorable arrangements for their
    participants. Most of these smaller plans simply cannot afford to
    engage independent consultants to review their fee arrangements.
    Smaller Plan Refuses Zero Fee Arrangement
        I understand that certain commentators argue that the
    ``unbundling'' of fee arrangements proposed under H.R. 3185 is
    unnecessary, and could potentially lead to increased costs if plan
    service providers are forced to calculate what portion of an aggregate
    fee applies to specific service elements. These commentators argue that
    any new requirement should only require the disclosure of aggregate
    plan level fees. Additionally, some commentators argue that bundled
    providers are not able to determine how costs break down between
    investment and administrative services, so they cannot provide this
    information.
        When we manage an RFP for a company, we typically include proposals
    from both bundled and unbundled service providers. Furthermore, we ask
    both the bundled and unbundled providers to separately propose fees for
    administrative and investment management services. This permits the
    fiduciaries selecting the vendors to make an informed decision
    regarding the cost and quality of each service element. In our
    experience, virtually all bundled providers are willing and able to
    propose services in this manner, although some bundled providers will
    only present ``unbundled'' pricing to larger plans.
        Our experience managing an RFP process for a regional bank with
    about $15 million in plan assets earlier this year may help illustrate
    why we believe that any new disclosure requirements should require
    unbundling of fees. On behalf of the bank, we requested proposals from
    five different types of providers representing three different business
    models: large financial firms including two mutual fund companies and
    two insurance companies, as well as an unbundled arrangement led by an
    independent third party administrator (TPA).
        One of the insurance companies refused to provide unbundled
    pricing, simply claiming that its fees would be zero. This proposal was
    rejected without further review. The second insurance company proposed
    a relatively high hard dollar fee under an unbundled pricing structure,
    with the hard dollar fee offset by any revenue sharing payments
    received by the insurer. Alternately, this insurance company suggested
    that if the plan's current money market position were invested in a
    fixed rate account managed by the insurer, all explicit fees would be
    waived. This insurance company was invited to make a finals
    presentation to the plan fiduciaries.
        The two mutual fund company proposals presented primarily unbundled
    pricing, with explicit fees that were somewhat lower than the second
    insurance company's unbundled pricing, but with a requirement that at
    least some of the fund company's own proprietary funds be offered
    through the plan. One fund company proposed lower hard dollar fees, but
    offered more expensive funds. The other fund company proposed higher
    hard dollar fees, but offered less expensive funds. The fund company
    with the lower cost funds was invited to the finals presentations.
        The TPA was named as the third finalist. This proposal featured the
    lowest hard dollar fees of any of the three finalists, and complete
    flexibility for investment choice. Without knowing the identity of the
    other finalists, the TPA suggested that funds from the low cost fund
    company would be good investment choices.
        In this case, the bank selected the low cost fund company as its
    new 401(k) provider. While the TPA presented the least expensive and
    most flexible proposal, the bank was concerned that the TPA's
    administrative capabilities did not appear to be as deep as the fund
    company's.
    Conclusions
        401(k) fees have been identified as a potential problem for at
    least a decade. The Department of Labor and the ERISA Advisory Council
    have focused on this topic since at least 1997. However, other than
    educational initiatives, very little real progress has been made
    towards rationalizing, or even better understanding, 401(k) fee
    structures. In the past five years, 401(k) fee issues have become even
    more prominent, and it appears that the Department of Labor is now
    poised to release a series of regulations that will improve 401(k) fee
    disclosure. However, various commentators have noted that the
    Department's proposed regulations may be insufficient to address many
    of the issues faced by employers today, such as properly comparing
    bundled and unbundled service arrangements. In fact, it appears that
    the Department's proposed regulations will require less disclosure from
    bundled arrangements than will be required from unbundled arrangements.
    Such an uneven disclosure regimen could have the unintended and
    unwarranted consequence of favoring one type of service provider over
    another, which could lead to reduced competition and higher fees.
        In its current form, H.R. 3185 may not be a perfect bill. The
    litany of required fee disclosures may be excessive, and it's possible
    that certain types of fee disclosures could be collapsed and
    streamlined to reduce costs of complying with the bill and to improve
    the comprehensibility of the fee disclosure. The basic concepts behind
    H.R. 3185, however, the concepts of increased disclosure of fees and
    costs to 401(k) plan fiduciaries and 401(k) plan participants, are, in
    my opinion, quite sound and are badly needed to protect and improve the
    retirement security of American workers,
        I would like to add that the current bill's proposed requirement
    that 401(k) plans include some form of balanced index fund might
    establish a dangerous precedent for statutory endorsement of specific
    investment approaches. In my view, it is better to let the competitive
    and ever changing forces of the marketplace, with enhanced and
    effective disclosure of 401(k) fees and investment costs, drive the
    choice of investment vehicles for 401(k) plans. As a practical matter,
    if H.R. 3185 or a similar bill is enacted, we are likely to see index
    funds featured more prominently in 401(k) plans simply because the
    enhanced disclosure regimen makes low cost index funds look relatively
    attractive, and not because the statute requires that they be offered.
                                     ______

        Chairman Miller. Thank you very much.
        Thank you all for your testimony and your insights.
        Let me explain the situation to the committee and to the
    witnesses. We are going to begin a series of six votes here
    that I believe will take us a good part of 1 hour. We are going
    to begin the round of questioning and go as long as we can so
    that members can still make the votes, but I think at that
    point I will ask the members whether or not we let the panel
    go, rather than sit here for 1 hour. We would obviously like to
    be able to submit questions to you in writing, but I just think
    it would be unfortunate if we had you hang in here for 1 hour.
    I don't know that 1 hour will be enough time, unfortunately,
    with the way the votes are currently structured.
        If that meets with the approval of the members of the
    committee and with the witnesses--I can see that you are
    crestfallen that you are going to get out of here in a few
    minutes. [Laughter.]
        Okay, we will stick around and you guys will wait here 1
    hour. No. [Laughter.]
        Okay. We will do it that way. I will try to abbreviate
    because I know there is interest among the members here.
        Just quickly, Mr. Thomasson, if I might just ask you, the
    suggestion is made time and again that this is all information
    that the average person won't understand, can't use or won't
    use, and really doesn't provide any additional insights for
    them in the management of their plans. I would say in some
    cases that even suggests for the sponsors of the plan speaking
    to the individual. Yet we see from the GAO report and from
    calculations that many people have done a small differential
    can mean a lot of money over a period of years. I just wondered
    if you might explain. You have handed out how you thought it
    could be done with your testimony, but if you might explain
    your take on the question of complexity and whether this is all
    too much for the consumer.
        Mr. Thomasson. Thank you very much, Mr. Chairman. There are
    two levels of disclosure, as illustrated in the bill itself.
    One is a plan fiduciary disclosure. The other is a participant
    disclosure. While recordkeeping services, recordkeeping
    administration and some investment services are complex from
    the standpoint of being able to explain it, with multiple
    categories of fees and expenses, we think and we believe that a
    summary of these fees on the plan sponsor side, from the
    standpoint of investment management, recordkeeping and
    administration, as well as selling advisory services, are the
    three categories that are what plan sponsors need information
    on to be able to evaluate different service providers.
        They have an obligation to do so. If they do not have a
    breakdown of some type to be able to evaluate plan operations,
    selling and advisory fees, and the investment management
    itself, then they have no comparison with which to delineate
    whether a certain provider is better than another.
        Now, that does not preclude the fact that in either case, a
    plan sponsor will roll out and eventually have a total overall
    cost, but the comparison for their fiduciary responsibility to
    determine whether a service from a provider is appropriate,
    they need that breakdown.
        On the participant side, we agree that participant activity
    is really driven by the type of information they get. There are
    studies that say the participant disclosures, if they are too
    much for them, it actually will not be in their best interest
    to deliver that information to them because they will not be
    able to make appropriate decisions.
        What we have done and what we think is appropriate from the
    participant perspective is to examine what participants really
    need to make those decisions. Now, keep in mind that when a
    participant even gets the opportunity to make a decision, the
    universe of choices that they make has already been selected
    for them by the plan fiduciary. If a fiduciary selects a plan
    provider or a set of services and investments from a specific
    provider regardless of whether they are bundled, unbundled, or
    whoever they are, those decisions have already been made.
        So whatever that provider gives them, whatever the
    investments that have been selected, that is the universe that
    participants are able to choose from. Therefore, there is a
    subset of things that participants need to make those
    decisions. The investment expenses are obvious. In a situation
    where participants need to select the investments on their own
    behalf for their retirement security, they need to know what
    that management cost is going to be.
        If there are other fees on total plan assets--in other
    words, wrap charges, other types of fees that are assessed
    against the entire account as a plan or against individual
    participant accounts or against individual investments, they
    need to know what those are. And then the summary of those two
    together is total investment fees.
        In addition, since participants have the ability to execute
    instructions or give instructions to the provider or to the
    plan sponsor fiduciary relative to activities that they want to
    undertake, such as distributions or loans or initiate a loan
    process or other items like that, a fee menu of transaction
    expenses is kind of like a menu at a restaurant. It is
    something that they understand they need and they will say,
    ``Okay, I will be charged this if I initiate this
    transaction.''
        So those are three categories that we think need to be
    done--the investment expenses with all the fees on plan assets
    and the fee menu itself.
        Chairman Miller. Thank you.
        Mr. McKeon?
        Mr. McKeon. Thank you, Mr. Chairman. I agree with your
    decision. It is unfortunate that the votes were called at this
    time because this is an outstanding panel, and I would like to
    hear more from them. Maybe we could, at some other day,
    continue this discussion, because they have a lot to tell us
    about this.
        I am going to go as quickly as I can. One of the things
    that I noticed in most of your testimony, you are really
    talking a lot about fees. I heard very little about net return.
    If a fee is \1/2\ point and the return is 10 percent; if the
    fee is 1 point and the return is 20 percent, I think that is
    what is most important to the ultimate beneficiary. I would
    really like to get into this a lot more.
        Also, some funds obviously have higher returns than others.
    We have been talking kind of like everything is kind of the
    same, and that kind of information needs to be disclosed.
        We have two members--I would like to yield my time to Mr.
    Kline and Mr. Castle. They have some specific questions they
    would like to ask, if that is all right, Mr. Chairman.
        Mr. Kline. I thank the gentleman for yielding.
        Just a quick comment. I couldn't help but notice, Mr.
    Certner, when you were talking about the AARP survey, that you
    had an astonishing number of participants who didn't know the
    names of their funds; didn't know if they were equity; didn't
    know if they were bond. And yet we are going to give them
    numbers on recordkeeping, and office supplies and so forth that
    I think is just a tad too much.
        Clearly, a subject of interest that has gone up and down
    the table is the issue of bundling. There must be some
    advantages to bundling. I wonder, Mr. Minsky, if you could tell
    us, is there an advantage or should we just spread this all out
    in a big laundry list?
        Mr. Minsky. Thank you, Congressman.
        I think it is a difficult question for me to answer because
    I am not a service provider, but let me give you my perspective
    as a plan sponsor, which is that I think in any arrangement, it
    is really degrees of bundling. I have yet to see in my
    experience any relationship with a service provider that is
    completely unbundled. There are always some services that are
    included and some that are not.
        So for me, it is really more a question of the level of
    transparency, and that is what the business model is. I think
    for plan sponsors of different sizes, the degree of bundling or
    unbundling that makes sense will vary. For each individual
    situation, it will vary. I think Mr. Chambers raised a really
    interesting point, with a much smaller plan than ours, which is
    that they had a competitive process. They saw a number of
    business models, some that were more bundled than others.
        Ultimately, they chose a service provider that was slightly
    more expensive than the least-bundled one. My guess is that for
    them, that made a lot of sense because of the services being
    provided. I think that is an appropriate decision for a plan
    sponsor and a plan fiduciary to make.
        Mr. Kline. Thank you.
        Mr. Chambers. Could I comment just briefly on that?
        Chairman Miller. I am very concerned about our time for
    responses to these from other members. Excuse me.
        Mr. Castle. I will be brief, and I will submit a question
    in writing, which you can respond to. It is a little bit off
    the subject, perhaps, so I will just state what it is going to
    be about.
        I think we basically are running into what is going to be a
    crisis in this country. I speak to many retired individuals or
    people getting ready to retire who believe that Social Security
    is going to be sufficient for them to live on. I think Mr.
    Miller in his opening statement indicated the amount of money
    that people have in their 401(k) plans, and while a lot of
    people have 401(k) plans, there are people who do not have
    401(k) plans. We can worry about the actual information which
    is reported to them, which is what the legislation is all
    about, and I have no particular judgment about that, except
    that hopefully competition would make that work. I think it
    should be clearer than it is.
        But I am very concerned about what we are doing to make
    sure that people understand that they are not going to have a
    defined benefit, that Social Security probably will not be
    enough, and they better have a 401(k) plan for their future,
    and make absolutely sure that that is being told to these folks
    out there. I am not just worried about the details of the
    investment. I am worried about the people who are not in it.
        Mr. Certner indicated how many people are in it, but I am
    worried about all those who are not in it, who need to be in
    it. And they need to understand how much money they are going
    to need. Do they really understand what happens at the end of
    it when they get to be 65 years of age and they have $20,000 in
    the plan, what do they expect to get from that?
        So I am going to ask you what is being done about spreading
    that information, because we need to do something in this
    country if we are going to be able to meet the needs of our
    senior citizens when they retire.
        Chairman Miller. Mr. Andrews?
        Mr. Andrews. Thank you.
        We have read your testimony. We appreciate it. This is the
    lightning round.
        So Mr. Scanlon, am I correct in reading your testimony that
    you do think there should be a distinction between what is
    disclosed to plan sponsors and what is disclosed to
    participants. Is that correct?
        Mr. Scanlon. Yes, and let me explain that. We believe that
    plan sponsors, being fiduciaries, are in a position to disclose
    information to their participants in a format that allows
    comparability----
        Mr. Andrews. Right.
        Mr. Scanlon [continuing]. And allows the individual
    participant to make the best choices against other competing
    choices.
        Mr. Andrews. I do appreciate it. I didn't want to rush you.
        Mr. Minsky, Mr. Scanlon suggests a disclosure to employees,
    which if I understand it, has three pretty simple categories:
    recordkeeping, money management and other. What is wrong with
    that? What would be wrong with presenting those three generic
    categories?
        Mr. Minsky. I am not sure that anything is inherently wrong
    with that. It is just that the devil is in the details with
    regard to ``other.'' My only concern is that we not provide
    participants with disclosure that confuses them and ultimately
    leads to them making irrational decisions.
        Mr. Andrews. And finally, very quickly, Mr. Thomasson, do
    you support requiring funds to offer an index fund as one of
    the options for investors?
        Mr. Thomasson. Thank you, Congressman.
        I might pass that over to Mr. Chambers, who is the
    investment advisor.
        Mr. Andrews. Do you, Mr. Chambers?
        Mr. Chambers. Frankly, sir, I don't believe that it is
    necessary. At the same time, I think that index funds would be
    far more prevalent in 401(k) plans than they are today if H.R.
    3185 were enacted, simply because the disclosures would lead
    people to select index funds.
        Mr. Andrews. Thank you very, very much.
        Gentlemen, thank you.
        Chairman Miller. Thank you again. My apologies. These votes
    were supposed to be here later this afternoon, but here we are
    this morning. I thank you very much for taking time to come
    before the committee.
        We will keep the record open for 14 days for those who want
    to make submissions. We will be contacting you with some
    questions that I know that I have. So thank you very much.
        [The statement of Mr. Altmire follows:]

