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



 
                   THE APPROPRIATENESS OF RETIREMENT

                               PLAN FEES
=======================================================================


                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 30, 2007

                               __________

                             Serial 110-64

                               __________

         Printed for the use of the Committee on Ways and Means



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                      COMMITTEE ON WAYS AND MEANS

                 CHARLES B. RANGEL, New York, Chairman

FORTNEY PETE STARK, California        JIM MCCRERY, Louisiana
SANDER M. LEVIN, Michigan            WALLY HERGER, California
JIM MCDERMOTT, Washington            DAVE CAMP, Michigan
JOHN LEWIS, Georgia                  JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts       SAM JOHNSON, Texas
MICHAEL R. MCNULTY, New York         PHIL ENGLISH, Pennsylvania
JOHN S. TANNER, Tennessee            JERRY WELLER, Illinois
XAVIER BECERRA, California           KENNY HULSHOF, Missouri
LLOYD DOGGETT, Texas                 RON LEWIS, Kentucky
EARL POMEROY, North Dakota           KEVIN BRADY, Texas
STEPHANIE TUBBS JONES, Ohio          THOMAS M. REYNOLDS, New York
MIKE THOMPSON, California            PAUL RYAN, Wisconsin
JOHN B. LARSON, Connecticut          ERIC CANTOR, Virginia
RAHM EMANUEL, Illinois               JOHN LINDER, Georgia
EARL BLUMENAUER, Oregon              DEVIN NUNES, California
RON KIND, Wisconsin                  PAT TIBERI, Ohio
BILL PASCRELL, JR., New Jersey       JON PORTER, Nevada
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama

             Janice Mays, Chief Counsel and Staff Director

                  Brett Loper, Minority Staff Director

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.

                            C O N T E N T S

                               __________
                                                                   Page

Advisory of October 24, 2007, announcing the hearing.............     2

                               WITNESSES

The Honorable Bradford P. Campbell, Assistant Secretary of Labor, 
  Employee Benefits Security Administration, U.S. Department of 
  Labor..........................................................     6
W. Thomas Reeder, Esq., Benefits Tax Counsel, Office of Tax 
  Policy, U.S. Department of the Treasury........................    20
Andrew J. Donohue, Director, Division of Investment Management, 
  U.S. Securities and Exchange Commission........................    26
Barbara D. Bovbjerg, Director, Education, Workforce, and Income 
  Security Issues, U.S. Government Accountability Office.........    35

                                 ______

Burgess A. ``Tommy'' Thomasson, Jr., President and CEO, 
  DailyAccess Corporation, Mobile, Alabama, on behalf of the 
  American Society of Pension Professionals & Actuaries, and the 
  Council of Independent 401(k) Recordkeepers....................    81
Harold L. Jackson, President and CEO, Buffalo Supply, Inc., 
  Lafayette, Colorado, on behalf of the U.S. Chamber of Commerce.    96
Allison R. Klausner, Assistant General Counsel--Benefits, 
  Honeywell International Inc., Morristown, New Jersey, on behalf 
  of the American Benefits Council...............................   106
Lew I. Minsky, Senior Attorney, Florida Power & Light Company, 
  Juno Beach, Florida, on behalf of the ERISA Industry Commitee..   121
Paul Schott Stevens, President and CEO, Investment Company 
  Institute......................................................   131

                                 ______

Bertram L. Scott, Executive Vice President, Strategy, Integration 
  and Policy, TIAA-CREF, New York, New York......................   156
Mindy L. Harris, President, National Association of Government 
  Defined Contribution Administrators, Portland, Oregon..........   166
David L. Wray, President, Profit Sharing/401(k) Council of 
  America, Chicago, Illinois.....................................   171
Lisa A. Tavares, Esq., Partner, Venable Law Firm, LLP............   178
Norman P. Stein, Professor, University of Alabama School of Law, 
  on behalf of the Pension Rights Center.........................   183
David Certner, Legislative Counsel and Legislative Policy 
  Director, AARP.................................................   187

                       SUBMISSIONS FOR THE RECORD

American Council of Life Insurers, Statement.....................   202
Daniel Wintz, Omaha, Nebraska, Statement.........................   204
Gerald C. Schneider and Judith M. Schneider, Letter..............   204
Kevin Powell, Statement..........................................   205
Massachusetts Mutual Life Insurance Company, Statement...........   209
Matthew D. Hutcheson, Statement..................................   211
South Carolina Retirement Systems, Letter........................   214
Wayne H. Miller, Denali Fiduciary Management, Vashon, Washington, 
  Statement......................................................   216

              THE APPROPRIATENESS OF RETIREMENT PLAN FEES

                              ----------                              


                       TUESDAY, OCTOBER 30, 2007

                     U.S. House of Representatives,
                                Committee on Ways and Means
                                                    Washington, DC.

    The Committee met, pursuant to notice, at 10:00 a.m., in 
room 1100 Longworth House Office Building, Hon. Charles B. 
Rangel (Chairman of the Committee), presiding.
    [The advisory of the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
October 24, 2007
FC-16

     Chairman Rangel Announces a Hearing on the Appropriateness of 
                          Retirement Plan Fees

    House Ways and Means Committee Chairman Charles B. Rangel today 
announced that the Committee on Ways and Means will hold a hearing on 
the appropriateness of fees that are charged to the pension plans of 
workers who participate in 401(k), 403(b), and 457 plans. This hearing 
will take place on Tuesday, October 30, 2007, in 1100 Longworth House 
Office Building, beginning at 10:00 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing. A list of invited 
witnesses will follow.
      

FOCUS OF THE HEARING:

      
    This hearing will focus on the impact that administrative and 
investment fees have on workers' ability to adequately save for their 
retirement.
      

BACKGROUND:

      
    Over the past two decades, 401(k) plans have grown to be the most 
popular form of defined contribution (DC) retirement savings plans. As 
of 2006, approximately 50 million American workers actively 
participated in a 401(k) plan, with an asset value of $2.753 trillion, 
which represents 16 percent of all retirement assets.
      
    Other common forms of DC plans are 403(b) annuity and 457 plans. 
According to a report by the Spectrum Group, there were approximately 
31,450 Section 457 plans in 2000. This market has grown over the last 7 
years, as reflected in a recent report by the Employee Benefit Research 
Institute (EBRI) that examined 2004 data. The report estimated total 
Section 457 plan assets to be about $117 billion. More recent data on 
457 plans for the first quarter of 2007 show assets of $161 billion, 
with more than 3.8 million participants. According to recent data 
released by the Investment Company Institute, Section 403 (b) plans 
held assets valued at $701 billion, with approximately 5.5 million 
workers participating in these plans.
      
    The growth in DC plans has resulted in a shift of the burden of 
saving for retirement. Today, the role of employers in these plans is 
shrinking while the role of the workers increases. The majority of 
workers who participate in these plans are responsible for making sure 
they set aside adequate savings to finance their retirement years. This 
includes making wise investment choices and monitoring account activity 
to ensure efficient use of funds. These funds can be easily eroded 
through excessive investment costs.
      
    According to the Bush Administration's budget for fiscal year 2007, 
Federal tax expenditures for 401(k) plans were estimated at $39.8 
billion for 2007 and a total of $233 billion over the next five years. 
Other employer-sponsored plans, including 403(b) and 457 plans, were 
estimated to cost $52.4 billion for 2007 and a total of $228 billion 
over the next five years.
      
    As assets in DC plans grow, so does the Federal subsidy for the 
savings held in these plans. The Committee is charged with the task of 
ensuring that these Federal tax subsidies are used as intended under 
the Internal Revenue Code.
      
