[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


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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.
---------------------------------------------------------------------------
    \1\ EBRI Issue Brief No. 308, August 2007.
---------------------------------------------------------------------------
    Meaningful and easy to understand information is vital because the 
fees and expenses charged to participants significantly reduce the 
amount of assets available for retirement. Plan fees compound over time 
and the larger the fee, the bigger the bite that is ultimately taken 
out of the participant's retirement nest egg. Both plan sponsors and 
participants need to have the right information in order to make 
decisions that safeguard the plan's retirement income returns and 
enhance workers' retirement savings.
    Some have suggested that added focus on fees and expenses is not 
important, that such costs do not add up to a significant impact. After 
all, even an additional 1% in fees--100 basis points--is only $1.00 out 
of every hundred dollars. But this argument understates the impact that 
fees and expenses have on total return, especially compounded over long 
periods of time.
    The U.S. Government Accountability Office (GAO) recently estimated 
that $20,000 left in a 401(k) account for 20 years could grow to 
$70,555 at 7% interest return minus a 0.5 percent charge for fees (6.5% 
net return). The same $20,000 would grow to only about $58,400 if the 
annual fees are 1.5% (5.5% net return).\2\ The one percent fee 
differential has a dramatic impact--resulting in an over 17 percent 
reduction in the account balance over the 20-year period. Using GAO 
assumptions, AARP has estimated that over a longer 30-year period, the 
same $20,000 with a 0.5 percent charge would grow to $132,287, while a 
charge of 1.5 percent would reduce that growth to $99, 679--about a 25 
percent reduction in the account balance. Even a difference of only 50 
basis points, from 0.5 percent to 1.0 percent, would reduce the value 
of the account by $17,417, or a little over 13 percent over the 30-year 
period.
---------------------------------------------------------------------------
    \2\ Changes Needed to Provide 401(k) Plan Participants and the 
Department of Labor Better Information, GAO-07-21 (November 2006).


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

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

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

                                 
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