    Prepared Statement of Hon. Jason Altmire, a Representative in Congress
                         From the State of Pennsylvania

        Thank you, Mr. Chairman, for holding this hearing on the 401(k)
    Fair Disclosure for Retirement Security Act of 2007 (H.R. 3185).
        As we discovered in our previous hearing on 401(k) plans, the fees
    associated with these plans vary greatly and can have a significant
    impact on the amount of money participants are able to accumulate in
    their plans. Further, because 401(k) plans have become the primary way
    that most Americans save for retirement, the amount of money employees
    are able to accumulate in these plans directly relates to their
    retirement security.
        I am pleased that Chairman Miller has offered legislation that will
    increase the disclosure of 401(k) plan fees, potentially helping plan
    sponsors and plan participants make better investment decisions. I look
    forward to hearing more from our witnesses on how the specific
    provisions in the 401(k) Fair Disclosure of Retirement Security Act
    will impact 401(k) plan administrators, sponsors and participants. In
    particular, I am interested in hearing more about what amount of
    information should be disclosed to plan sponsors and plan participants.
        Thank you again, Mr. Chairman, for holding this important hearing.
    I yield back the balance of my time.
                                     ______

        [Additional submissions from Mr. McKeon follow:]

       Prepared Statement of the American Benefits Council and American
           Council of Life Insurers and Investment Company Institute

        The role of section 401(k) plans in providing retirement security
    has grown tremendously over the last 25 years and is continuing to
    grow. In that light, legislative and regulatory actions with respect to
    such plans similarly take on an increased importance. Applicable
    legislation and regulations should ensure that these plans function in
    such a way as to help participants achieve retirement security. At the
    same time, we all must bear in mind that unnecessary burdens and cost
    imposed on these plans will slow their growth and reduce participants'
    benefits, thus undermining the very purpose of the plans.
        It is in this spirit that the American Benefits Council (the
    ``Council''), the American Council of Life Insurers (``ACLI''), and the
    Investment Company Institute (``ICI'') submit this statement with
    respect to H.R. 3185, the 401(k) Fair Disclosure for Retirement
    Security Act of 2007.
        The Council is a public policy organization representing
    principally Fortune 500 companies and other organizations that assist
    employers of all sizes in providing benefits to employees.
    Collectively, the Council's members either sponsor directly or provide
    services to retirement and health plans that cover more than 100
    million Americans.
        The ACLI represents 373 member companies accounting for 93 percent
    of the life insurance industry's total assets in the United States.
    Life insurers are among the country's leaders in providing retirement
    security to American workers, providing a wide variety of group
    annuities and other products, both to achieve competitive returns while
    retirement savings are accumulating and to provide guaranteed income
    past retirement.
        ICI is the national association of U.S. investment companies, which
    manage about half of 401(k) and IRA assets. ICI advocates policies to
    make retirement savings more effective and secure.
    Legislative and Regulatory Processes
        At the outset, we want to address the legislative and regulatory
    processes with respect to plan fees. Chairman Miller has introduced
    H.R. 3185, which addresses the disclosure of plan fees by a service
    provider to a plan administrator, as well as the disclosure of plan
    fees by a plan administrator to participants. Other Committees and
    Members have also indicated interest in exploring the issues related to
    disclosure of plan fees. In addition, the Department of Labor has been
    working on regulatory initiatives with respect to plan fees. The
    Department's initiatives address three issues: the same two issues
    addressed by Chairman Miller's bill plus plans' obligations to report
    plan fees to the Department and the Internal Revenue Service on the
    annual Form 5500.
        We have been very active participants in the legislative and
    regulatory processes. For example, we have participated with other
    trade groups in providing extensive input to the Department on their
    initiatives.
        The Department is nearing completion of the Form 5500 project. The
    Department will likely, in the next month or two, issue proposed
    regulations relating to disclosure of plan fees by service providers to
    plan fiduciaries. We understand that the Department intends to issue
    proposed regulations on disclosures to plan participants in late 2007
    or early 2008.
        We support improvement to the rules regarding plan fee disclosure.
    Effective plan fee disclosure to participants can enable them to
    understand their options and choose the investments best suited to
    their circumstances. Disclosure to plan fiduciaries equips fiduciaries
    to negotiate and shop for the best services at reasonable prices. In
    addition, clarity with respect to both sets of rules can provide plan
    fiduciaries with a means of helping their participants without
    incurring potential liability.
        In the effort to improve the fee disclosure rules, we believe that
    it is very important that the legislative and regulatory processes be
    coordinated. For example, it would be very harmful for the system for
    one set of rules to apply for a year or two, only to be supplanted by a
    different set of rules. The additional programming and data collection
    costs caused by such a scenario would be enormous, not to mention the
    resulting confusion among participants and plan fiduciaries. Such cost
    would, of necessity, be absorbed by plan participants or possibly to
    some extent by plan sponsors. Plan sponsors could react by reducing
    benefits and possibly even eliminating or failing to adopt plans; plan
    participants would simply receive smaller benefits, which would be very
    unfortunate.
        Accordingly, we urge both Congress and the Department to consider
    how best to coordinate their efforts to avoid very adverse
    consequences.
    Plan Fee Issues
        We welcome this opportunity to share our views on H.R. 3185. We
    very much appreciate the open manner in which Chairman Miller has
    invited input on his bill.
        We present our views in the context of a list of principles that we
    believe should guide the development of plan fee disclosure rules. This
    is not by any means a comprehensive list; we would, of course, be very
    pleased to work with the Committee on additional important issues
    related to plan fee disclosure.
    Disclosure to Plan Participants
        At the outset, it is critical to emphasize that the disclosure
    rules should take into account the sharply different circumstances of
    participants and plan fiduciaries. Participants need clear, simple,
    short disclosures that effectively communicate the key points that they
    need to know to decide whether to participate and, if so, how to
    invest. Excessive detail can prevent employees from reading or
    understanding the disclosure and can also serve to obscure key points.
    Plan fiduciaries need more detailed information since it is their duty
    to understand fully the options available and to make prudent choices
    on behalf of all of their participants.
        We support improved disclosure of plan fees to participants (and
    improved disclosure to plan fiduciaries, as discussed below). As noted,
    participants need disclosures that are simple and concise. At the same
    time, however, participants need to understand the fees they are paying
    within the context of the investment and other services they are
    receiving. This means that participants must recognize that fees are
    only one factor to consider in choosing an investment option. Fee
    disclosure must not be elevated in a manner that discourages plan
    participants from considering potential or expected investment returns,
    their projected retirement date, their risk tolerance, and other
    factors when making investment decisions, as well as decisions
    regarding participation in, contributions to, and distributions from
    the plan.
        In this context, we offer the following principles that we believe
    should guide plan fee disclosure rules with respect to participants. In
    connection with each principle, we discuss briefly our concerns with
    H.R. 3185.
         The disclosure needs to be short, simple, and easy to
    understand. As noted, H.R. 3185 requires extensive fee disclosure. We
    believe that participants will be far more likely to read and use
    information that is shorter and simpler. One possible solution could be
    to require affirmative delivery of basic fee information and make more
    comprehensive fee information available on request.
         Disclosure should include key information important to
    participants, generally including, for example, the investment
    objectives, risk level, fees, and historical returns of investment
    options. Undue emphasis on fees will only mislead participants by
    elevating fees above other equally or more important factors. We are
    concerned that the volume of fee information required by H.R. 3185
    outstrips the volume of other information, such as information
    regarding investment objectives, historical return, and risk level.
    This over-emphasis on fees could cause participants to make imprudent
    choices or possibly could cause them not to participate in the plan.
    Again, one possible solution could be to require affirmative delivery
    of basic fee information and make more comprehensive fee information
    available on request.
         Reform of existing rules regarding electronic
    communication is needed to facilitate less expensive, more efficient
    forms of communication, including the use of internet and intranet
    postings. Consideration should be given to adopting rules at least as
    workable as the Internal Revenue Service's rules regarding electronic
    communication. Such rules ensure that electronic communications are
    only used with respect to participants who can access such
    communications; at the same time, the Service's rules are also
    generally workable for plans. H.R. 3185 does not address electronic
    communication. Without the effective ability to use electronic
    communication, compliance with extensive new disclosure rules would be
    unreasonably costly and burdensome.
         Participant-level disclosure rules should apply to all
    participant-directed plans not just 404(c) plans. H.R. 3185 applies the
    disclosure rules to all participant-directed plans.
         Fee information should be provided upon enrollment and
    updated annually. H.R. 3185 is generally consistent with this
    principle. However, on a related note, it is critical that the annual
    benefit statement required by H.R. 3185 be coordinated with the
    existing benefit statement requirements. Fee information should be
    disclosed in the manner in which fees are charged. Artificial division
    of a single fee into components that are not available separately is
    costly and serves no purpose. This issue applies to disclosure both to
    participants and to plan fiduciaries. Because it applies more acutely
    in the latter context, it is discussed below.
         Where disclosure of exact dollar amounts would be costly,
    the use of estimates or examples based on prior year data should be
    permitted. H.R. 3185 can be read to require the exact dollar amount of
    fees to be determined for plans and for participants. This could be
    enormously costly. For example, for participants moving in and out of
    investment options all year, determining the precise dollar amount of
    fees charged for the year would require tremendous work as well as new
    recordkeeping systems. Very helpful fee information can be conveyed
    efficiently through the disclosure of expense ratios and reasonable
    estimates; the cost of turning those estimates into precise numbers
    would be very high and clearly not justified by the marginal difference
    between a reasonable estimate and the exact number.
         Plan fiduciaries should retain flexibility to determine
    the format for disclosure based on the nature, expectations, and other
    attributes of their workforce. H.R. 3185 generally does not require a
    specific format for disclosure.
         The rules must be flexible enough to accommodate the full
    range of possible investment options. H.R. 3185 establishes a very
    detailed disclosure regime that will not be able to cover all the
    products that are or may be used in the 401(k) plan market. While it
    seeks to set out specific disclosure elements for many investment
    products used in 401(k) plans today, the bill's framework does not
    easily accommodate certain other products, such as those providing a
    guaranteed rate of return based on the general assets of the provider.
    The framework also may be inadequate or inappropriate to address new
    types of products that may develop. We would be pleased to continue
    working with this Committee on how to address these issues.
    Disclosure by Service Provider to Plan Fiduciary
        We support improved disclosure of plan fees by service providers to
    plan fiduciaries. Plan fiduciaries need fee information in order to
    negotiate and shop effectively for services. In this regard, we offer
    the following guiding principles and related comments on H.R. 3185.
         Fee information should be disclosed in the manner in which
    fees are charged. Artificial division of a single ``bundled'' fee into
    components that are not available separately serves no purpose. Service
    providers should be required to disclose what services are included in
    the ``bundle'' and what services can be purchased separately by the
    plan fiduciary. H.R. 3185 can be read to require ``unbundling the
    bundle'', i.e., to require that a service provider ascribe separate
    fees to services that are not sold separately by the service provider.
    This is not meaningful information. It is burdensome and costly to
    produce; it has no significance since the services cannot be purchased
    separately from the service provider; and accordingly, it would not
    further fiduciaries' understanding of their options.
        Plan fiduciaries can reasonably make the decision whether to
    purchase services on a bundled or unbundled basis. Some fiduciaries
    believe, for example, that bundling provides economies of scale and
    facilitates efficient shopping for service providers, especially with
    respect to plans maintained by small employers. In some circumstances,
    it may be easier and more efficient to compare service providers that
    provide bundled services than to construct a full array of plan
    services from multiple vendors and to try to compare services from such
    vendors that are significantly different in scope.
        A plan fiduciary purchasing services on a bundled basis retains the
    duty to determine if (1) the bundled package of services is appropriate
    for the plan, and (2) the bundled price is reasonable, both initially
    and over time. This will require the plan fiduciary to monitor, for
    example, whether any asset-based fees continue to be reasonable,
    especially with respect to services that do not vary based on the size
    of the plan assets. Again, for some fiduciaries, those monitoring tasks
    may be simpler in the bundled context than where there are multiple
    providers with respect to a single plan.
         Where disclosure of exact dollar amounts would be costly,
    the disclosure of fee formulas should be permitted. As in the case of
    participant disclosure, disclosure of exact fee dollar amounts to plan
    fiduciaries could be extremely expensive in circumstances where fees
    are based on a percentage of assets. Plan fiduciaries only need the fee
    formula (such as the basis points charged); that gives them all the
    tools they need to evaluate the cost of the service. The high cost of
    calculating exact dollar amounts clearly outstrips the value of such
    exactitude.
         Disclosure of revenue sharing received by plan service
    providers from third parties should be required. Disclosure of the
    affiliation between two or more service providers should also be
    disclosed. However, payments from one service provider to another
    affiliated service provider are not revenue sharing and should not be
    required to be disclosed. H.R. 3185 can be read to require payments
    among affiliates to be disclosed. Affiliates are part of one economic
    unit, so that any explicit payments between them may not reflect an
    arm's length transaction and thus may have little or no significance.
    Moreover, financial relationships between affiliates can be complex,
    including numerous non-market transactions, such as the exchange of
    services without any charges; in this context, calculating the value of
    ``revenue sharing'' would require identifying and valuing all of these
    non-market transactions and would thus be enormously difficult and
    uncertain.
        In short, determining the value of intra-affiliated group payments
    would be costly and filled with speculation and uncertainty. Also, in
    light of the relationship between the entities, such payments are not
    revenue sharing in a true sense. We look forward to working further
    with the Committee on this issue.
         Fees paid by plan sponsors should not be subject to any of
    the disclosure rules. Where plan assets are not involved, ERISA's rules
    are not implicated. H.R. 3185 should be clarified in this regard.
         Fees charged by service providers to plans should be
    disclosed. Fees charged to service providers by their suppliers have no
    relevance to plans and should not be required to be disclosed. H.R.
    3185 can be read to require disclosure of a service provider's
    transactions with almost all of its suppliers, which could be a huge
    number. These suppliers have no contractual relationship to the plan,
    thus making the massive disclosure requirement meaningless for the
    plan.
    Investment Option Requirement
        H.R. 3185 requires one specific type of index fund to be offered
    under all participant-directed plans. This would set a dangerous
    precedent, as it would (1) substitute Congress' current judgment
    regarding investments for the judgment of plan fiduciaries who are
    familiar with their workforce and (2) establish an investment rule
    based on today's thinking that does not take into account future
    investment trends and principles. This provision could also send a
    signal to participants that this particular investment option is the
    best one, despite the fact that another option might better fit their
    circumstances.
        We urge that this provision be deleted.
    ``Conflicts of Interest''
        H.R. 3185 requires disclosure of conflicts of interest to both
    participants and plan fiduciaries. Conflicts of interest are prohibited
    by ERISA's prohibited transaction rules, so it is not clear which if
    any permitted practices must be disclosed under these rules. The
    disclosure rules in H.R. 3185 may simply be aimed at requiring
    disclosure that a service provider is selling its own products or the
    products of an affiliate or business partner. If so, it is very
    important that a different term--- other than ``conflict of
    interest''--- be used. As long as a service provider is not acting as a
    fiduciary, selling its own products or those of an affiliate or
    business partner is simply selling, not a conflict of interest.
    Labeling such actions as a conflict of interest is technically
    incorrect and will create confusion for all parties, including
    participants who could be unnecessarily discouraged from participating
    in the plan.
    Effective Date
        Any revisions to the fee disclosure rules will require (1)
    interpretation and implementation by the Department of Labor, (2)
    extensive systems changes, and (3) development of effective
    communication methods. Accordingly, it is critical that legislation not
    be effective prior to plan years beginning at least 12 months after the
    publication of final regulations interpreting the legislation.
                                     ______