    In announcing the hearing, Chairman Rangel said, ``This is an 
important issue for millions of American workers who are being asked to 
shoulder the cost of saving adequately for their retirement. If we are 
going to ask our workers to fully take on this level of responsibility, 
and the Federal Government is going to subsidize these efforts, we have 
a duty to make sure that our Federal dollars are efficiently and 
effectively working for the benefit of our workers. We need to make 
sure that these subsidies are being reflected in the account balances 
of these workers.''
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
for the hearing record must follow the appropriate link on the hearing 
page of the Committee website and complete the informational forms. 
From the Committee homepage, http://waysandmeans.house.gov, select 
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hearing for which you would like to submit, and click on the link 
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submission as a Word or WordPerfect document, in compliance with the 
formatting requirements listed below, by close of business Tuesday, 
November 13, 2007. Finally, please note that due to the change in House 
mail policy, the U.S. Capitol Police will refuse sealed-package 
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encounter technical problems, please call (202) 225-1721.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
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guidelines will not be printed, but will be maintained in the Committee 
files for review and use by the Committee.
      
    1. All submissions and supplementary materials must be provided in 
Word or WordPerfect format and MUST NOT exceed a total of 10 pages, 
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Committee relies on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
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company, address, telephone and fax numbers of each witness.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
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materials in alternative formats) may be directed to the Committee as 
noted above.

                                 
    Chairman RANGEL. The Committee on Ways and Means will come 
together as we review the plan fees, how reasonable they are, 
and how we can protect our retirement system. We have now over 
700,000 plans serving more than 55 million workers, involving 
billions of dollars, and of course the excessive fees would 
erode these savings. Our Committee has a responsibility to see 
whether the Federal subsidy is fully going to the 
Beneficiaries, rather than in the hands of management, with 
assets of $2.5 trillion. Just a one percent rate of excess fees 
will divert $25 billion away from the workers. So, this hearing 
is to help us to have a better understanding of the problem so 
that we can work together with other Committees of jurisdiction 
to make certain that what we are subsidizing benefits the 
workers and not the management alone. So, I would like to yield 
to the Ranking Member, Jim McCrery, and I look forward to 
working with him in a bipartisan way. After he concludes, I 
would like to yield to Chairman Jim McDermott, who has spent a 
lot of time and has put a lot of good work into this problem 
and its solution. Mr. McCrery?
    Mr. MCCRERY. Thank you, Mr. Chairman. Today, our Committee 
will examine the fees that are charged within defined 
contribution retirement plans, what valuable services are being 
provided in exchange for those fees, how those fees are 
disclosed to both plan sponsors and participants and what the 
government is doing to ensure that workers' savings are not 
eroded by excessive fees. These are necessarily complex issues, 
requiring a comprehensive analysis by the Committees of 
jurisdiction. This hearing will provide us with a better 
understanding of the intersection of retirement savings and the 
tax code. There is an expression I think that has been around 
here quite a while among policymakers and repeated often among 
staff and even lobbyists and that is that pension issues have 
always been bipartisan. This hearing is a perfect example of 
that sentiment. I want to thank Chairman Rangel and his staff 
who have worked so hard to put together this hearing and who 
have reached out to me and my staff from day one. Many of the 
witnesses here today are at our joint request. We welcome them 
and appreciate their contributions.
    Over many years, this Committee has provided tax preferred 
tools for Americans to save for their retirement. Employer-
sponsored defined contribution plans like 401(k)s, 403(b)s, and 
457 plans enable workers to build nest eggs. The system is 
designed to make saving every pay period attractive, easy and 
rewarding. This is a success story. People are taking advantage 
of the savings opportunities we have provided them through the 
Tax Code. Participation is up. Workers are benefiting from the 
personal investment advice and automatic enrollment provisions 
we enacted as part of the Pension Protection Act of 2006, as 
well as a higher savings limits first enacted in 2001 and then 
made permanent in the Pension Protection Act.
    I am also encouraged that with respect to retirement plan 
fees and their disclosure to plan sponsors and participants, 
various government agencies are working together. They are 
listening to each other, considering all points of view. I look 
forward to hearing about those efforts today. The Congress, 
through its Committees of jurisdiction, has a responsibility to 
ensure our policy goals for tax preferred retirement plans are 
being realized.
    Mr. Chairman, on the issue of helping Americans save, as on 
so many other important issues facing the country, I look 
forward to continuing our work together. I yield back and hope 
that the Committee will greet our witnesses, our great many 
witnesses today with enthusiasm and a search for understanding 
of these complex issues. Thank you.
    Chairman RANGEL. Thank you, Mr. McCrery. I think we are on 
common bipartisan ground, these Committees, especially the 
401(k)s were initiated to have private citizens assume more of 
their responsibility in their retiring years. Our Committee is 
there to provide the incentives to encourage them to do this. 
Certainly if we have found abuse in the system, there is no 
reason to believe why the Administration and Democrats and 
Republicans alike would not want to work together. So, I 
appreciate the outstanding quality of witnesses that we have 
before us today. I thank you not only for your written 
statements and your testimony, but I am hoping that you 
continue to work with our staffs in a bipartisan way so that we 
can come up with a solution that will have for political 
setbacks. As always, is when we are trying to correct something 
where people unfairly benefit, but if we act in a cooperative 
way and a bipartisan way, I am certain that the American people 
would believe that we are trying to do the right thing, so I 
thank you for the work that you have engaged in this subject 
already, and I want you to share the benefit of that experience 
with us to make certain that we are on the right track.
    At this time, I will ask that Chairman Jim McDermott to 
continue to chair this meeting and allocate the time as he and 
the Ranking Member would see fit. Mr. McDermott?
    Mr. MCDERMOTT [presiding]. Thank you very much, Chairman 
Rangel. We are here today to address a pocketbook issue 
affecting an increasing number of Americans because our laws 
simply have not kept pace with the changes in the American 
economic landscape. We know today that America's future 
retirees will need to rely upon their personal savings more 
than any time since the second World War. Here is why: If you 
turn your attention to the monitors, you can see in graphic 
detail how pension plans have changed. Over the last 25 years, 
the availability of traditional defined benefit pension plans 
have plummeted from about 30 percent down to 5 percent,--if you 
look at the chart up there, you will see the red line--and so 
has the participation by the American people. In 1980, it was 
30 percent and now we are at 5 percent.
    Now, defined contribution plans, 401(k) plans have 
basically replaced them and that is what that yellow line is on 
the graphic. The risk of retirement security has been shifted 
from employers to employees, workers. We are talking about the 
amount of money people have to live on and this shift of 
personal plans dramatically emphasizes the need to make every 
invested dollar count. So, it is critically important for 
people to consider the cost of administering a 401(k) plan and 
who pays the cost. The answer to these questions are startling.
    First, let's look at the next slide. In a very recent 
survey, July 2007, AARP determined that 83 percent of 
participants did not even know how much they were paying in 
fees. They absolutely were ignorant of what the plan was 
costing them. In fact, 65 percent of the participants thought 
they paid no fees at all.
    Let me reiterate a shift in our economy to personal plans 
dramatically emphasizes the need to make every invested dollar 
count and grow. These fees, which come in all shapes and sizes, 
often seem relatively small but this next slide shows the 
impact. Now, even a 1 percent difference, and that slide is a 
little hard to see, but if you put $20,000 in and then let it 
accumulate over the next 20 years. A 1 percent difference in 
fees will amount to $12,000. So, we are talking about a huge 
amount eaten up by these fees, and people are basically unaware 
of it. The Chairman is raising an issue today of whether we 
should require more disclosure of the fees associated with 
defined contribution pension plans and it is important and very 
timely.
    My colleague, Mr. Neal, and others is ahead of the curve 
and has already introduced legislation as did Chairman Miller 
of the Education and Labor Committee. So, I am looking forward 
to your testimony today because we must be sure that today's 
workers and tomorrow's retirees are adequately empowered and 
enabled to understand, invest and prepare for their retirement 
needs.
    We have a very distinguished panel to begin with today. The 
first of our panelists is the Honorable Bradford Campbell, who 
is the Assistant Secretary of Labor for employee benefits at 
the Department of Labor; Mr. Reeder is a Benefits Tax Counsel 
for the Office of Tax Policy at the Department of Treasury; 
Andrew Donohue is the benefits--or is the Division of 
Investment Management of the U.S. Securities and Exchange 
Commission; and Barbara Bovbjerg is the Director of Education 
and Workforce and Income Security issues for the government 
Accountability Office (GAO). So, Mr. Campbell, we look forward 
to your testimony. Your full testimony will be put into the 
record. We would like you to try and keep your testimony to 5 
minutes and then we will turn the crew loose on you for 
questions.
    Mr. Campbell?

