[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
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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\
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\1\ Based on 2004 filings of the Form 5500.
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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.
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\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).
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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\
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\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.
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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.
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\1\ EBRI Issue Brief No. 308, August 2007.
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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.
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\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).
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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.
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[Whereupon, at 11:30 a.m., the committee was adjourned.]