                                        [Filed Electronically],
                                                         July 24, 2007.
    U.S. Department of Labor Employee Benefits Security Administration,
            Office of Regulations and Interpretations, Constitution Avenue,
            NW, Washington, DC.
    Attention: Fee Disclosure RFI

    Re: Fee and Expense Disclosures to Participants in Individual Account
        Plans

        Dear Sir or Madam: The undersigned twelve organizations
    representing both employer sponsors of defined contribution retirement
    plans as well as the financial institutions that provide services to
    such plans respectfully submit the attached joint recommendations in
    response to the Request for Information (``RFI'') issued by the
    Department of Labor (the ``Department'') regarding fee and expense
    disclosures to participants in individual account plans, published at
    72 Fed. Reg. 20,457 (April 25, 2007). We appreciate the opportunity to
    provide input on this important matter.
        Several of the undersigned organizations worked together last year
    to develop and submit joint recommendations and a fee and expense
    reference tool with respect to the Department's ongoing project under
    ERISA Section 408(b)(2) related to fee disclosure between plan
    fiduciaries and service providers. With the same goal of achieving
    consensus on how to enhance fee disclosure, an even broader group of
    interested organizations has worked together over the past several
    months to develop joint recommendations regarding participant-level
    disclosure of defined contribution plan fee information. On this
    important issue, our organizations believe the Department has both the
    statutory authority and institutional expertise to improve disclosure
    of fee information to participants without new legislation. We hope the
    attached recommendations, which have the support of this broad array of
    organizations active in the retirement policy arena, will be of
    significant use to the Department as it considers what changes to
    current disclosure requirements may be appropriate.
        Our organizations would welcome the opportunity to meet with
    Department officials to discuss the attached recommendations and will
    plan to be in contact in this regard. In the meantime, please feel free
    to contact any of the individuals and organizations listed below.
                Sincerely,
                                  American Bankers Association,
                                     American Benefits Council,
                             American Council of Life Insurers,
            Committee on Investment of Employee Benefit Assets,
                                      ERISA Industry Committee,
                                 Financial Services Roundtable,
                                  Investment Company Institute,
                         National Association of Manufacturers,
                      Profit Sharing/401(k) Council of America,
         Securities Industry and Financial Markets Association,
                         Society for Human Resource Management,
                                      U.S. Chamber of Commerce.

                  Joint Submission to the Department of Labor:

          Recommendations for Participant-Level Disclosure of Defined
                       Contribution Plan Fee Information

         Disclosure Regarding Fees is Important to Defined
    Contribution Plan Participants. An increasing number of Americans rely
    on employer-sponsored defined contribution plans (such as 401(k)s) to
    help them accumulate the savings they will need for a secure
    retirement. Many defined contribution plan participants make their own
    investment elections from among the options offered by the plan and it
    is important that they have appropriate information to assist them in
    making these decisions. Disclosure about the fees associated with the
    plan and its investment options are an important component of this
    information. All defined contribution plans have costs. Participants
    often pay these costs under arrangements that differ from plan to plan.
    We believe it is beneficial for participants to have a general
    understanding of their plan's fee structure and the overall magnitude
    of the costs they bear as well as to receive fee information that is
    material in selecting specific investments for their accounts.
    Disclosure requirements should be evaluated based on whether
    information provided will be useful to typical plan participants in
    making investment selections. The benefits to participants should be
    real rather than hypothetical. More disclosure will not always be
    better. Under existing legal standards, plan fiduciaries (typically the
    employer plan sponsor) and service providers have worked hard to
    provide participants with meaningful, clear and concise information
    about key characteristics of plan investment options, including fees,
    and they continually seek to enhance these disclosures. Our
    organizations are eager to work with policymakers to improve existing
    legal standards regarding disclosure, where appropriate, to ensure that
    participants have information to make sound investment decisions. Any
    prospective enhancements to current law should foster simplicity,
    flexibility and efficiency in fee disclosure so that the result is a
    stronger defined contribution system for plan participants rather than
    one weakened by complex and costly disclosure that fails to serve
    participants' interests.
         Enhanced Disclosure Requirements Regarding Fees Should
    Extend to All Participant-Directed Retirement Plans. New fee disclosure
    requirements should apply to all participant-directed individual
    account retirement plans subject to the Employee Retirement Income
    Security Act of 1974 (ERISA) rather than only to ERISA 404(c) plans. In
    this regard, the Department of Labor (DOL) has the authority to
    promulgate disclosure standards for all participant-directed individual
    account retirement plans under ERISA.\1\ The focus of policymakers
    should be on improving disclosure practices in all participant-directed
    plans, as this will serve participants' interests more than a detailed
    reworking of the ERISA 404(c) regulations.
    ---------------------------------------------------------------------------
        \1\ DOL has authority under ERISA Section 505 to require that all
    participants who have the right to direct investment of their accounts
    have basic information about plan investment options. ERISA Section 505
    grants DOL authority to issue such regulations as are necessary or
    appropriate under Title I of ERISA, which includes the statute's
    fiduciary responsibility requirements. In addition, ERISA Section 109
    grants DOL authority to prescribe the content of various reports and
    documents, including materials furnished or made available to
    participants.
    ---------------------------------------------------------------------------
         Fee Disclosure to Participants Serves Different Needs Than
    Fee Disclosure to Plan Fiduciaries. The purposes behind fee disclosure
    to plan fiduciaries and plan participants are fundamentally different.
    In selecting and monitoring service providers and in selecting a plan's
    menu of investment options, plan fiduciaries engage in acts subject to
    ERISA-imposed obligations, including to act prudently and in the best
    interest of participants, to pay no more than reasonable compensation
    and to avoid prohibited conflicts of interest. Such fiduciary
    determinations are aided by having detailed information about the
    services provided, fees charged and compensation earned by plan service
    providers (including through revenue sharing from third parties).
    Participants, on the other hand, do not select among service providers
    or determine the menu of plan investment options. They choose
    investments for their account from a menu of plan investment options
    selected by the plan fiduciary. The fees associated with the plan and
    its investment options are only one of a number of important criteria
    for making sound investment decisions. The voluminous and detailed
    information about plan fees and provider compensation (including
    revenue sharing) that is typically appropriate for plan fiduciaries to
    consider will not help participants select among plan investment
    options. Rather, providing this detail to plan participants could
    impair sound decision-making by overloading them with information,
    elevating fees above other investment selection criteria (which can
    produce poor investment decisions) and contributing to the decision
    paralysis that keeps some participants from joining plans. In light of
    the many other disclosures plans are required to provide to
    participants, an additional notice that is unduly detailed or technical
    will often be a source of aggravation to participants, reducing their
    interest in plan information generally. Policymakers should keep in
    mind the distinct purposes behind plan fiduciary and plan participant
    fee disclosure as they craft new participant disclosure rules.
         Disclosure to Participants Should Include Expenses That
    Affect Participants' Choices. Participants should be informed of the
    asset-based fees they will be charged for participating in the plan
    (typically expressed as a rate, in basis points), whether such fees are
    levied by particular investment options or charged regardless of the
    specific investment options selected by the participant. Fee disclosure
    to participants about investment options should also include any
    additional per-participant charges associated with the investment, such
    as charges for buying, selling or redeeming the investment (such as
    front- and back-end sales charges, redemption fees and market value
    adjustment charges). Plans also should inform participants about the
    existence of any plan administration or ongoing service charges that
    participants will pay on a per account (rather than an asset-based)
    basis. In some plans, asset-based charges on investments not only
    finance investment management but also defray other plan costs (such as
    plan administration). Where this is the case, participants should
    receive a general disclosure that the asset-based fees on investments
    defray other plan costs. More detail about the components of asset-
    based fees is not relevant to the total cost of investing, which is the
    information participants need. By disclosing the rate of asset-based
    fees together with information on any additional per account
    administrative charges, participants will be provided with a clear
    understanding of the costs of investing under the plan. Participants
    should also be informed that some transactions or services (e.g., plan
    loans or use of investment advice, managed account or brokerage window
    services) will result in additional charges to participant accounts,
    the specifics of which will be disclosed at the time the participant
    uses these services. Because most of these transactional charges will
    never apply to most participants, requiring detailed disclosure to all
    participants as to the specifics of such charges would make fee
    disclosure cumbersome and obscure the core information. Detailed
    information about costs for participant-initiated transactions and
    services should be made available upon participant request and provided
    at the time of the transaction. Plan fiduciaries should have
    flexibility to determine the precise form of the key fee disclosures
    discussed herein based on the facts and circumstances, but they will
    typically be expressed as a rate (in basis points) and/or as an
    illustrative dollar charge.
         Fee Information Should Appear Alongside Other Key
    Information Participants Need to Make Investment Decisions. Fees should
    be disclosed along with other information participants need to make
    informed investment decisions. Fee information should not be elevated
    so as to suggest that fees are the most important factor in selecting
    investments from among the plan's options. An undue focus on fees in
    new required disclosures might encourage participants to select the
    plan's lowest-cost investment option, which may not be the best choice
    for a participant. Instead, fees associated with a plan's investment
    option should be disclosed together with other key information: the
    option's investment objective and product characteristics, its
    historical performance and risks and the identity of the investment
    advisor or product provider. This information should be conveyed in
    clear and simple terms, and plan fiduciaries should have flexibility to
    determine the format in which the information is communicated to
    participants. Web-based disclosure of information about investment
    options will often be the most useful because it permits participants
    to browse multiple interrelated pieces of information and access more
    detailed information about a given investment option or topic of
    interest to them.
         Policymakers Should Be Sensitive to Costs When Imposing
    New Disclosure Requirements. While participant disclosure should
    provide sufficient information on fees and other key investment option
    characteristics for participants to make sound investment decisions,
    new disclosure requirements come with added costs. Such costs must be
    justified in terms of providing a material benefit to participants
    selecting among plan investments. The costs of some potential
    disclosure requirements would simply be exorbitant and unjustified. Any
    new disclosure requirements necessarily will impose expenses and
    burdens on both plan sponsors and plan service providers and will come
    on top of the multitude of new and costly disclosures required under
    the Pension Protection Act of 2006. The costs of new disclosure
    requirements are likely to be reflected in higher prices for plan
    administrative services, which are payable from plan assets. As a
    result, in many defined contribution plans the added costs of new
    disclosure requirements are likely to be borne in substantial part by
    plan participants. Plan fiduciaries and providers also will be
    concerned that expanded disclosure requirements could result in new and
    costly liabilities, a result that would further increase expenses in
    the system. New disclosure costs and potential liabilities could deter
    some small employers from sponsoring a qualified retirement plan for
    employees. Given these considerations, it is imperative that new
    participant disclosures be focused squarely on providing participants
    with information that will actually be useful in making investment
    decisions.
         Use of Electronic Technologies to Provide Plan Investment
    and Fee Information Should Be Strongly Encouraged. One important way to
    reduce costs and provide more useful information is to take full
    advantage of electronic mechanisms for delivering and providing access
    to information. New rules should move beyond existing regulations to
    permit, and indeed encourage, employers to use internet or intranet
    posting to deliver and provide access to fee and other information on
    plan investment options. (We recognize that certain participants
    without computer access will continue to need access to paper copies.)
    Notifying participants about the posting or availability of required
    disclosures on websites will typically be the most inexpensive method
    of delivery and should be promoted under new disclosure rules. As is
    common today, plan fiduciaries will work with service providers to
    provide required information on plan investment options to participants
    and should be able to connect participants directly to content on the
    websites of service providers (via click-through web links or
    otherwise) rather than having to maintain all information on plan
    investment options and fees on their own internet or intranet site.
         Disclosure of Fees and Other Plan Investment Information
    Should Facilitate Comparisons. While plan fiduciaries should retain
    flexibility to determine the specific format for communicating fee and
    other plan investment information to their particular participant
    population, they should strive to disclose the information in a form
    that facilitates comparison across the plan's investment options. At
    the same time, unique features of particular investment options also
    would have to be communicated. Web-based disclosure methods and tools
    are likely to be the most useful as they can visually convey the full
    range of plan investment options while allowing participants to access
    more detailed information about each option via click-through web
    links.
         Participants Should Have Access to Fee and Other
    Investment Information at Enrollment and Annually Thereafter.
    Participants should receive disclosure about plan fees (asset-based
    fees, transaction charges associated with investment options, any
    separate per account administrative fees and the potential for
    participant-initiated transaction and service charges) and the other
    key characteristics of investment options when they enroll in the plan
    and select plan investments for the first time. Some plans,
    particularly ones that have formulas for reducing plan fees as assets
    grow, will not know in advance the exact asset-based or per account fee
    levels that participants can expect in the year ahead. As a result,
    plan fiduciaries should be permitted to use fee levels from the most
    recently concluded plan year in the fee disclosures they make to
    participants at enrollment. In addition, on an annual basis, plan
    fiduciaries should inform participants where they can find or how they
    can request updated information on fees and other characteristics of
    plan investment options (by providing a click-through web link or
    directing them to an internet or intranet website, telephone number or
    plan official). Plan fiduciaries should have flexibility as to whether
    to make this annual disclosure--regarding where participants can find
    or how they can request such information--a stand-alone communication
    or a component of an existing disclosure document. Plan fiduciaries
    should ensure that the underlying general information on fees and other
    characteristics of plan investment options is updated annually to
    reflect any changes.
         Plans Should Disclose to Participants Administrative and
    Transaction Dollar Charges Deducted from Participant Accounts.
    Participants should receive disclosure regarding any administrative or
    transaction flat dollar charges that have been deducted from their
    accounts. Such charges would include per account flat dollar charges
    imposed on all participants for the costs of plan administration as
    well as any dollar charges that result from purchases or sales of
    particular investments or from participant-initiated transactions or
    services (such as plan loans). Plan fiduciaries should have flexibility
    as to the means and timing of such disclosures. For example, some
    fiduciaries may include this information in quarterly benefit
    statements while others may include it in a confirmation notice
    following a particular transaction.
         Participants Have Access to Education Materials that
    Provide Context for Fee and Other Plan Investment Information.
    Participants make the best use of information about their plan
    investment options (including information regarding fees) when this
    information builds on basic investment education. The Pension
    Protection Act of 2006 (PPA) requires that participants have access to
    investment education materials and a new requirement in this area is
    not needed. Under PPA, the quarterly benefit statements provided to
    participants who direct their retirement plan investments must include
    a notice directing participants to a Department of Labor (DOL) website
    on individual investing and diversification (http://www.dol.gov/ebsa/
    investing.html). This website includes the DOL's brochure, A Look at
    401(k) Plan Fees. Plan sponsors may wish to direct participants to this
    resource at other times, including at enrollment when they provide
    participants with initial information on plan investment options and
    fees. Plan sponsors will also likely want to continue to draw on
    investment education materials that they and their service providers
    develop. Given the extensive work by the private sector in the
    investment education area and the new prominence of the DOL's
    individual investing website as a result of the PPA requirement, we
    recommend that the DOL establish a formal and periodic process to seek
    private-sector input regarding the contents of its site.
                                     ______