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

    Mr. CAMPBELL. Yes, sir. Thank you, Mr. Chairman, Mr. 
McDermott, Mr. McCrery and the other Members of the Committee 
for this opportunity to testify today to discuss 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 of Labor. Over the past 20 years, the retirement 
plan universe has undergone significant changes, as Mr. 
McDermott noted, that affect both workers and plan fiduciaries. 
More workers now control the investment of the retirement 
savings and participant-directed individual account plans, such 
as 401(k) plans, and at the same time the financial services 
marketplace has increased in complexity. Plan fiduciaries, who 
are charged by law with responsibility for making prudent 
decisions when hiring service providers and for paying only 
reasonable plan expenses, have found their jobs more difficult 
as the number and types of fees proliferate and as 
relationships between service providers become more complex.
    These trends cause the Department to conclude that despite 
the success of our fiduciary outreach and education efforts, a 
new regulatory framework was necessary to better protect the 
interest 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 disclosures, comparative information that 
helps them choose between their plan options. 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 to assess whether the 
cost of services are necessary, appropriate and reasonable.
    The third regulation addresses disclosures made by plan 
administrators to the public and the government via the Form 
5500, the annual report filed by pension plans with the 
Department of Labor. It is essential to understand that the 
disclosure needs of each of these groups are different and that 
therefore the disclosures that we will require in our 
regulatory process are also different.
    Participants are choosing investments from among a defined 
universe of plan options and to do this they need concise 
summary information that allows them to compare these options 
in meaningful ways, taking into account the fees, the 
historical rates of return, the nature of the investment, and 
other information relevant to that decision. Plan fiduciaries 
are trying to decide if the services that they are receiving 
and the prices they are charged are reasonable and necessary, 
taking into account the needs of the plan as a whole.
    The fiduciaries also need to know whether the services that 
are provided will be influenced by compensation arrangements 
between the plan and third parties and the nature of the 
services provided their necessity and the reasonableness of the 
fees. The process by which plan fiduciaries make these prudent 
decisions necessitates a very detailed and comprehensive 
disclosure.
    Earlier this year, we issued a Request For Information on 
participant level disclosures and there appears, based on the 
responses we received, to be basic agreement that participants 
generally will not benefit from lengthy disclosure documents 
that contain large quantities of legalese and detailed 
information because they simply will not be used. Because 
participants typically bear the cost of producing these 
disclosure materials, doing so in that way could perversely 
have the effect of increasing plan fees without providing 
additional utility.
    I wanted to make sure that the Committee understands that 
we are not at the beginning of these regulatory projects, we 
are actually quite far advanced in the process. One of the 
three regulations will be final in the next several weeks, 
dealing with the disclosure to the public. We will also--we 
have completed drafting, and currently the Administration is 
reviewing and we will promulgate in the next several months 
these service provider disclosures to plan fiduciaries proposed 
regulation. We have also concluded, as I mentioned, the Request 
For Information on participant level disclosures and anticipate 
issuing a proposed regulation in this area this Winter.
    I want to commend the Committee for its interest in this 
issue, but I also want to note that it is not necessary for 
there to be additional legislation for the Department to engage 
in these regulatory projects. We have the authority under 
current law to do so. I believe that our regulatory initiatives 
will address the issues that have been raised thus far and 
Congress' consideration of these issues. I think also given the 
technical nature of many of the issues presented, the 
regulatory process is well suited to resolving many of the 
concerns that have come up. It is deliberative, it is open, it 
is inclusive in its design to resolve many of these complex 
issues.
    If the Committee does choose to pursue legislation, I would 
ask that it bear in mind the work that we have already done as 
it considers these issues.
    In conclusion, Mr. Chairman, I would like to thank you and 
Mr. McDermott and Mr. McCrery, you and your colleagues for your 
interest in this issue because it is very important to ensuring 
adequate retirement security for America's workers. I am 
committed personally to ensuring that our regulatory projects 
are completed in a timely manner. I would be happy to answer 
any questions you may have.
    [The prepared statement of Mr. Campbell follows:]

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    Mr. MCDERMOTT. Thank you very much for your testimony. 
Thank you.
    Mr. Reeder?

  STATEMENT OF W. THOMAS REEDER, ESQ., BENEFITS TAX COUNSEL, 
     OFFICE OF TAX POLICY, U.S. DEPARTMENT OF THE TREASURY

    Mr. REEDER. Mr. Chairman, Ranking Member McCrery, Members 
of the Committee, I appreciate the opportunity to appear today 
to discuss retirement plan investment fees and other expenses 
paid by participants and sponsors in tax preferred retirement 
plans. The administration commends this Committee in promoting 
the facilitation of establishment of retirement savings plans 
by as many employers as possible and encouraging participation 
in those plans by as many workers as possible. Transparency of 
the cost of investing the assets of these plans is certainly an 
important factor in making employer-sponsored savings plans 
more attractive to employers and workers.
    The Employee Retirement Income Security Act 1974, or ERISA, 
established minimum reporting, disclosure, fiduciary, and tax 
rules related to retirement plans, as well as remedies for 
violation of those rules. Responsibility for the interpretation 
and enforcement of ERISA was divided among the Labor 
Department, the Treasury Department, and the Pension Benefit 
Guaranty Corporation Originally, ERISA granted dual 
jurisdiction to both the Labor and Treasury Departments over 
certain issues but shortly after ERISA's enactment, the ERISA 
Reorganization Plan No. 4 1978 allocated responsibility for 
particular issues between the two departments. The division of 
jurisdiction between Labor and Treasury has evolved into a 
balance that works very well to capitalize on the expertise in 
those two departments.
    Pursuant to ERISA and the Reorganization Plan, the Labor 
Department has primary jurisdiction over the reporting, 
disclosure, and fiduciary responsibility rules of ERISA. 
Nonetheless, the Treasury Department certainly shares with its 
partner agency the goals of minimizing plan expenses. The 
Internal Revenue Code contains substantial favorable tax 
treatment for retirement savings, and we all are working to 
maximize the efficiency of that favorable treatment. Dollars 
spent on plan fees, as has already been pointed out, and 
expenses are dollars not available for retired Americans. Over 
time, excessive or hidden fees will significantly erode a 
worker's retirement savings.
    At Treasury and the IRS, we have worked hard to reduce the 
cost of sponsoring and maintaining tax qualified retirement 
plans. For example, we continue to expand plan sponsors' 
ability to use pre-approved plans, which are much less 
expensive to sponsor and maintain than individually designed 
plans. We developed and continued to refine a correction 
program under which plan sponsors can voluntarily correct 
qualification problems in a structured, predictable, cost-
effective manner rather than having to disqualify the plan 
completely.
    As described in more detail in my written testimony, we 
have also specifically addressed and continue to consider 
options for addressing plan fees and expenses in a limited 
number of contexts within the Treasury Department's 
jurisdiction.
    We appreciate the Committee's concern for enhancing 
participant disclosure and providing transparency of cost 
information. At the same time, we share the Labor Department's 
concern that legislation in this area could disrupt the Labor 
Department's significant ongoing deliberative efforts to 
enhance disclosures of plan fees. We are also concerned that 
the cost of additional disclosure will ultimately be borne by 
plan participants. In designing any new disclosure 
requirements, the expected participant cost should be carefully 
weighed against expected benefits to participants of additional 
disclosure. Excessive disclosures related to plan fees and 
costs could be confusing and thus could actually impair rather 
than enhance a worker's ability to make informed decisions 
regarding their plan investments.
    Moreover, while fees and other costs are very important 
factors in a plan sponsor's choice of third party investment 
and administrative service providers and in a participant's 
choice of particular investment options, these costs are not 
the only factors: customer service, reliability, accuracy, 
communications, returns, management continuity and quality, and 
many other factors may be appropriate for plan sponsors and 
participants to consider. Care should be taken in structuring 
disclosure requirements so that fees and costs are not over 
emphasized.
    In conclusion, we look forward to working within the 
administration, as well as with Congress, to address issues 
regarding plan investment fee transparency in a manner that 
facilitates the establishment of more plans and maintenance of 
those plans by American employers for their workers and 
facilitates participation in these programs by their workers.
    I appreciate the opportunity to appear today, and I will be 
happy to answering any questions you may have.
    [The prepared statement of Mr. Reeder follows:]
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    Mr. MCDERMOTT. Thank you very much for your testimony, Mr. 
Reeder.
    Mr. Donohue?