      Prepared Statement of Larry H. Goldbrum, Esq., General Counsel, the
                                SPARK Institute

        Chairman Miller, Ranking Member McKeon, honorable members of the
    Committee, my name is Larry Goldbrum and I am General Counsel of The
    SPARK Institute, an industry association that represents the interests
    of a broad based cross section of retirement plan service providers,
    including members that are banks, mutual fund companies, insurance
    companies, third party administrators and benefits consultants. It is
    an honor for me to share our organization's views on the proposed
    401(k) Fair Disclosure for Retirement Security Act of 2007.
        Although The SPARK Institute1 has publicly supported and promoted
    meaningful fee disclosure by employers, retirement plan service
    providers and investment providers, we are concerned about the
    unnecessarily burdensome and costly approach taken in the 401(k) Fair
    Disclosure for Retirement Security Act of 2007 (the ``Bill''). We
    believe the Bill will ultimately serve to weaken, not strengthen, the
    defined contribution system. The Bill, as currently proposed, will
    discourage new plan formations, will significantly increase plan costs,
    will discourage employee participation and savings, and will create
    fertile ground for frivolous lawsuits brought by plaintiffs' lawyers
    primarily seeking settlements from perceived deep pockets.
    Background
        The disclosure provisions in the Bill require plan sponsors to make
    certain disclosures to plan participants and for plan service providers
    to make certain disclosures to plan sponsors. Earlier this year, the
    Department of Labor's (``DOL'') issued a Request for Information
    (``RFI'') regarding plan participant disclosures. Included in our
    response to the RFI, were guiding principles that we believe should be
    followed by legislators and regulators in developing any participant
    disclosure rules and regulations. The principles are:
        1. Fee information is only one of many data points and arguably not
    the most important one that participants should consider in making
    investment decisions.
        2. Over-emphasis on fees and expenses may lead to poor investment
    decisions, as well as lower employee participation and contributions to
    employer sponsored retirement plans.
        3. Participant fee disclosure must be short and simple to have any
    chance of being effective.
        4. Only information that is reasonably likely to be read and
    influence the investment decisions of otherwise passive participant
    investors in choosing among their plans' investment options should be
    included in any required disclosure.
        5. Participants will ultimately bear the costs of any required
    disclosure and access to additional information.
        Fee disclosure requirements should neither favor any one retirement
    plan or investment industry segment nor disrupt the current competitive
    balance among such service providers.
        The following is a section-by-section analysis of our views
    regarding some of the more significant provisions of the Bill.
    Plan Sponsor Fees and Conflicts Disclosures
                A. General disclosure requirements
        A plan may not enter into a contract involving compensation to a
    service provider of $1,000 or more unless the ``plan administrator''
    receives advance written disclosure from the service provider of
    certain required information. The required disclosures include
    identification of who provides the services under the agreement,
    including affiliates and third parties. Additionally, the disclosures
    must include: (1) a description of the services, (2) an itemized list
    of the expected annual ``cost'' of each component of such services, and
    (3) information about amounts paid to affiliates and third parties.
    Sections 111(a)(1) & (9).
        1. The SPARK Institute represents the interests of a broad based
    cross section of retirement plan service providers, including members
    that are banks, mutual fund companies, insurance companies, third party
    administrators and benefits consultants. Our members include most of
    the largest service providers in the retirement plan industry and our
    combined membership services more than 95% of all defined contribution
    plan participants.
        2. Exiting regulations under ERISA Section 404(c), and the proposed
    qualified default investment alternative regulations are safe-harbors
    that plan sponsors are not obligated to comply with.
        SPARK Institute Observations--We are concerned that these
    requirements obligate service providers to disclose proprietary
    information that will become readily available to their competitors.
    The proposal is extremely broad and would require record keepers who
    subcontract out certain services that have nothing to do with
    participant investments to reveal the identity of their suppliers and
    the financial terms of their arrangements.
        The proposal requires disclosure of the ``cost'' of the services.
    We presume that the reference is intended to mean the cost of such
    services to the plan or the participant, not the service provider's
    costs. We are concerned that the language in the proposal is
    susceptible to confusion and misinterpretation. Additionally, the
    requirement that the service provider provide an itemized breakdown of
    the costs of the underlying component services will be onerous for
    bundled service providers. The information required for such breakdowns
    is generally not available and requiring an itemized breakdown is
    contrary to the bundling concept.
        Additionally, the proposal does not take into account the fact that
    generally neither the plan nor the plan sponsor enters into agreements
    with the mutual fund companies that manage the funds used by the plans.
    If the proposal were to require such agreements the disruption to plan
    sponsors, retirement plan service providers, and investment companies
    would be significant. The time and resources necessary to obtain such
    agreements would be staggering. Moreover, it would be unreasonable to
    require retirement plan record keepers to enter into such agreements
    and make the disclosures on behalf of the investment funds selected by
    a plan.
        B. Required minimum disclosures--The proposal includes a long list
    of information that must be disclosed by all service providers. The
    list includes sales commissions, start-up fees, investment management
    expenses, investment advice expenses, estimated trading expenses,
    expenses for administration and record keeping, legal fees, trustee
    fees, termination or surrender charges, total asset-based fees, 12b-1
    fees, and soft dollars. Section 111(a)(2)(A). Expense estimates can be
    used if the actual amounts are not known. However, estimates that are
    later discovered to be materially incorrect must be corrected as soon
    as practicable. Section 111(a)(2)(B).
        SPARK Institute Observations--We are concerned that the required
    minimum disclosures create a rigid and inflexible list of information
    that plan sponsors must receive from every service provider they deal
    with. Without restating the reasons we provided in other documents, we
    note that a conceptual framework that allows service providers
    flexibility to customize disclosures for their products and services
    should be established instead of detailed lists of disclosures.
        Additionally, we are concerned that the proposal requires plan
    specific dollar disclosures or estimates instead of expressly allowing
    for the requirements to be satisfied by using fee or rate disclosures.
    Dollar disclosures and estimates of certain fees that are driven by
    factors beyond the control of the service provider can be difficult to
    calculate. Such fees include, for example, loan origination,
    distribution, and participant investment advice fees. A calculation or
    estimate of any of such fees is dependant upon decisions made by
    participants that cannot always be predetermined. Additionally, dollar
    estimates of asset-based fees can vary significantly due to market
    fluctuation. Service providers will have to monitor their actual fees
    and compare them to their estimates on a regular basis in order to be
    able to make corrections required by the proposal. We are concerned
    that this entire process creates unnecessary additional work for plan
    sponsors and service providers when the same goal can be accomplished
    through simple rate disclosures.
        C. Conflicts disclosure--The Bill requires detailed written
    disclosure regarding any potential conflicts that the service provider
    may have ``due to [a] financial or personal relationship'' that the
    service provider may have with the plan sponsor, the plan or other
    service providers, and for which the service provider receives payment
    for services. Such disclosure must include information about the use of
    the service provider's proprietary investment products and whether the
    service provider receives payments from third parties for making such
    third parties investment products available. Section 111(a)(3).
        SPARK Institute Observations--We are concerned that the language of
    this provision is needlessly broad, potentially confusing and
    susceptible to misinterpretation. We are concerned about the references
    to ``personal relationships'' and conflicts with other service
    providers which appear to be unnecessary. We believe that a more
    appropriate provision would be to require service providers to disclose
    potential conflicts that they may have with the plan, plan sponsor and
    plan participants as a result of financial compensation they may
    receive from third parties in connection with the plans that they
    service.
        D. Mutual fund share classes--Service providers must disclose that
    the ``share prices'' of certain mutual funds share classes may be
    different from the funds' retail share classes. The proposal appears to
    incorrectly refer to ``share prices'' instead of the expense ratio of
    the funds. Section 111(a)(4).
        SPARK Institute Observations--Although we generally understand what
    we presume to be the point of this provision, i.e., to let plan
    sponsors know that there may be other share classes offered by a fund,
    the specificity of the provision causes it to miss its objective. Many
    funds offer multiple non-retail classes of shares (e.g., trust and
    institutional shares) that may be available to retirement plans and
    cheaper than retail classes. We are concerned that the focus on retail
    shares will likely defeat the purpose of the provision. We also note
    that the focus of the proposal on retail shares suggests that the
    drafters appear to be operating under the incorrect assumption that the
    expense ratios of retail shares classes are generally lower than the
    expense ratios of share classes used by retirement plans. We are also
    concerned that the assumed underlying purpose of this provision only
    applies solely to mutual funds. We believe that a more appropriate
    approach would be to establish a general conceptual requirement that
    meets the intended objective.
        E. ``Free services''--The proposal requires that any service
    provider that provides services ``without charge or for fees set at a
    discounted rate or subject to rebate'' must disclose the extent to
    which and the amount such service provider is paid by others from
    participant accounts. Section 111(a)(5).
        SPARK Institute Observations--We are concerned that this provision,
    which appears to be intended to force disclosure of potential conflicts
    of interest, is too broad, duplicative with other provisions of the
    proposal, potentially confusing and susceptible to misinterpretation.
    We note that other provisions in the proposal specifically require the
    disclosure of potential conflicts of interest. Service providers
    typically publish a ``standard'' price list for their services but
    generally discount such prices due to industry competition. The price
    lists are generally used for broad marketing purposes and during the
    very early sales stages (e.g., prospecting phase). Service providers
    generally do not publish or disclose publicly the actual fees that they
    are willing to accept for their services because that information is
    considered confidential and proprietary. Additionally, service
    providers' fees are frequently negotiated with the plan sponsor and
    change based on many factors, including for example, the plan's service
    needs and demographics. We are concerned that virtually every deal
    would be subject to the disclosure requirements of this provision
    merely because service providers generally charge less than the fees
    set forth in their standard publicly available fee schedules.
        F. Model statements--The DOL is directed to issue a model statement
    for the foregoing disclosures. Section 111(a)(6).
        SPARK Institute Observations--We are concerned that the DOL is
    being directed to accomplish the impossible. As we have stated before
    in other documents, a one size fits all disclosure form that is
    suitable for and acceptable to the various retirement plan services and
    investment providers, takes into account all of the products and
    investment structures, maintains the competitive balance in the
    affected industries, and is cost effect to produce will be virtually
    impossible to create. Although we recognize that service providers will
    not be required to use the model, we are concerned that some plan
    sponsors may demand it. Consequently, certain service providers may be
    competitively disadvantaged during the sales process.
        G. Annual Disclosure--The written disclosure must be provided at
    least annually, and within 30 days of any material change. Section
    111(a)(7).
        SPARK Institute Observations--We are concerned that this
    requirement is needlessly burdensome. Service providers should not be
    required to produce the required plan specific dollar disclosures or
    estimates annually unless they materially change their rates or their
    compensation from third parties changes materially. We note that ERISA
    already limits a plan fiduciary's ability to unilaterally increase the
    compensation it receives from a plan. A more appropriate alternative
    may be that service providers should only be required to update their
    plan sponsor disclosures when there are material changes relating to
    (i) the amounts charged by the service provider to the plan sponsor,
    the plan or plan participants, or (ii) the compensation the service
    provider may receive from others, including third parties and the funds
    that are used by the plan.
        H. Availability of required disclosures--The written disclosure
    statement must be made available to plan participants upon request, and
    must be posted on the plan sponsor's website or, we presume, by the
    service provider for the plan sponsor. Section 111(a)(8).
        SPARK Institute Observations--We are concerned that the proposed
    disclosure requirements include proprietary and confidential
    information that service providers should not be forced to provide to
    plan participants. Given the specific plan participant disclosure
    requirements, the role of the plan sponsor, and the nature of the
    required plan sponsor disclosures, the information that is included in
    the plan sponsor disclosure statement is of little value to plan
    participants. Moreover, the information that will be included in such
    statement will be complex, will confuse the vast majority of
    participants, and will be subject to misinterpretation. Plan sponsors
    and service providers should not be put in a position of having to
    explain this information to participants who have no control over the
    plan sponsor level decisions that such information is intended to
    facilitate. Moreover, by requiring such information to be provided to
    participants and posted on websites, the confidential and proprietary
    information included in such statements will easily become available to
    each service provider's competitors. Additionally, we are concerned
    that the confidential and proprietary information will become readily
    available to plaintiffs' lawyers and will create fertile ground for
    frivolous and costly lawsuits brought by such lawyers primarily seeking
    settlements from plan sponsors and service providers who are perceived
    to have deep pockets and who are concerned about their public
    reputations.
    III. Participant Investments and Fees Disclosures
        A. Advance notice of investment options--Generally, participant
    directed plans must provide a written notice to participants at least
    annually, no less than 15 days before each plan year, regarding the
    plan's investment options. Such notice must also be provided in advance
    of any change in investment options, or when an employee begins
    participation in the plan. Section 111(b)(1). The proposal includes a
    long and detailed list of information that must be included in the
    participant notice. Section 111(b)(2).
        SPARK Institute Observations--We are concerned that these mandated
    detailed disclosures are inconsistent with the guiding principles that
    The SPARK Institute believes should be taken into account in connection
    with the development of any new rules and regulations relating to
    participant fee disclosure. Among the problems with the notice
    requirement are that the notice will overwhelm and confuse participants
    instead of enlightening them, and will be costly to produce and