     STATEMENT OF ANDREW J. DONOHUE, DIRECTOR, DIVISION OF 
 INVESTMENT MANAGEMENT, U.S. SECURITIES AND EXCHANGE COMMISSION

    Mr. DONOHUE. Chairman Rangel, Ranking Member McCrery, Mr. 
McDermott, and Members of the Committee, I am pleased to be 
here today to discuss the Securities and Exchange Commission's 
perspective on the challenge of helping workers invest for 
their retirements. With a rapidly aging workforce, you have 
rightly identified this as an issue of current concern.
    In the 21st century, Americans will live significantly 
longer than their parents and longer than most of them planned 
for their retirement. A number of older Americans will face 
difficulties in making their retirement assets last an extra 
decade or more.
    Last year, the SEC launched the Seniors Initiative to 
address these issues from a number of angles, from investor 
education, to targeted examinations, to aggressive enforcement 
efforts. The hallmarks of this initiative have been partnership 
with other agencies like the relationship we have built with 
the Department of Labor with respect to our ongoing examination 
of the adequacy of disclosures available to investors 
concerning mutual funds and other investment vehicles in a 
typical defined contribution retirement plan.
    A significant part of the Commission's regulatory 
responsibilities with respect to mutual funds involve the 
development and administration of mutual fund disclosure 
requirements. With over 96 million Americans investing in 
mutual funds for their retirements, their children's education 
needs, and their other basic financial roles, it is important 
that mutual fund disclosure is effective. As a result, fund 
investors, including those who invest through defined 
contribution plans, should receive clear, concise and 
meaningful disclosure about key fund information.
    Today, I will outline the Mutual Fund Disclosure Reform 
Initiative that my staff is preparing for Commission 
consideration, and the way in which it could prove to be 
helpful in the defined contribution plan marketplace.
    In recent years, numerous commentators have suggested that 
investment information that is central to an investment 
decision should be provided in a streamline document with other 
more detailed information provided elsewhere. Furthermore, 
recent investor surveys indicate that investor prefer to 
receive information in consider, user-friendly formats.
    To gather perspectives from the public, in June of 2006, 
the Commission held a roundtable on interactive data and mutual 
fund disclosure reform issues. At the roundtable, 
representatives from investor groups, the mutual fund industry, 
analysts and others discussed how the Commission could change 
the mutual fund disclosure framework so that investors would be 
provided with better information.
    Significant discussion at the roundtable concerned the 
importance of providing mutual fund investors with access to 
key fund data in a shorter, more easily understandable format. 
The participants focused on the importance of providing mutual 
fund investors with shorter disclosure documents containing key 
information with more detailed disclosure documents available 
to investors who choose to review the additional information. 
Roundtable participants identified the most important 
information that investors are likely to need to make an 
investment decision, such as information about a mutual fund's 
fees and investment objectives and strategies, risks and 
performance.
    We have also benefited from the work of a Mutual Fund Task 
Force organized by the National Association of Securities 
Dealers (NASD). This Task Force concluded that investors would 
benefit from the creation of a profile plus document that would 
be available on the Internet and would include, among other 
things, basic information about a fund's investment strategies, 
risks and total cost with hyper links to additional information 
on the fund's prospectus.
    The Commission is examining ways to reform the mutual fund 
disclosure framework. The goal of this examination is to find 
the best way to get investors a concise summary document 
containing key information about a fund described in plain 
English and in a standardized order. The key information 
contained in a concise mutual fund summary potentially could 
include a fund's fees and investment objectives and strategies, 
risks and performance. This reform initiative is intended to 
provide investors with information that is easier to use and 
more readily accessible while retaining the comprehensive 
quality of the information available today. This should help 
investors who are overwhelmed by the choices among funds, which 
are too often described in lengthy and legalistic prospectuses. 
A concise mutual fund summary could enable investors to readily 
access key information that is important to an informed 
investment decision, including information about fund fees.
    If the Commission determines to propose the reformed mutual 
fund disclosure framework, I am hopeful that we will receive 
helpful public comment on the utility of the proposed approach. 
As the staff works to develop a reform initiative, we will do 
it with a view toward making it useful for all fund investors, 
including those in defined contribution plans. Along these 
lines, my staff and I have been working with the Employee 
Benefits Security Administration of the Department of Labor 
(EBSA). We keep EBSA apprised of our progress on the mutual 
fund disclosure reform initiative. We also have been discussing 
how a concise mutual fund summary could dovetail with EBSA's 
efforts in the defined contribution plan market. The work with 
EBSA has been helpful, cooperative, and mutually beneficial. 
Our staff and I will continue to work with Assistant Secretary 
Campbell and the EBSA as we move forward on mutual fund 
disclosure reform.
    Thank you for this opportunity to appear before the 
Committee, and I would be happy to answer any questions you may 
have.
    [The prepared statement of Director Donohue follows:]
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    Mr. MCDERMOTT. Thank you very much for your testimony, Mr. 
Donohue.
    Ms. Bovbjerg?