    maintain.
        B. Required information--The Bill requires the notice to include
    the following information regarding each investment option: name,
    investment objectives, level of risk, whether the option is a
    comprehensive solution, historical performance, historical fees, an
    explanation of the difference between asset-based and annual fees,
    comparative benchmark information, and how to get additional
    information. The notice must include a cautionary statement about
    relying too much on fees as the basis for investment decisions.
    Additionally, the notice must include a fee menu in an easy to
    understand format for the average participant. The fee menu must
    include such information that the DOL determines is necessary to allow
    participants to evaluate the services that may be provided in
    connection with the investment options and the fees that could be
    charged. Fees must be categorized among the following three categories:
    (i) fees that vary based on the investments selected by the participant
    (e.g., expense ratios), (ii) fees that vary based on the total assets
    in the participants account regardless of the investment option, and
    (iii) administration and transaction based fees (e.g., loan origination
    fees). The notice must also include a description of the purpose of
    each fee, including whether such fee is for investment management,
    commissions, administration or record keeping. The notice must include
    information about potential conflicts of interest that any person
    receiving fees may have. Sections 111(b)(2) & (3). Estimates can be
    used if the actual amounts are not known. Section 111(b)(5).
        SPARK Institute Observations--We are concerned that these
    disclosure requirements are extremely and needlessly complex, and as
    noted above, the information is likely to confuse participants rather
    than enlighten them. Many of the concepts required to be disclosed
    cannot be explained in a short, easy to understand format that the
    average participant will understand. In order to preclude after the
    fact claims by plaintiffs' lawyers that such disclosures were not
    understandable or insufficient, most notices will become lengthy and
    detailed with technical disclosures intended to mitigate the risk of
    litigation. This will make the disclosures useless to the vast majority
    of participants.
        The requirements do not take into account the fact that the list of
    information may not be available for or apply to non-mutual fund
    investment options (e.g., expense ratios for annuity products).
    Additionally, many plans offer plan specific asset allocation funds or
    portfolios to plan participants as investment options. Such plan
    specific portfolios are typically not mutual funds, but they may use
    mutual funds as their underlying investments. We are concerned that
    suitable benchmarks may not always be available for such portfolios.
    The list of required disclosures also excludes some information that
    should be provided, such as the identity of the type of security (e.g.,
    mutual fund, annuity, etc.), the identity of the investment manager or
    guarantor (in the case of guaranteed products), and non-performance
    factors for insurance type products.
        The purpose of the proposed expense categories is unclear, such
    categories will require fees to be disclosed in awkward ways, and will
    create confusion. For example, mutual fund expense ratios would be
    disclosed under category ``i'' because they vary based on the
    investment selected, but redemption fees associated with a fund
    presumably would have to be disclosed under category ``iii'' because
    they are transaction based.
        Plan sponsors and service providers should not be required to
    develop and provide specific disclosures of the underlying components
    of the investments fees (e.g., mutual fund expense ratio components)
    and the purpose of such fees. Such disclosure should be available upon
    request only and should be provided through materials otherwise
    available from a fund (e.g., profile prospectus or a full prospectus).
        Plan sponsors should not be required to provide potential service
    provider conflict of interest disclosures to plan participants when
    such information has no direct impact on participant decisions. For
    example, a potential conflict of a broker that is properly disclosed to
    a plan sponsor should not have to be disclosed to participants who will
    never come in contact with such broker. In such cases the information
    will only create needless confusion and potential suspicion. However,
    if the potential conflict is that the broker's compensation may vary
    based on how participants invest their accounts and the broker may talk
    to participants about their plan investments, then such disclosure may
    be meaningful. However, such disclosure should be included in more
    appropriate documents (e.g., investment education materials used by the
    broker) instead of a mandated annual disclosure form.
        C. Model notice--The DOL is directed to issue a model notice for
    the foregoing disclosures. Section 111(b)(4).
        SPARK Institute Observations--We are concerned that the DOL is
    being directed to accomplish the impossible. As we have stated before
    in other documents, a one size fits all disclosure form that is
    suitable for and acceptable to the various retirement plan services and
    investment providers, takes into account all of the products and
    investment structures, maintains the competitive balance in the
    affected industries, and is cost effect to produce, will be virtually
    impossible to create. Although we recognize that service providers
    would not be required to use the model, we are concerned that some plan
    sponsors may demand it.
    IV. Annual Participant Benefits Statement
        A. In addition to providing the participant investment notice
    discussed above, participant directed plans would be required to
    provide an annual benefits statement that discloses very specific and
    detailed fee information. The statements would have to be provided
    within 90 days of the close of each plan year. Most of the required
    information, or similar information, is already provided on quarterly
    participant statements. However, the proposal requires detailed dollar
    disclosure of the fees charged against the participant's account for
    each investment, including the underlying investment fees (e.g.,
    expense ratios and trading costs), loads, total asset-based fees
    (including variable annuity charges), mortality and expense charges,
    guaranteed investment contract fees, employer stock fees, directed
    brokerage charges, plan administration fees, participant transaction
    fees, total fees, and total fees as a percentage of current assets.
    Section 111(c)(2). The statement must compare the performance of the
    investment options to a nationally recognized market-based index.
    Estimates can be used if the actual amounts are not known. Section
    111(c)(4).
        SPARK Institute Observations--We are concerned that these
    requirements are in many respects extremely complex, and in certain
    other respects, duplicative to existing quarterly participant statement
    requirements. We are also concerned that providing this statement is
    impractical and will be expensive. Plans already provide quarterly
    participant statements. However, most record keeping systems are not
    designed to produce a single cumulative annual statement. Additionally,
    most systems are not currently able to gather, calculate and present
    the detailed fee information required under the proposal. Most of the
    information related to the fees of the underlying investments is
    embedded within the underlying investment funds. In the case of mutual
    funds, the information that plan sponsors would have to provide is
    simply not on the record keeping systems because such information by
    its very nature is embedded in the investment fund. It is not clear
    whether rate disclosures would be sufficient under the proposal when
    the participant level dollar disclosures are not readily available,
    even if they could be calculated at a cost. The detailed items that
    must be disclosed to participants will also have to be explained to
    them and will most likely confuse instead of enlighten. Concerns about
    potential litigation among plan sponsors and service providers will
    cause the statement content to expand, become complex and ultimately,
    be overwhelming for the average participant. In summary, the proposal
    will, if implemented, result in the creation of a statement that is
    more confusing than anything that plan participants currently receive
    or have access to regarding any of their investments.
        Additionally, redesigning record keeping systems to produce the
    statements and complying with these requirements on an ongoing basis
    will be expensive. Such costs will ultimately be borne by participants
    for little or no perceived benefit because, for the vast majority of
    participants, the information will either be ignored or will not
    motivate better participant saving and investment behavior.
        B. The DOL is directed to issue a model notice for the foregoing
    disclosures. Section 111(c)(5).
        SPARK Institute Observations--As we noted previously, we are
    concerned that the DOL is being directed to accomplish the impossible.
    Other Disclosure Provisions
        A. The disclosure requirements are not intended to limit or serve
    as a basis for any inference regarding a plan fiduciary's
    responsibility to discharge its duties with respect to the plan for the
    purpose of, among other things, defraying the reasonable expenses of
    administering the plan (see ERISA Section 404(a)(1)(A)(ii)). Section
    111(d).
        SPARK Institute Observations--As noted previously, we are concerned
    that these disclosure requirements will create fertile ground for
    frivolous and costly lawsuits brought by plaintiffs' lawyers primarily
    seeking settlements from plan sponsors and service providers who are
    perceived to have deep pockets and who are concerned about their public
    reputations.
        B. The disclosure requirements of the Bill would be effective for
    plan years beginning after enactment.
        SPARK Institute Observations--We are concerned that the service
    providers that will be expected to facilitate compliance with the plan
    sponsor and other disclosure requirements will need significantly more
    time to prepare for such requirements. For example, the system
    functionality that would be necessary in order to produce the annual
    participant statements does not exist today and will take a significant
    amount of time to develop. Additionally, we are concerned that the plan
    sponsor disclosure requirements will apply to existing service
    agreements. Service providers will be overwhelmed with having to
    provide customized plan specific disclosures for thousands, and for
    some providers, tens of thousands of plans that they service.
    Index Fund Requirement
        Participant directed plans must include at least one investment
    option which is a nationally recognized market-based index fund which
    offers a combination of returns, risk and fees that is likely to meet
    the retirement income needs at adequate levels of contributions.
    Section 402(c).
        SPARK Institute Observations--We presume that the intent of this
    provision is to make ``low cost'' investment options available to plan
    participants. However, we are concerned about the potential
    misconception that requiring such options to be added will meet its
    objective. Requiring such funds to be added will not change the
    economics of servicing a plan. Regardless of which funds are used in
    any plan, plan service providers must have a source of revenue to get
    paid. If an index fund offers a class of shares that provides revenue
    sharing to unaffiliated plan service providers, such class will most
    likely be used when necessary to generate adequate revenue for the
    service providers. Service providers may choose to only offer funds
    that provide such adequate revenue. Alternatively, record keepers can
    assess additional asset-based charges to fund accounts to generate the
    necessary revenue. In both cases the plan sponsor and service provider
    can agree to fee arrangements that maintain the current revenue and
    economics of the plan. We note that plan sponsors will have the option,
    which they have today, to pay for most plan fees out of their own
    assets or impose such fees on plan participants. Consequently,
    mandating the use of index funds will not meet the presumed objectives
    and seems unnecessary.
        Additionally, the requirement that the index fund is one that
    ``offers a combination of returns, risk and fees that is likely to meet
    the retirement income needs at adequate levels of contributions'' is
    too subjective. Reasonable investment experts are likely to disagree on
    which funds satisfy such requirements. The subjective nature of the
    requirement makes it untenable. Plan sponsors should not be required to
    select a fund based on such criteria. Additionally, we are concerned
    that these subjective requirements will inevitably expose plan sponsors
    to after the fact claims from plaintiffs' lawyers that the fund
    selected did not or will not generate enough income for participants.
        Finally, we are unaware of any existing rules or regulations that
    require a plan to include a specific fund as an investment option.2
    Index funds should not be mandated through legislation and given a
    Congressional ``seal of approval'' as an investment option.
    Additionally, we note that the index fund mandate will not change
    participant behavior. Participants who are not otherwise engaged in
    making investment decisions will not become engaged as a result of
    having this option available. Participants who are otherwise engaged
    and investment savvy will simply consider this option among the others
    available to them and will evaluate it based on its merits, which will
    include many factors other than fees. However, plan sponsors should not
    be forced to include such funds in their plans. Instead, market forces
    and the suitability of such funds for use in plans should be allowed to
    drive plan sponsor decisions.
    Advisory Council
        The Bill would establish the Advisory Council on Improving
    Employer-Employee Retirement Practices. Section 519. The Council would
    have 12 members, half of whom will represent the interests of plan
    participants and the other half will represent employers.
        SPARK Institute Observations--Setting aside whether or not such
    Council is necessary, beneficial or will be effective, we are concerned
    that the proposal does not include any representation from the
    retirement services and investment products industries. Long-term
    improvement to retirement plan and investment products ultimately
    requires the products, support and services from such industries. We
    believe that any council of this type would be more productive,
    effective, and benefit from the inclusion of appropriate industry
    experts.
    Conclusion
        Although The SPARK Institute supports and encourages greater fee
    transparency, we are concerned that the Bill will be unduly burdensome
    for plan sponsors and service providers. We believe that the proposal
    will impose significant additional burdens on plan sponsors, and create
    needless complication that could have a detrimental effect on the
    voluntary employer sponsored retirement plan system.
        The required disclosures place too much emphasis on fees, will be
    lengthy, complex and intimidating for participants. Such disclosures
    will likely not be read and will not change the behavior of the vast
    majority of plan participants. The proposal also appears to rely on
    paper-based notices instead of promoting the use of the internet and
    other electronic means of disclosure.
        Additionally, we are concerned that service providers' proprietary
    and confidential information will become readily available to their
    competition. The requirements will expose plan sponsors and service
    providers to new types of frivolous and costly lawsuits brought by
    plaintiffs' lawyers primarily seeking settlements from plan sponsors
    and service providers who are perceived to have deep pockets and who
    are concerned about their public reputations. Such requirements, among
    others of the Bill, will disrupt the competitive balance in the
    retirement plan and investment industries.
        We are also concerned that the proposed rules are in certain
    respects duplicative with existing requirements under ERISA, and in
    certain other respects, may be inconsistent with requirements under
    rules and regulations of other regulatory agencies. Duplication and
    inconsistencies make compliance more complicated and costly for
    everyone involved.
        The SPARK Institute believes that regulators, such as the DOL and
    Securities and Exchange Commission, should be permitted to address and
    resolve the perceived disclosure issues under existing law through
    their regulatory authority. If regulators believe that additional laws
    are needed in order to facilitate solving such concerns, then Congress
    should adopt legislation that fills the ``gaps'' identified by the
    regulators.
        On behalf of The SPARK Institute, I thank the Committee for the
    opportunity to share our views on this important issue.
                                     ______

      A Primer on Plan Fees and an Analysis of H.R. 3185, the 401(k) Fair
                 Disclosure for Retirement Security Act of 2007

       American Bankers Association; Committee on Investment of Employee
     Benefit Assets; the ERISA Industry Committee; the Financial Services
        Roundtable; Investment Adviser Association; Investment Company
                                   Institute;

     National Association of Manufacturers; Profit Sharing/401k Council of
    America; Securities Industry and Financial Markets Association; Society
        for Human Resource Management; United States Chamber of Commerce

        ERISA provides many safeguards for the protection of workers'
    retirement assets. Plan assets must be held in a trust that is separate
    from the employer's assets. The fiduciary of the trust (normally the
    employer or committee within the employer) must operate the trust for
    the exclusive purpose of providing benefits to participants and their
    beneficiaries and defraying reasonable expenses of administering the
    plan. In other words, the fiduciary has a duty under ERISA to ensure
    that any expenses of operating the plan, to the extent they are paid
    with plan assets, are reasonable.
    Plan fees
        As Congress examines retirement plan fees, it is critically
    important that policymakers have accurate information regarding such
    fees. The vast majority of participants in ERISA plans have access to
    capital markets at lower cost through their plans than the participants
    could obtain in the retail markets because of economies of scale and
    the fiduciary's role in selecting investments and monitoring fees. The
    level of fees paid among all ERISA plan participants will vary
    considerably, however, based on variables that include plan size (in
    dollars and/or number of participants), participant account balances,
    asset mix, and the types of investments and the level of services being
    provided. Below is data from surveys conducted by various organizations
    that monitor and analyze plan fees. The studies reflect, in particular,
    the impact of plan size and average account balances on fees:
        CEM Benchmarking Inc.--CEM is a benchmarking company that serves
    300 of the world's largest public and corporate pension plans in the
    US, Canada, Europe and Australia. A study of 88 US defined contribution
    plans with total assets of $512 billion (ranging from $4 million to
    over $10 billion per plan) and 8.3 million participants (ranging from
    fewer than 1,000 to over 100,000 per plan) found that total costs
    ranged from 6 to 154 basis points\1\ (bps) of plan assets in 2005.
    Total costs varied with overall plan size. Plans with assets in excess
    of $10 billion averaged 28 bps while plans between $0.5 billion and
    $2.0 billion averaged 52 bps. Further, costs depended on the average
    account balance. Plans with an average account balance less than
    $55,000 paid four bps more in administrative compliance costs than
    plans with an average account balance exceeding $55,000. Total costs
    were also affected significantly by asset mix. Costs rose as the
    proportion of plan assets invested in domestic small cap stock and
    alternative investments (i.e., real estate) increased. In a separate
    analysis conducted for the Profit Sharing / 401k Council of America,
    CEM reported that, in 2005, its private sector corporate plans had
    total average costs of 33.4 bps and median costs of 29.8 bps.
    ---------------------------------------------------------------------------
        \1\ One basis point is one-hundredth of one percent--100 basis
    points equals one percent.
    ---------------------------------------------------------------------------
        HR Investment Consultants--HR Investment Consultants is a
    consulting firm providing a wide range of services to employers
    offering participant-directed retirement plans. It publishes the 401(k)
    Averages Book that contains plan fee benchmarking data. The 2007
    edition of the book reveals that average total plan costs ranged from
    159 bps for plans with 25 participants to 107 bps for plans with 5,000
    participants.
        Committee on Investment of Employee Benefit Assets (CIEBA)--CIEBA
    is the voice of the Association of Financial Professionals (AFP) on
    employee benefit plan asset management and investment issues. CIEBA
    represents more than 115 of the country's largest pension/retirement
    funds. Its members manage $1.4 trillion in defined benefit and defined
    contribution plan assets, on behalf of 16 million (defined benefit and
    defined contribution) plan participants and beneficiaries. A 2005
    survey of 109 CIEBA members revealed that plan costs paid by defined
    contribution plan participants averaged 22 bps.
    Department of Labor fee transparency initiatives
        Fee disclosure and transparency present complex issues. Amending
    ERISA through legislation to prescribe specific fee disclosure will
    lock in disclosure standards built around today's practices and could
    discourage product and service innovation. The Department of Labor
    (DOL) has announced a series of regulatory initiatives that will make
    significant improvements to fee disclosure and transparency. The
    undersigned support the DOL's efforts. We believe that this is the best
    approach to enhance fee transparency in a measured and balanced manner
    and we urge Congress to delay taking legislative action until the
    Department of Labor has completed its work. The DOL's initiatives are
    as follows:
        Annual Reporting Requirements--Among the new impending fee
    disclosure obligations are revised annual reporting requirements for
    plan sponsors. DOL is about to finalize modifications to the Form 5500
    and the accompanying Schedule C, on which sponsors report compensation
    paid to plan service providers. The modifications will expand the
    number of service providers that must be listed and impose new
    requirements to report service provider revenue-sharing. The final
    regulations implementing the new Form 5500 are expected in the very
    near future and are expected to first be applicable to the 2009 plan
    year.
        Service Provider Disclosure Obligations--DOL also intends later
    this year to issue a revised regulation under ERISA Section 408(b)(2),
    which is a statutory rule dictating that a plan may pay no more than
    reasonable compensation to plan service providers. The expected
    proposal is designed to ensure that plan fiduciaries have access to
    information about all forms and sources of compensation that service
    providers receive (including revenue-sharing). Both sponsors and
    providers will be subject to new legal requirements under these
    proposed rules, including an anticipated requirement that all third
    party compensation be disclosed in contracts or other service provider
    agreements with the plan sponsor.
        Participant Disclosure Rules--The DOL's remaining initiative
    focuses on revamping participant-level disclosure of defined
    contribution plan fees. DOL issued a Request for Information (``RFI'')
    in April 2007 seeking comment on the current state of fee disclosure,
    the existing legal requirements and possible new disclosure rules.
    Comments were filed by July 24, 2007. DOL has indicated that it intends
    to propose new participant disclosure rules early in 2008 that will
    likely apply to all participant-directed individual account retirement
    plans.
    Principles for reform
        We support regulatory reforms that reflect the following
    principles:
         Sponsors and Participants' Information Needs Are Markedly
    Different. Any new disclosure regime must recognize that plan sponsors
    (employers) and plan participants (employees) have markedly different
    disclosure needs.
         Overloading Participants with Unduly Detailed Information
    Can Be Counterproductive. Overly detailed and voluminous information
    may impair rather than enhance a participant's decision-making.
         New Disclosure Requirements Will Carry Costs for
    Participants and So Must Be Fully Justified. Participants will likely
    bear the costs of any new disclosure requirements so such new
    requirements must be justified in terms of providing a material benefit
    to plan participants' participation and investment decisions.
         Information About Fees Must Be Provided Along with Other
    Information Participants Need to Make Sound Investment Decisions.
    Participants need to know about fees and other costs associated with
    investing in the plan, but not in isolation. Fee information should
    appear in context with other key facts that participants should
    consider in making sound investment decisions. These facts include each
    plan investment option's historical performance, relative risks,
    investment objectives, and the identity of its adviser or manager.
         Disclosure Should Facilitate Comparison But Sponsors Need
    Flexibility Regarding Format. Disclosure should facilitate comparison
    among investment options, although employers should retain flexibility
    as to the appropriate format for workers.
         Participants Should Receive Information at Enrollment and
    Have Ongoing Access Annually. Participants should receive fee and other
    key investment option information at enrollment and be notified
    annually where they can find or how they can request updated
    information.
    Analysis of H.R. 3185 (generally applicable to participant-directed
            individual account plans)
        Disclosures to plan administrators Under H.R. 3185, plan service
    providers are required to provide a ``service disclosure statement''
    that describes all plan fees, in twelve specific detailed categories,
    as a condition of entering into a contract. The proposal would also
    require that this information be broken down by each cost component or
    be ``unbundled.'' The statement must describe the nature of any
    ``conflicts of interests,'' the impact of mutual fund share class if
    other than ``retail'' shares are offered and if revenue sharing is used
    to pay for ``free'' services. Estimates are permitted only when actual
    amounts are not known. Service disclosure statements must be posted on
    the employer's intranet site and be provided to participants upon
    request.
        The requirements of H.R. 3185 are duplicative with the existing
    fiduciary requirement that fees paid with plan assets be reasonable.
    The DOL's pending proposed regulatory changes under section 408(b)(2)
    likely will result in similar disclosures, provided at the same general
    point in time, as this new provision. Under the DOL's approach, the
    disclosures will be incorporated into fiduciary requirements regarding
    plan fees, making noncompliance a prohibited transaction.
        The purpose of the requirement to ``unbundle'' all fees for all
    services is unclear. It is likely to be costly and is not likely to
    provide additional helpful information. Bundled service providers
    incorporate all services under a single price or several broad
    categories of prices. Plan administrators must ensure that the
    aggregate price of all services in a bundled arrangement is reasonable
    at the time the plan contracts for the services and that the aggregate
    price for those services continues to be reasonable over time. For
    example, asset-based fees should be monitored as plan assets grow to
    ensure that fee levels continue to be reasonable for services with
    relatively fixed costs such as plan administration and per-participant
    recordkeeping. The plan administrator should be fully informed of all
    the services included in a bundled arrangement to make this assessment.
    Many plan administrators, particularly small employer plan
    administrators, may prefer reviewing costs in an aggregate manner and,
    as long as they are fully informed of the services being provided, they
    can compare and evaluate whether the overall fees are reasonable
    without being required to analyze each fee on an itemized basis.
    Imposing ``unbundled'' fee disclosure also raises significant concerns
    as to how a service provider would disclose component costs for
    services that are not offered outside a bundled contract. The posting
    of detailed unbundled services information could also force the public
    disclosure of proprietary information regarding contracts between
    service providers and plan sponsors.
        The provision relating to ``conflicts of interest'' should be
    substantially revised. ERISA already prescribes strict rules for
    prohibited activities for service providers who are parties-in-interest
    or fiduciaries to a plan. While disclosure of conflicts is important,
    the provision goes much further by requiring the disclosure of
    relationships and affiliations between different providers, regardless
    of whether these relationships involve a conflict of interest. Plan
    sponsors are expected to be provided with considerably expanded
    disclosures in the near future as the result of the DOL initiatives (in
    all likelihood sooner than if new legislation is enacted). This
    additional information will be very helpful to plan sponsors in meeting
    their fiduciary requirements related to administering an ERISA-covered
    retirement plan.
        The purpose of the share class disclosure requirement is not clear.
    Depending on the size of a plan and its service needs, participants may
    pay fees that are lower, higher, or the same as ``retail'' prices.
    There are myriad costs associated with administering a 401(k) plan that
    do not apply to individual ownership of a mutual fund and, for this
    reason, participants in some plans, particularly new small business
    plans, may pay additional costs. A comparison with an ``institutional''
    share in this situation could result in an incorrect conclusion that
    the plan is paying more than reasonable expenses.
        Disclosures to plan participants Under H.R. 3185, plan
    administrators must provide an advance notice of investment election
    information to participants and beneficiaries, generally 15 days prior
    to the beginning of the plan year. The notice must include the name of
    the option; investment objectives; risk level; whether the option is a
    ``comprehensive investment designed to achieve long-term retirement
    security or should be combined with other options in order to achieve
    such security''; historical return and percentage fee assessment;
    explanation of differences between asset-based and other annual fees;
    benchmarking against a nationally recognized market-based index or
    other benchmark retirement plan investment; and where and how
    additional plan-specific and generally available investment information
    regarding the option can be obtained. The notice must include a
    statement explaining that investment selection should not be based
    solely on fees but on other factors such as risk and historical
    returns. The notice must include a fee menu of the potential service
    fees that could be assessed against the account in the plan year. Fees
    must be categorized as, 1) varying by investment option (including
    expense ratios, investment fees, redemption fees, surrender charges);
    2) asset-based fees assessed regardless of investment option selected;
    and 3) administration and transaction fees, including plan loan fees,
    that are either automatically deducted each year or result from certain
    transactions. The fee menu shall include a general description of the
    purpose of each fee, i.e., investment management, commissions,
    administration, recordkeeping. The menu will also include disclosure of
    potential conflicts of interest that may exist with service providers
    or parties in interest, as directed by the Secretary of Labor.
        Plan administrators must also provide an annual benefit statement
    that includes starting balance; vesting status; contributions by
    employer and employee during the plan year; earnings during the plan
    year; fees assessed in the plan year; ending balance; asset allocation
    by investment option, including current balance, annual change, net
    return as an amount and a percentage; service fees charged in the year
    for each investment, including, separately, investment fees (expense
    ratios and trading costs), load fees, total asset based fees (including
    variable annuity charges), mortality and expense charges, guaranteed
    investment contract (GIC) fees, employer stock fees, directed brokerage
    charges, administrative fees, participant transaction fees, total fees,
    and total fees as a percent of current assets; and the annual
    performance of the investment options selected by the participant as
    compared to a nationally recognized market based index
        The new disclosure requirements that would be imposed by H.R. 3185
    are overly complex and costly. We support disclosure of relevant fee
    information about the plan, but flexibility should be provided to
    ensure that the plan administrator can tailor the disclosure to meet
    the needs of plan participants. The participant disclosure requirements
    as presently drafted will likely result in lengthy ``legalese''
    documents that would confuse most participants and possibly hinder
    rather than help them make investment decisions. The scope and detail
    of the disclosure might well result in a document that, at best, is
    ignored and, at worst, deters participation in the plan.
        We agree that fee information should not be provided in a vacuum.
    Some of the required data elements and comparisons in the legislation
    use confusing terminology, have overlapping requirements, or are
    excessively detailed. For example, a ``benchmark retirement plan
    investment'' does not currently exist and no single benchmark is
    appropriate for every kind of investment. In many cases the required
    participant disclosure item would apply to some products and not
    others, and could be difficult to calculate, especially by the plan
    administrator.
        Recordkeeping systems are not currently able to meet all the
    requirements of the annual benefit statement in H.R. 3185. Additional
    costs to participants will result from the significant system changes
    needed to comply and simpler disclosure would provide much of the same
    benefits to participants. Much of the required data about the plan and
    the participant's account is already required to be disclosed in the
    new benefit statement mandated under the Pension Protection Act, yet
    there is no coordination of the two requirements.
        Minimum investment option requirement--Plans must include at least
    one investment option which is a nationally recognized market-based
    index fund that, as determined by the DOL, offers a combination of
    historical returns, risks, and fees that is likely to meet retirement
    income needs at adequate levels of contribution.
        Plans should not be required to include a particular investment
    (with resulting fiduciary liability if the investment is found not to
    meet statutory and regulatory requirements). The provision would
    override a plan's ability to select and monitor plan investments by
    reaching a values conclusion that this investment is appropriate for
    all plans. It sets a precedent for further mandates regarding the
    investment of plan assets which is counter to ERISA's focus on a
    prudent process and would preempt the judgment of investment
    professionals. It is unlikely that any one ``market-based index'' alone
    is ``* * * likely to meet retirement income needs.'' Further, embedding
    a particular investment option in law may lead participants to believe
    that this is either the ``best'' option or the government-sanctioned
    option, thereby steering plan participants into the investment which
    may not be appropriate for the individual participant.