STATEMENT OF BARBARA BOVBJERG, DIRECTOR, EDUCATION, WORKFORCE, 
  AND INCOME SECURITY ISSUES, U.S. GOVERNMENT ACCOUNTABILITY 
                             OFFICE

    Ms. BOVBJERG. Thank you, sir, Mr. Chairman, Mr. McCrery, 
thank you so much for inviting me here today to speak about the 
importance of 401(k) fee information and providing it to plan 
sponsors and participants. Plan sponsors, as fiduciaries, need 
the expense information necessary to make plan design and 
administration choices that are in the best interest of the 
participants. For participants, information about the fees 
being charged is important if individuals are indeed to be 
responsible for making wise decisions about their accounts.
    I will speak first today about what information plan 
sponsors need, then discuss the information most necessary for 
participants. My statement is drawn primarily from our work 
last year on 401(k) fees.
    Plan sponsors need a broad range of expense information, 
including fees, to adequately fulfill their fiduciary duties. 
ERISA, the law governing employer pension plans, requires that 
sponsors evaluate fees for reasonableness. While sponsors 
likely know what fees are associated with the investment 
options they offer to plan participants, they know less about 
fees embedded in the costs associated with the outside vendors 
that many hire to perform plan services. Specifically, as we 
noted in our prior work, plan sponsors may not have information 
they need on business arrangements among these outside service 
providers. Such arrangements, including revenue sharing, can 
represent hidden fees and could embody conflicts of interest 
negatively affecting plan participants. We have made 
recommendations to require plan service providers to offer 
sponsors information of this nature.
    In our work with the pension industry, sponsor 
representatives and the Department of Labor, we have observed 
general agreement that sponsors should obtain such information. 
However, you should be aware that there is disagreement among 
pension professionals as to how much sponsors need to know 
about the so-called bundled arrangements, which are 
aggregations of services. Some feel that breaking down these 
consolidated fees into their component parts would raise plan 
costs and not provide particularly useful information. Others 
believe that not providing a break-out of such services and 
their costs would hide information from sponsors. However cost 
and fee information is provided, we believe fundamentally that 
it should be offered clearly and in a consistent way so 
sponsors can assure themselves, plan participants, and 
ultimately the Department of Labor that plan costs are 
reasonable.
    But let me turn now to what participants need to know. 
Although most participants are responsible for directing the 
investment of their 401(k) accounts, few know what they pay in 
fees or even if they pay fees at all according to an AARP 
survey and this can be costly. Over a 20-year period, as Mr. 
McDermott said earlier, a 1 percentage point fee difference can 
reduce retirement savings by 17 percent, so it is clear that 
participants need basic fee information. What is not so clear 
is what information is the most relevant.
    Most would agree that participants need to know what direct 
expenses are charged to their accounts. In our earlier report 
on this topic, we recommended that participants at least get 
information that allows them to make comparisons across 
investment options within their plans. We suggested that 
expense ratios would meet this need in most instances. 
Participants may also benefit from information on other types 
of fees, for example, annual fees or fees charged on a per 
transaction basis. Industry professionals we contacted also 
suggest that additional investment-specific fees might usefully 
be disclosed including sales charges, surrender charges, and 
so-called wrap fees. Some also suggest that participants 
receive information on returns net of fees to encourage them to 
consider fees in the context of an overall investment return 
rather than focusing on fee levels alone.
    However, even more so than for sponsors, keeping the 
information simple and consistent is important if participants 
are to read and make use of it. In prior work, we found that 
certain practices help people understand complicated 
information. The use of simple language, straightforward and 
attractive lay-out, brevity and multiple means of distribution 
are all key to documents the general public will obtain, read, 
and comprehend. The format content and means of conveying 
401(k) fee information will be crucial to achieving not just 
disclosure, but also improved participant understanding.
    In conclusion, 401(k) sponsors and participants both need 
better and more consistent information on plan fees. Focusing 
on the most basic fee information, providing it in a way that 
participants will read and understand it, and being consistent 
in its provision across plans will be key. Providing 
information of this nature will not only inform plan 
participants in making retirement savings and investment 
decisions, it may also have the salutary effect of sharpening 
competition and, in the end, reducing fees charged to 401(k) 
plans. That concludes my statement, Mr. Chairman. I welcome 
your questions.
    [The prepared statement of Ms. Bovbjerg follows:]
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    Mr. MCDERMOTT. Thank you very much for your testimony. 
Without objection, I would like to enter into the record a 
statement by George Miller, the Chairman of the Education and 
Workforce Subcommittee.
    [The prepared statement of Mr. Miller follows:]
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    Mr. MCDERMOTT. Mr. Campbell, I read the GAO highlights from 
last year in September and it says, ``Congress should consider 
amending ERISA to require sponsors to disclose fee information 
on each 401(k) investment option in the plan to participants 
and to require that 401(k) service providers disclose plan 
sponsors for compensation providers received from other service 
providers. In addition, GAO recommends that Labor require plan 
sponsors to report a summary of all fees paid out of assets or 
by participants. Labor generally agreed with the findings and 
conclusion of the report.'' Why has nothing been done at this 
point?
    Mr. CAMPBELL. Well, actually, Mr. Chairman, I would take 
some issue with that, that nothing has been done. In fact, we 
have been quite active in this area for some time.
    Mr. MCDERMOTT. When will your regulations be issued?
    Mr. CAMPBELL. The first of the three regulations will be a 
final regulation within the next several weeks. That goes to 
disclosures to the public and to the government in the Form 
5500. The proposed regulation for disclosures by service 
providers to plan fiduciaries is currently under review and 
will be promulgated within the next 2 months or so. The final 
regulation disclosures to participants, we completed a Request 
For Information (RFI) this summer to address those issues 
because those are some of the most technically difficult to 
address, and we will be issuing the proposed regulation this 
winter.
    Mr. MCDERMOTT. Let me be a little more specific, do any of 
those regulations exempt the disclosure of fees collected by 
bundled plans?
    Mr. CAMPBELL. No, this has been an issue that I think has 
become somewhat confused as two service providers with 
different business models look at our proposed regulation on 
the Form 5500 and offer different perspectives in the comment 
process. We believe--the interest in the Labor Department is 
ensuring that fiduciaries of plans have the information they 
need to carry out their duties under the law, to be able to 
assess the reasonableness of fees. In order to do that, we 
believe some of those fees clearly need to be broken out by 
bundle providers and others may not necessarily have to be. It 
is a question of which fees are appropriate to that 
understanding. With that respect, transaction-based fees I 
think would clearly need to be broken out, fees that are taken 
out of assets under management, finders' fees and fees that 
would cause a material conflict of interest on the part of 
service providers with respect to third parties. Those are all 
areas that I think additional disclosure would be necessary 
regardless of the business model employed by a various service 
provider.
    Mr. MCDERMOTT. Would that include fees paid by one 
provider, a manager, or received from another 401(k) plan that 
is being offered by the first provider, sort of--I do not know 
what you would call it, but some kind of return on investment, 
if I sell your stuff, do you give me something back?
    Mr. CAMPBELL. It could well. The issue would be the nature 
of the fee itself and whether it is material to the plan to 
understand that relationship and how it would impact the fees 
that plan is paying or the services it is receiving. If, for 
example, it is receiving investment advice, the impartiality of 
that advice is a material consideration, so we the plan 
fiduciary would need to be able to assess whether there were 
material conflicts of interest by that advice provider.
    Mr. MCDERMOTT. So, you are saying that revenue sharing 