                                     ______

           Prepared Statement of the Investment Company Institute\1\

        Hearing on ``H.R. 3185, the 401(k) Fair Disclosure for Retirement
    Security Act of 2007'' Committee on Education and Labor U.S. House of
    Representatives October 4, 2007
        The Investment Company Institute1 welcomes the interest of Chairman
    Miller and the House Education and Labor Committee in enhancing
    disclosure in 401(k) plans and appreciates the opportunity to provide
    its views in connection with this hearing on H.R. 3185, the ``401(k)
    Fair Disclosure for Retirement Security Act of 2007.'' The Institute
    has long supported effective disclosure to participants in individual
    account plans and the employers who sponsor those plans.\2\ Mutual
    funds currently provide the most complete disclosure of any investment
    product available in 401(k) plans and the Institute has extensively
    studied what information is useful to and used by investors.
        Chairman Miller has been open in soliciting comments on H.R. 3185
    and we value the opportunity to offer constructive input as the
    Committee explores these issues.
        The defined contribution system of 401(k) and similar plans has
    been a huge success. As of 2006, Americans have saved $4.1 trillion in
    private defined contribution plans, and another $4.2 trillion in IRAs.
    (Estimates suggest about half of all IRA assets originate from 401(k)
    and other employer plans.) Around half of all of the assets in defined
    contribution plans and IRAs are invested in mutual funds.\3\
        Collaborative research between the Employee Benefit Research
    Institute (EBRI) and the Institute demonstrates that participants
    generally make sensible choices in allocating their investments\4\ and
    that a full career with 401(k) plans produces adequate replacement
    rates at retirement.\5\ Institute research also suggests that plan
    participants and plan sponsors are cost conscious when selecting mutual
    funds for their 401(k) plans. On an asset-weighted basis (that is,
    taking into account where 401(k) participants concentrate their
    assets), the average asset-weighted expense ratio for 401(k) stock
    mutual fund investors was 0.74%, half of the simple average stock
    mutual fund expense ratio in 2006 (1.50%).\6\
        The biggest challenge in ensuring adequate retirement security for
    all Americans lies in encouraging workers to contribute and encouraging
    employers to offer a workplace plan. Disclosure reform should seek to
    improve the 401(k) system without imposing burdens, costs and
    liabilities that deter employers from offering plans. For these
    reasons, we urge the Committee to proceed carefully as it considers
    specific changes to the 401(k) disclosure regime.
        Initiatives to strengthen the 401(k) disclosure regime should focus
    on the decisions that plan participants and sponsors must make and the
    information they need to make those decisions. The purposes behind fee
    disclosure to plan sponsors and participants differ. Participants have
    only two decisions to make: whether to contribute to the plan (and at
    what level) and how to allocate their account among the investment
    options the plan sponsor has selected. Disclosure should help
    participants make those decisions. Voluminous and detailed information
    about plan fees could overwhelm the average participant and could
    result in some employees deciding not to participate in the plan. On
    the other hand, plan sponsors, as fiduciaries, must consider additional
    factors in hiring and supervising plan service providers and selecting
    plan investment options. Information to plan sponsors should be
    designed to meet their needs effectively.
    Comments on H.R. 3185
         Disclosure to plan sponsors should provide information
    that allows them to fulfill their fiduciary responsibilities.
        ERISA requires that plan fiduciaries act prudently and solely in
    the interest of plans and participants. Plan assets can only be used
    for the exclusive purpose of providing benefits and defraying
    reasonable expenses of administering plans. ERISA's prohibited
    transaction rules require that a contract with a service provider be
    for necessary services and provide only reasonable compensation. The
    Institute has consistently supported efforts to ensure that plan
    sponsors have the information they need as fiduciaries to select and
    monitor service providers and review the reasonableness of plan
    fees.\7\ The Institute's views on disclosure to plan sponsors are set
    out in greater detail in the attached testimony we recently presented
    to the ERISA Advisory Council.
        H.R. 3185 would require plan sponsors to obtain very detailed fee
    and financial relationship information from plan service providers. We
    recommend instead that the requirements be streamlined. In our view,
    plan sponsors should obtain information from service providers on the
    services that will be delivered, the fees that will be charged, and
    whether and to what extent the service provider receives compensation
    from other parties in connection with providing services to the plan.
    These payments from other parties, commonly called ``revenue sharing,''
    often are used in bundled and unbundled service arrangements to defray
    the expenses of plan administration.
        We also recommend that a service provider that offers a number of
    services in a package be required to identify each of the services and
    total cost but not to break out separately the fee for each of the
    components of the package. If the service provider does not offer the
    services separately, requiring the provider to assign a price to the
    component services will produce artificial prices that are not
    meaningful. In today's competitive 401(k) market, bundled and unbundled
    providers compete effectively for plan business. This healthy
    competition has helped spur innovation in 401(k) products and services,
    such as new education and advice programs and target date funds.
    Forcing a 401(k) provider to quote separate prices for component
    services would constitute an inappropriate decision by policymakers to
    favor one business model over another. So long as plan fiduciaries can
    compare the total cost of recordkeeping and investments of a bundled
    provider with the total costs of recordkeeping and investments of an
    unbundled provider, they have the relevant information to discharge
    their fiduciary obligations.
        The Institute supports disclosure of revenue sharing by requiring
    that a service provider disclose to plan sponsors information about
    compensation it receives from other parties in connection with
    providing services to the plan. This information will allow the plan
    sponsor to understand the total compensation a service provider
    receives under the arrangement. It also will bring to light any
    potential conflicts of interest associated with revenue sharing
    payments, for example, where a plan consultant receives compensation
    from a plan recordkeeper.
        Allocations among affiliated service providers are not revenue
    sharing. When services are provided by affiliates of the service
    provider, a plan sponsor should understand all the services that will
    be provided and the aggregate compensation for those services. The
    service provider should not be required to disclose how payments are
    allocated within the organization. These allocations are not market
    transactions and any pricing of these transactions will be artificial,
    and, thus, of little value. Disclosure of allocations within a firm
    will not inform the plan sponsor of additional compensation retained by
    the firm and will not inform the plan sponsor of a potential conflict
    that is not already apparent given the affiliation of the entities.
         Disclosure to plan participants should be simple and
    focused on key information.
        Participants should receive the following key pieces of information
    for each investment product offered under the plan:
         Types of securities held and investment objective of the
    product
         Principal risks associated with investing in the product
         Annual fees and expenses expressed in a ratio or fee table
         Historical performance
         Investment adviser that manages the product's investments
        This list is informed by research on what information investors
    actually consider before purchasing mutual fund shares.\8\ The research
    also found that investors find a summary of information more helpful
    than a detailed document. This basic information should be provided on
    all investment options available under the plan, regardless of type.\9\
    The need for cost-effective, simple disclosure focusing on the key
    information participants need to make informed choices enjoys broad
    support, as reflected in the attached joint recommendation by 12 trade
    associations to the Department of Labor.\10\
        ERISA disclosure rules should encourage and facilitate electronic
    delivery of investment information to participants. Plans should be
    allowed to provide online disclosure for every investment option for
    those employees who have reasonable access to the Internet.
        Fees and expenses are only one piece of necessary information.
    While the fees associated with a plan's investment options are an
    important factor participants should consider in making investment
    decisions, no participant should decide whether to contribute to a plan
    or allocate his or her account based solely on fees. In many plans the
    lowest fee option is a money market fund or other low-risk investment
    because these funds are the least costly to manage. It is not
    appropriate for most participants to invest solely in these relatively
    lower return options.\11\
        H.R. 3185 would require extensive disclosure to participants at
    enrollment and in annual statements. We do not believe this type of
    extensive disclosure is effective. Instead, participant disclosure
    should be short and concise and focused on the key information,
    described above, that participants need to make informed decisions in
    allocating their accounts. This is the approach the SEC is taking in
    developing a new streamlined disclosure document for mutual funds that
    easily could be adapted for all 401(k) investment products.\12\
        The SEC's experience in developing mutual fund disclosure
    requirements is relevant also with respect to two other matters covered
    in H.R. 3185. First, H.R. 3185 would require the disclosure to sponsors
    and participants of the trading costs of a mutual fund or other
    collective fund used as a 401(k) plan investment. The SEC has
    repeatedly examined how best to disclose a mutual fund's ``trading
    costs'' \13\ and has determined that the fund's turnover ratio is the
    best proxy for the trading costs of the fund. The turnover ratio can be
    easily calculated by funds, is easily understood by investors and is
    readily comparable among funds. It is expected that the SEC will
    include the fund portfolio turnover ratio as a prominent element of the
    new mutual fund profile it is developing. We recommend that any ERISA
    requirement to provide information to plan participants or sponsors
    about trading costs of pooled accounts use the portfolio turnover ratio
    as the appropriate proxy.
        Second, H.R. 3185 would require that plans translate asset-based
    fees of plan investments into dollar amounts. The SEC concluded in 2004
    that the most comparable and cost-effective way to give shareholders an
    understanding, in dollar terms, of the implications of asset-based fees
    on their account was to require a fee example in shareholder reports
    showing the fee paid on each $1,000 invested.\14\ More complex dollar
    disclosures simply impose unnecessary costs and would not facilitate
    comparability. In 401(k) plans these costs would generally be borne by
    participants. We recommend that any ERISA requirement to provide
    participants with disclosure about the impact of fees on their accounts
    use a similar hypothetical example.
         Congress should not mandate a 401(k) plan's investment
    line-up.
        H.R. 3185 would require a 401(k) plan to offer an index fund
    meeting requirements specified in the bill. The Institute is concerned
    with mandating in federal law that 401(k) plans offer a particular type
    of investment option. Congress should not substitute its judgment for
    investment experts and mandate investment choices properly reserved to
    plan sponsors as fiduciaries. It also should not endorse one type of
    investment strategy (indexing) over another (active management). This
    represents a significant departure from the basic fiduciary structure
    of ERISA and the Institute is concerned about the precedent this
    provision would set.
        The mutual fund industry is committed to meaningful 401(k)
    disclosure, which is critical to ensuring secure retirements for the
    millions of Americans that use defined contribution plans. We thank the
    Committee for the opportunity to submit this statement and look forward
    to the opportunity for continued dialogue with the Committee and its
    staff.
                                  attachments
         Institute Policy Statement on Retirement Plan Disclosure
    (January 30, 2007)
         Institute Statement to ERISA Advisory Council (September
    20, 2007)
         Joint Trade Association Recommendations on Fee and Expense
    Disclosures to Participants in Individual Account Plans (July 24, 2007)
         Institute Comment Letter to Department of Labor on Fee
    Disclosure RFI (July 20, 2007)
                                    endnotes
        \1\ Institute members include 8,889 open-end investment companies
    (mutual funds), 675 closed-end investment companies, 471 exchange-
    traded funds, and 4 sponsors of unit investment trusts. Mutual fund
    members of the Institute have total assets of approximately $11.339
    trillion (representing 98 percent of all assets of US mutual funds);
    these funds serve approximately 93.9 million shareholders in more than
    53.8 million households.
        \2\ Attached to the testimony is a Policy Statement on Retirement
    Plan Disclosure adopted by the Institute Board of Governors in January
    2007 that reaffirms and chronicles the Institute's long record in
    support of better disclosure.
        \3\ Brady and Holden, The U.S. Retirement Market, 2006, ICI
    Fundamentals, vol. 16, no. 3 (July 2007), available at http://
    www.ici.org/pdf/fm-v16n3.pdf.
        \4\ For example, in 2006, participants in their 20s allocated 59.7%
    of their accounts to pooled equity investments and company stock, and
    only 18.4% to GICs and other fixed-income investments. Participants in
    their 60s allocated 35.6% to GICs and other fixed-income investments.
    See Holden, VanDerhei, Alonso, and Copeland, 401(k) Plan Asset
    Allocation, Account Balances, and Loan Activity in 2006, ICI
    Perspective, vol. 13, no. 1, and EBRI Issue Brief, Investment Company
    Institute and Employee Benefit Research Institute, August 2007,
    available at http://www.ici.org/pdf/per13-01.pdf. The 2006 EBRI/ICI
    database contains 53,931 401(k) plans with $1.228 trillion in assets
    and 20.0 million participants.
        \5\ See Holden and VanDerhei, Can 401(k) Accumulations Generate
    Significant Income for Future Retirees? and The Influence of Automatic
    Enrollment, Catch-Up, and IRA Contributions on 401(k) Accumulations at
    Retirement, ICI Perspective and EBRI Issue Brief, Investment Company
    Institute and Employee Benefit Research Institute, November 2002 and
    July 2005, respectively, available at http://www.ici.org/pdf/per08-
    03.pdf and http://www.ici.org/pdf/per11-02.pdf, respectively.
        \6\ Holden and Hadley, The Economics of Providing 401(k) Plans:
    Services, Fees, and Expenses, 2006, ICI Fundamentals, vol. 16, no. 4
    (September 2007), available at http://www.ici.org/pdf/fm-v16n4.pdf.
        \7\ For example, see Statement of the Investment Company Institute
    on Disclosure to Plan Sponsors and Participants Before the ERISA
    Advisory Council Working Groups on Disclosure (September 21, 2004),
    available at http://www.ici.org/statements/tmny/04--dol--krentzman--
    tmny.html.
        \8\ See Understanding Investor Preferences for Mutual Fund
    Information, Investment Company Institute (2006), available at http://
    www.ici.org/pdf/rpt--06--inv--prefs--full.pdf.
        \9\ As described in more detail in the attached Institute comment
    letter to the Department of Labor, disclosure of this information is
    appropriate for mutual funds, insurance separate accounts, bank
    collective trusts, and separately managed accounts. The same key pieces
    of information are relevant and should be disclosed for fixed-return
    products, where a bank or insurance company promises to pay a stated
    rate of return. In describing fees and expenses of these products, for
    example, the disclosure should explain that the cost of the product is
    built into the stated rate of return because the insurance company or
    bank covers its expenses and profit margin by any returns it generates
    on the participant's investment in excess of the guaranteed rate of
    return. In describing principal risks of these products, the summary
    should explain that the risks associated with the guaranteed rate of
    return include the risks of interest rate changes, the long-term risk
    of inflation, and the risks associated with the product provider's
    insolvency.
        \10\ Also attached is the Institute's comment letter to the
    Department of Labor regarding improvements to participant disclosure.
        \11\ In 2006, the asset-weighted average total mutual fund expense
    ratio for money market funds held in 401(k) plans was 0.43%, compared
    with 0.56% for bond mutual funds and 0.74% for stock mutual funds. See
    Holden and Hadley, supra note 6. In plans offering investment in
    employer stock, the employer stock option fund may be the lowest fee
    option because essentially no active investment management is involved,
    but it also would not be appropriate for participants to invest solely
    in one security. This point is made in the Department of Labor's
    publication for participants, Taking the Mystery Out of Retirement
    Planning, page 11, available at http://www.dol.gov/ebsa/publications/
    NRTOC.html.
        \12\ See Statement of the Securities and Exchange Commission Before
    the House Financial Services Committee (June 26, 2007), available at
    http://www.house.gov/apps/list/hearing/financialsvcs--dem/sec--
    testimony--(6-2607).pdf.
        \13\ The trading costs of a pooled investment product such as a
    mutual fund, collective trust, or insurance company separate account
    include not only brokerage commissions, but also costs that cannot be
    quantified or expressed with accuracy, including bid-ask spreads and
    ``market impact'' costs.
        \14\ See Securities and Exchange Commission, Final Rule,
    Shareholder Reports and Quarterly Portfolio Disclosure of Registered
    Management Investment Companies, 69 Fed. Reg. 11244 (March 9, 2004).
                                     ______