would actually be covered in the things that are revealed?
    Mr. CAMPBELL. Well, as I said, I think it would depend on 
the category of the fee in terms of how it is broken out. I am 
not trying to dodge your question. It unfortunately gets rather 
difficult in breaking out the specific types of fees, what they 
are called versus what they actually do. For our purposes, we 
would look at, as I said, issues like are they transaction-
based, and are they coming out of the assets under management 
to determine whether those fees are material.
    Mr. MCDERMOTT. Thank you. Mr. McCrery?
    Mr. MCCRERY. Mr. Campbell, it is my understanding that the 
Department of Labor under ERISA has the responsibility for 
oversight of the fiduciary responsibilities of sponsors, is 
that correct?
    Mr. CAMPBELL. Yes, sir.
    Mr. MCCRERY. Can you just give us a thumbnail sketch of 
what the standards are that plan sponsors are supposed to 
adhere to?
    Mr. CAMPBELL. Certainly, sir. With respect to selecting 
service providers, the plan fiduciaries are responsible and 
they are personally liable for losses that would result from a 
breach of these duties. They are responsible for ensuring that 
the plan is paying for only necessary and appropriate services 
and that these services are reasonable, that the contract is 
not of an excessive duration, that the amount being paid in 
relation to the services being received is appropriate. So, in 
the course of assessing that duty, it is incumbent on plan 
fiduciaries to go out and solicit information from various 
service providers to get a sense of how those fees relate to 
one another and whether the deal, so to speak, the offer they 
are looking at is appropriate and meets those duties. So, it is 
a process-oriented decision that goes into have you followed a 
prudent process in assessing those issues.
    Mr. MCCRERY. How does the Department of Labor enforce that 
responsibility under ERISA?
    Mr. CAMPBELL. Looking into the prudence of fees and the 
reasonableness of fees is one of the issues that we do conduct 
in our ongoing enforcement. In the last several years, we had 
something in the order of 350 cases that involved fee questions 
and recovered I believe something over $60 million for plans 
associated with those. But in part, it is because looking at 
this issue and the proliferation of new and different kinds of 
fees and the complexity of this marketplace, that we decided 
that education and outreach alone and enforcement alone were 
not sufficient, that what was necessary was an enhanced 
regulatory structure that would globally address these concerns 
and that is why we devised the three regulations that we are 
currently proposing. I think this particular issue that you are 
describing with disclosures by service providers to plans would 
be particularly addressed by our regulation that would 
essentially redefine what a reasonable contract is in order to 
qualify for the statutory exemption for a reasonable contract 
by specifying what disclosures are necessary, that they be in 
writing and these sorts of considerations.
    Mr. MCCRERY. So, does the Department of Labor act as kind 
of the IRS over taxpayers, do you audit randomly plan sponsors 
and their plans?
    Mr. CAMPBELL. We target our investigations by a variety of 
methods. Some of it we determine by looking at data filed with 
us on the Form 5500. That would be sort of analogous to 
reviewing the 10forties and looking for anomalies. We do that. 
We also, of course, get tips from participants, from plan 
fiduciaries, from service providers. We do not generally 
conduct purely random audits given the size of this universe. 
We have determined that we can be more effective in our 
enforcement efforts by targeting areas that we believe, based 
on what we have seen in our investigations, need additional 
interest. Sort of a proxy for that random audit is that when we 
do an investigation of a plan, we do not look solely at the one 
issue that brought us there. We tend to look more 
comprehensively at a variety of issues which gives us a similar 
effect while still targeting our enforcement resources.
    Mr. MCCRERY. Did you say that the new regulations that you 
are developing, the three demonstration projects that you are 
undertaking now as well as any other re-formulation of 
regulations, will help you to audit and to discover instances 
of abuse?
    Mr. CAMPBELL. Yes, sir, we will be collecting additional 
information about fees and expenses on the Schedule C of the 
Form 5500, which will assist us in that portion of targeting. 
It will also be in the 408(b)(2) regulation the disclosure by 
service providers to plans requiring written contracts with all 
the disclosures that we have been discussing here today, which 
will help us ensure that both service providers have complied 
and that fiduciaries have conducted their duties appropriately 
in evaluating that information.
    Mr. MCCRERY. Mr. Chairman, I think it is very important 
that we support and, if necessary, supplement the efforts of 
DOL in enhancing their ability to ensure that plan sponsors are 
being good fiduciaries. The reason I say that is to me, you 
have got the responsibility of the plan sponsors to act as 
fiduciaries for the participants. Basically, we are talking 
about employers acting as fiduciaries for their employees. I 
get stuff in the mail, I have got mutual funds, I have got a 
Thrift savings plan. I have got an IRA that I had before I came 
to Congress, and I get stuff. I get these reams of stuff in the 
mail. Do I read them? Heck, no. Raise your hands, you out in 
the audience, if you read all that stuff you get in the mail. 
You do not either. Lie detector test right here. My point is 
that the plan sponsor, the employer, is much better able to 
look at all of these fees and the appropriateness of these fees 
than I can or a plan participant, an employee. They are just 
not going to do it, so I think DOL, based on what I have heard 
today, is headed in the right direction of enhancing their 
ability to monitor, to audit, and, if necessary, to impose 
fines punishment for plan sponsors that are not being good 
fiduciaries rather than our focusing micro on what plan 
participants need to know about conflicts of interest and this 
and that and bundling and unbundling. That is fine, but what I 
want to know as a plan participant, is what is my cost over the 
years going to be, is it going to be one point higher than Plan 
B or one point lower? Then I can weigh what is the history of 
performance of Plan A versus B, that is all I need to know. I 
do not need to know all this gobbledy gook, I will not look at 
it, I will not read it.
    Mr. MCDERMOTT. Although I did not read it all, I did find a 
report that the Department of Labor studied this issue in 1997, 
they wrote a report and that was the end of it. So, we hope 
that this time we do not just wind up with a report sitting on 
the shelf, they actually do come out with some regulations. I 
think it is time for there to be action taken.
    Mr. CAMPBELL. I assure you, Mr. Chairman, that is my 
intent. I cannot speak for what the Clinton Administration did 
or did not do.
    Mr. MCDERMOTT. This is not a partisan issue. This is an 
issue that has been all across and everybody has reason to be 
concerned about it. Mr. Rangel?
    Chairman RANGEL [presiding]. Well, it is not partisan 
unless you want to make it that.
    Mr. CAMPBELL. Not at all, sir.
    Chairman RANGEL. I agree with Mr. McCrery that just like 
insurance policies, all we want to know is are we getting a 
good deal and we do not want to know bad news. We want someone 
to kind of help us to be guided and believe that someone is 
taking care of. If it is not DOL or IRS, do not interfere, but 
at least allow us to know at the end of the day that the funds 
are being managed with a sense of fiduciary relationship. 
Having said that, I assume that all of you agree that the 
dramatic increase in these funds means that we should review 
how they are managed. Is there anyone that believes that we 
should just leave it alone and it will work its way out, work 
itself out? If we have to do something, have your departments 
and agencies ever come together to say that we have a problem 
in our country and make some contribution, as you definitely 
are this morning, to this panel in suggesting to us, as the GAO 
has, as to recommendations, as to what, if anything, we should 
be doing as the Legislative Branch of government? Mr. CAMPBELL?
    Mr. CAMPBELL. I believe all three agencies here have been 
coordinating very closely on this issue to ensure that we are 
within our different statutes, working in complementary fashion 
to address these concerns.
    Chairman RANGEL. You are doing that now?
    Mr. CAMPBELL. Yes, sir.
    Chairman RANGEL. All of you have had an opportunity to read 
the report of the GAO. Does that make any sense to the agencies 
that have managerial responsibilities of the funds? Have you 
taken any of the recommendations of the GAO into consideration?
    Mr. CAMPBELL. Yes, sir, we have indeed. In fact, in the 
development of these three regulations, the GAO's work has been 
helpful to us as well as the other comments that we have 
received from the public. In our response to the report that 
Mr. McDermott mentioned, we said that we generally agreed with 
the findings of the GAO and that is correct, we do, and that is 
why we engaged in these projects, not in response to the GAO 
report but, in response to this problem that all of us are 
perceiving.
    Chairman RANGEL. Well, have any of their recommendations 
made any sense to you so that you have adopted any of them?
    Mr. CAMPBELL. Yes, sir, I believe that we have. I think in 
the proposed regulations that will come out, it will be clear 
where the areas of agreement have been, and I think the general 
thrust of their comments are consistent with the thrust of our 
regulations.
    Chairman RANGEL. Well, absent--aside from the regulations, 
do you believe there is need for legislation by this Committee 
or any other Committee to assist you in monitoring how these 
funds are being managed? Do you think that the best thing we 
can do is to stay out, it or are there recommendations, 
legislative recommendations, you are prepared to make?
    Mr. CAMPBELL. Well, at this point we believe that we have 
the statutory authority already to pursue these regulations and 
that taken together these three regulations do cover the 
waterfront of the issues here and that the regulatory process 
is well suited to resolving these concerns.
    Chairman RANGEL. SEC agrees?
    Mr. DONOHUE. Chairman Rangel, the SEC does agree. We have 
worked closely with the Department of Labor and as we have been 
working with our simplified disclosure reform project, we have 
been keeping in touch with the Department of Labor with an 
effort to see how we can be helpful to make sure that America's 
investors have access to the information that they need to make 
informed investment decisions when they have an opportunity to 
invest in products and mutual funds that are under our 
jurisdiction. We have had very good cooperation from the 
Department of Labor in that regard.
    Chairman RANGEL. Does the GAO agree that the departments 
are treating your recommendations with some degree of urgency 
or the respect that you think it deserves?
    Ms. BOVBJERG. I think that the Department of Labor is 
trying to address the three recipients of information that our 
three recommendations addressed. One was what information comes 
to the Department of Labor in the Form 5500; we made that 
recommendation to Labor and they are working on an enhanced 
disclosure for them to use in enforcing ERISA. The other two 
were recommendations to Congress to amend ERISA to improve 
information that sponsors can get from service providers and 
information that sponsors must provide to participants. When we 
were considering these recommendations, we thought very 
carefully before making a recommendation to Congress to amend a 
statute, and we did believe that there were questions about 
whether Labor's regulations would cover all plans, for example, 
not just 404(c) plans, and whether they would indeed have the 
authority to regulate non-fiduciary service providers. Hence, 
we put these as recommendations to Congress.
    Chairman RANGEL. Let me take this opportunity to thank GAO 
for the good work that you continue to do. Tell me when did you 
say that this practice of regulations would be prepared so that 
we can take a look at it?
    Mr. CAMPBELL. The final Form 5500 regulation will be 
released within the next several weeks. The proposed service 
provider disclosure regulation will be released within the next 
2 months approximately and the participant level disclosures, 
we concluded a RFI this summer and will be releasing a proposed 
regulation this winter.
    Chairman RANGEL. To the GAO, having heard the broad 
jurisdiction that DOL claims to have, do you still think there 
is need for legislation outside of the regulations?
    Ms. BOVBJERG. We stand by our recommendations. We think it 
would enhance the likelihood that these disclosures would 
survive without challenge.
    Chairman RANGEL. Well, let's continue to work together. We 
look forward to the package that you are going to present to 
us, and I want to thank you, Mr. Chairman.
    Mr. MCDERMOTT [presiding]. Mr. Herger? Mr. Lewis? Mr. Neal?
    Mr. NEAL. Thank you, Mr. Chairman. Mr. Reeder, in your 
testimony, you cautioned against mandating overly detailed and 
lengthy disclosures. As you may know, the approach I have taken 
in my bill is a limited disclosure in major categories of cost 
to both workers and employers with the hope that increasing 
transparency can allow for more competition amongst providers. 
You suggested that any increase in cost should be weighed 
against benefits. Do you agree that improved performance and 
lower fees or expenses may be worth the cost if it is offered 
as I suggest?
    Mr. REEDER. Yes, Mr. Neal, I do agree that increased 
disclosure will in fact be beneficial, and I think the approach 
of your bill is an interesting approach. I have to agree with 
my colleague from the Department of Labor that I think they can 
mandate that through regulations, however without an additional 
mandate from Congress.
    Mr. NEAL. You also recommend that allowing State and local 
government plans to continue to oversee their retirement plans, 
including an effort to ferret out hidden fees. But, as one 
expert witness on panel three will tell us later, many are 
already forced to hire independent consultants to assist in 
this process, as noted by ``The New York Times'' yesterday as 
incidentally pretty good paying jobs apparently, would you 
agree that some limited and simple disclosure, either within 
the confines of the Tax Code or ERISA, could assist these local 
governments in getting the best deal from vendors?
    Mr. REEDER. It is difficult for me to take a position 
contrary to many years of experience and jurisprudence with 
Congress mandating stuff on States, but traditionally ERISA and 
the Code have exempted State and local governments from 
particular requirements for reasons of federalism issues, but I 
think that is Congress' decision to make.
    Mr. NEAL. Ms. Bovbjerg, in your testimony, you cite the 
recommendations of one expert before the ERISA Advisory 
Committee who suggested that companies need to evaluate fees 
based on three categories of services: investment, 
administrative, and third party expenses. This is similar to 
the disclosure I have sought in my legislation. Do you think 
that disclosure in these three broad groups is feasible by both 
bundled and unbundled service providers?
    Ms. BOVBJERG. I would like to think that it is feasible. We 
are told by bundled providers that it would be costly and 
difficult for them to do that. We have not assessed how costly 
it would be, how difficult it would be. So, we are operating on 
the premise that it is feasible, but don't know at what cost.
    Mr. NEAL. Okay. I had intended to go to Mr. CAMPBELL before 
you, but I was concerned my time would expire. Mr. Campbell, a 
similar question. Is it true that the proposed DOL regulation 
would have exempted bundled service providers from any 
additional disclosure provided by unbundled providers?
    Mr. CAMPBELL. No, sir. I think, as I indicated before, 
there has been some dispute as to exactly what the proposed 
regulation would have required, and I think that is in some 
ways, the beauty of the notice of common process is the 
comments we received in response that help us analyze where we 
were clear and where we were not. As I indicated before, our 
concern is making sure that fiduciaries have the information 
they need and to the extent fees, such as transaction-based 
fees, fees that are coming out of assets under management, 
finder's fees, and material conflicts of interest are at play, 
those should be broken out regardless of the business model of 
the service provider.
    Mr. NEAL. Well, if you heard that some bundled providers 
were already doing additional disclosure to some customers by 
segregating out major expenses, would you change your opinion 
of whether bundled providers can and should disclose more?
    Mr. CAMPBELL. Well, again, sir, our concern is ensuring 
that the plans have the information they need to make 
appropriate decisions. It is not in my view the place of the 
Department of Labor to specify which business model is the 
correct one. As long as the information necessary is coming 
out, then the interests of the law have been served.
    Mr. NEAL. Thank you, Mr. Chairman.
    Mr. MCDERMOTT. Thank you. Mr. Johnson?
    Mr. JOHNSON. Thank you, Mr. Chairman. Mr. Campbell, when I 
was Chairman of the Subcommittee with jurisdiction over ERISA, 
I often said Congress so loved to find benefit plans, they 
wrapped them in so much red tape, they strangled them to death 
and that is what has happened. You get a bunch of Federal 
regulation and defined benefit plans went by the board. Later 
testimony by another witness asserts that inappropriateness of 
DOL Field Assistance Bulletin 20033 regarding what they call 
extraordinary fees, and you probably are aware, being charged 
individually to participants, could you discuss why it makes 
sense to change or charge divorce decree costs to individuals 
rather than the plan because it was being charged to the plan, 
which is another big expense?
    Mr. CAMPBELL. Yes, sir, the Field Assistance Bulletin you 
are referencing goes to the question of how plans account for 