        [Internet address to Investment Company Institute (ICI) Fee
    Disclosure RFI to U.S. Department of Labor, dated July 20,
    2007, follows:]

      http://www.ici.org/statements/cmltr/arc-ret/07--dol--fee--disclose--
                                    com.html

                                     ______

               ICI Policy Statement -- Retirement Plan Disclosure

             Adopted by ICI's Board of Governors, January 30, 2007

        In 2005, there were 47 million active participants in 401(k) plans,
    with their retirement savings invested not only in mutual funds but
    also a wide range of other investment products. As 401(k) plans assume
    increasing importance for future retirees, plan sponsors must be able
    to make the right choices in setting up their plans and participants
    must have the information necessary to make informed investment
    decisions. To that end, the Institute urges that the Department of
    Labor clarify the requirements for disclosure of the fees and expenses
    associated with 401(k) plans to assist plan sponsors in making
    meaningful comparisons of products and service providers. Similarly, we
    support action by the Department of Labor to require straightforward
    descriptions of all the investment options available to participants in
    self-directed plans. To achieve these important goals:
         The Department of Labor should require clear disclosure to
    employers that highlights the most pertinent information, including
    total plan costs.
        We believe required disclosure to employers should focus on the
    total fees paid by the plan to a service provider (in the form of a
    percentage or ratio) and how expenses are allocated between the sponsor
    and participants. Required disclosure also should address the various
    categories of expenses associated with a plan, including arrangements
    where a service provider receives some share of its revenue from a
    third party. Under ERISA, the obligation to provide this information
    should rest with those parties having a direct relationship with the
    employer.
        The Investment Company Institute (ICI) is the national association
    of the U.S. mutual fund industry, which manages more than half of
    401(k) assets and advocates policies to make retirement savings more
    effective and secure.
        In the late 1990s, the Institute, in cooperation with other
    private-sector organizations, created a Model 401(k) Plan Fee
    Disclosure Form, which is posted on the Department of Labor website.
    More recently, the Institute also helped develop a list of service- and
    fee-related items that plan sponsors should discuss with potential
    providers. These tools serve to identify what services will be provided
    for the fees charged, show all forms of expenses, and help employers
    make meaningful comparisons among the products and services offered to
    the plan. The tools also can be useful to the Department in crafting
    regulations and other guidance.
         The Department of Labor should require that participants
    in all self-directed plans receive simple, straightforward explanations
    about each of the investment options available to them, including
    information on fees and expenses.
        In making investment elections under a plan, individuals should
    receive information on:
         investment objectives,
         principal risks,
         annual fees (expressed in a ratio or fee table),
         historical performance, and
         the investment adviser that manages the product's
    investments.
        The Department should expand the current disclosure requirements to
    require plan administrators to provide participants with a concise
    summary of these ?ve key pieces of information for each investment
    option. One effective way to deliver this information is through email
    and other forms of electronic communication. Additional information,
    such as how fees and expenses are allocated among service providers,
    should be made available to participants (for example, posted on the
    Internet).
        Such disclosure requirements would ?ll gaps in the information
    currently required to be provided to participants. The existing
    disclosure regime does not cover all plans in which participants make
    investment decisions for their accounts. For plans that are covered,
    participants must receive full information about mutual funds, in the
    form of the fund prospectus. For other products, important
    information--such as operating expenses and historical performance--is
    available only on request. We support revising current rules to require
    a summary document for all self-directed plans that provides, for each
    investment product, the type of information that investors value and
    use. This information will empower participants in self-directed plans
    to manage their accounts effectively.
        The mutual fund industry is committed to meaningful disclosure.
    Over the past 30 years, the Institute has supported efforts to improve
    the quality of information provided to plans and participants and the
    way in which that information is presented. Meaningful disclosure is
    critical to ensuring secure retirements for millions of Americans.
                                    appendix

             ICI's Record: 30 Years of Advocating Better Disclosure

        The Institute has long acted both in conjunction with other
    organizations and on its own to enhance the ability of employers to
    make appropriate choices for their plans. The Institute also has
    consistently called for effective disclosure to plan participants about
    investment options. This appendix describes the Institute's efforts
    over time to improve disclosure for both plan sponsors and
    participants.
    Disclosure to Participants
        For more than 30 years, the Institute has provided speci?c
    recommendations to the Department of Labor on the disclosure
    participants in self-directed plans should receive about investment
    options. Through letters and testimony before the Department and the
    ERISA Advisory Council, we recommended regulatory measures to ensure
    that participants and bene?ciaries receive adequate information on
    which to base their investment decisions.
         In a 1976 letter to the Department, the Institute
    advocated that when an individual becomes a participant, he or she
    should receive complete, up-to-date information about plan investment
    options, and, thereafter, regular and current information as to his or
    her investments.
         In 1987, the Institute recommended that under then-
    proposed 404(c) regulations, participants should receive the kind of
    information included in a mutual fund prospectus or Statement of
    Additional Information for all investment options--not just investment
    options subject to federal securities laws. We repeated this suggestion
    in 2001 to the Department and in testimony in 2004 and 2006 before the
    ERISA Advisory Council.
         In 1992, the Institute recommended that where a 404(c)
    plan has a limited number of investment alternatives, plan ?duciaries
    should be required to provide suf?cient investment information about
    each option up front. We urged the Department to specify the investment
    information that would be deemed sufficient, including information on
    fees and expenses and investment objectives.
         In testimony before the Department in 1997, the Institute
    asked the Department to address gaps in the disclosure regime,
    especially disclosure of administrative fees charged to participant
    accounts and information on annual operating expenses, which, for non-
    mutual fund investment vehicles, are required to be provided only upon
    request.
         In 1999, the Institute urged the Department to expand the
    scope of its proposed rules on electronic delivery to cover a broader
    range of disclosures and recipients.
         In testimony before the ERISA Advisory Council in 2004 and
    2006, the Institute called for participants to receive clear and
    concise summaries of each investment option, including the product's
    investment objective, principal risks, fee/expense ratio (in the form
    of a fee table), and information about the investment adviser. In 2006,
    we added historical performance to the list. In the 2006 testimony, we
    also urged that this disclosure regime should apply to all self-
    directed plans--not just 404(c) plans--and that the Department update
    and expand its electronic disclosure rule in light of the increasing
    role of the Internet.
    Disclosure to Plan Sponsors
        The Institute likewise has consistently advocated clear rules for
    disclosure to plan sponsors and has developed various tools for use by
    sponsors and service providers.
         In 1999, the Institute published a Uniform 401(k) Plan Fee
    Disclosure Form, developed jointly with the American Bankers
    Association (ABA) and American Council of Life Insurance (ACLI). The
    form, which the Department posted on its website, is designed to help
    employers identify and monitor 401(k) plan fees and expenses and
    compare the fees and services of different providers.
         In testimony before the ERISA Advisory Council in 2004,
    the Institute called for clear, meaningful, and effective disclosure to
    plan sponsors. We recommended that plan sponsors be required to obtain
    complete information about investment options before adding them to the
    plan menu and obtain information concerning arrangements where a
    service provider receives some share of its revenue from a third party.
    The Institute offered to organize a task force to assist the Department
    in developing a disclosure regime for these compensation arrangements.
         In 2005, the Institute published a Model Disclosure
    Schedule for Plan Sponsors that might be used to disclose information
    on receipt by service providers of revenue from unaf?liated parties in
    connection with services to a plan. The Institute began discussions
    with other trade associations on developing an appropriate disclosure
    regime.
         In 2006, the Institute published a 401(k) plan fee and
    expense reference tool, developed jointly with the ACLI, ABA,
    Securities Industry Association, and American Benefits Council. The
    tool is a list of fee and expense data elements that plan sponsors and
    service providers may want to discuss when entering into service
    arrangements. We have asked the Department to post the tool on its
    website.
                                     ______

                                    ------

        [Whereupon, at 11:30 a.m., the committee was adjourned.]