the cost associated with the Qualified Domestic Relations 
Orders (QDRO). Essentially, in instances where couples divorce, 
there is a question as to which party receives which portions 
of pension funds and under what circumstances. Given that that 
is a cost that is directly linked to that particular 
participant and their unique situation, the Department 
determined that it was appropriate for plans to allocate the 
costs associated with administering that consent decree, that 
QDRO, to that particular participant rather than distributing 
that cost among all participants who would therefore bear the 
cost of the portion of them who had QDROs.
    Mr. JOHNSON. No, I agree with you, I think you are right, 
and I am glad you made that statement. Could you tell me 
whether you think it is appropriate to disclose each cost 
associated with the bundled service provider or whether a 
single fee is appropriate or whether there is some middle 
ground on the issue?
    Mr. CAMPBELL. Well, I think the answer to your question, as 
we have discussed here today, is that there is some middle 
ground that is appropriate. The concern that we have is 
ensuring that fiduciaries get the information they need to 
assess the reasonableness of fees and whether the services are 
necessary and appropriate. To the extent relevant fees need to 
be unbundled, that is what we would provide in our regulation. 
To the extent fees can be aggregated without disturbing the 
ability of fiduciaries to conduct that analysis, that is not an 
issue the Department would need to disturb. Again, our position 
is not to select a business model for service providers, but 
rather to ensure fiduciaries can carry out their duty.
    Mr. JOHNSON. Yes, well, you remember we argued at length 
over whether or not to provide advice for the investors, and we 
more or less won that argument. But you guys are doing the 
right job over there.
    Mr. Reeder, you talked about systemic problems with respect 
to disclosure of fees and said you didn't think it would 
warrant a new Federal program, and I happen to agree. Do you 
want to elaborate on that at all?
    Mr. REEDER. I just want to reiterate the work that the 
Department of Labor is doing, and I do think that the 
Department of Labor does have the tools that it needs to 
provide regulations in this area, and we have been working with 
them very closely, especially on this package that is about to 
come out because we have an interest in the reporting of 
various items as well. But I think the Department of Labor has 
the tools that it needs.
    Mr. JOHNSON. Thank you, sir. I yield back, Mr. Chairman. I 
will go on and talk some more.
    [Laughter.]
    Mr. MCDERMOTT. Mr. Doggett?
    Mr. DOGGETT. Thank you and thank you for your testimony. 
Mr. Campbell, when the Department of Labor had an opportunity 
over a year ago to comment on the findings of the GAO, did it 
take exception or make objection to any of the findings of the 
GAO report?
    Mr. CAMPBELL. I do not recall off the top of my head the 
exact language in our response. The issue on which we do have 
disagreement is the current statutory authority of the 
Department. We believe that section 505 of ERISA provides us 
general rulemaking authority to implement the provisions of 
section 404, which is the appropriate section.
    Mr. DOGGETT. So, is that with the exception that you do not 
think we need to do anything in the Congress about this. As far 
as the specific kinds of disclosures that they thought were 
necessary for plan participants and plan sponsors, you agreed 
with their conclusions?
    Mr. CAMPBELL. Again, in general, yes, sir.
    Mr. DOGGETT. So, can we expect then that these regulations 
for plan participants that you eventually will get around to 
promulgating, will include addressing every recommendation GAO 
made, especially as it relates to bundled provider services?
    Mr. CAMPBELL. I think the issue there is to bear in mind 
the distinction between disclosures to participants and what 
they should contain versus disclosures to plan fiduciaries.
    Mr. DOGGETT. Yes, sir, and the GAO made recommendations 
concerning both and my question to you is as it relates 
specifically to plan participants, in these anticipated 
regulations, will you be addressing and attempting to implement 
every GAO recommendation, including those that relate to 
bundled services?
    Mr. CAMPBELL. I will not want to say ``every'' until I re-
read the GAO recommendations. However, sir, I think we are in 
general agreement as to the direction these participant 
disclosures----
    Mr. DOGGETT. How about just every one that you did not 
object to last year when you had the opportunity to do it?
    Mr. CAMPBELL. Well, again, sir, we did go through a request 
for information to provide additional information from the 
public, consumer groups, participants, plans, everyone. We need 
to evaluate the totality of that information in promulgating 
the final regulation. I can only say that again, we in the GAO, 
I think are on a very parallel path.
    Mr. DOGGETT. As it relates to your statutory authority, 
which you do not want any more--you do not want any more 
statutory authority in this area--do you believe that you have 
statutory authority to require an option in each one of these 
plans that they have a low cost index fund for participants to 
choose?
    Mr. CAMPBELL. No, sir, the statute does not specify.
    Mr. DOGGETT. So, if we wanted to provide that option so 
that the 401(k) investment that employees and employers are 
making is not eaten up with excessive fees, you do not have 
authority to address that by providing the low index fund 
option?
    Mr. CAMPBELL. No, sir, that would require a statutory 
change.
    Mr. DOGGETT. With reference to the pace at which you are 
responding to this problem, which many of us consider to be a 
rather significant problem for employees, that if they were 
out, able to invest on their own in an index fund, they would 
be having a much bigger investment nest egg built up than with 
some of the plans where they do not have information and there 
are very high fees involved. As far as whether anything is 
different today for a plan sponsor or a plan participant 
anywhere in America from where we were when the GAO put this 
report out, nothing has changed as of today? I understand you 
are studying it and you have got RFPs and you have got proposed 
regulations, but everything today is in exactly the same 
situation that it was when the GAO report came out, right?
    Mr. CAMPBELL. Yes, sir, that is correct.
    Mr. DOGGETT. Okay, and as far as whether anything is to 
change for plan participants in the future, if I understood 
your previous answers, you say that you will get around to 
proposing regulations this winter. I gather as a practical 
matter, given the normal pace at the Department of Labor, that 
probably means February but in practice is March or April?
    Mr. CAMPBELL. I believe on a regulatory agenda it does say 
February.
    Mr. DOGGETT. Yes, sir, and so if you meet the deadlines the 
way other regulations in other areas are made, we are 
approaching the spring, though I suppose it is winter, and once 
you propose the regulations, that does not mean anything 
changes for plan participants either. It just means the process 
has started. Would you anticipate that before this 
Administration ends, that anything would actually be done that 
would change the experience of any worker or employee in 
America?
    Mr. CAMPBELL. Absolutely, sir, if----
    Mr. DOGGETT. On plan participant regulations?
    Mr. CAMPBELL. Yes, sir, it is my intention to have a final 
regulation promulgated before the end of this Administration.
    Mr. DOGGETT. When would be a likely time to expect that 
that would happen? Can you give us any date before January 
2009?
    Mr. CAMPBELL. I think it would be close to the end of 2008 
given the requirements of the legislative process--excuse me, 
regulatory process.
    Mr. DOGGETT. Finally, just let me say that I have the same 
experience that Mr. McCrery has. I get tons of paper and I do 
not read a lot of it, but the two things that I can read and 
compare with ease are net investment return and expense ratio, 
and it is that information and the opportunity to have the 
option if someone wants to include it as a part of their 
portfolio of a low index--of an index of low cost fund that I 
think we need to address. Thank you very much. Particularly 
thanks to the GAO for this important study that you have done 
in your testimony.
    Mr. MCDERMOTT. Mr. Pomeroy?
    Mr. POMEROY. Thank you, Mr. Chairman. I am very pleased 
that we are as a Committee looking at the whole area of 
pensions. Because we have not done that for a while, I am going 
to have my questions principally on defined benefits. So, I 
would ask the two Administration representatives whether the 
Administration believes defined benefit plans continue to offer 
something of value to plan participants in the marketplace?
    Mr. REEDER. Absolutely, Mr. Pomeroy, we agree.
    Mr. POMEROY. There is no Administration effort to press 
companies to either freeze pension plans or convert defined 
benefit pension plans into something other than defined benefit 
plans?
    Mr. CAMPBELL. No, sir.
    Mr. REEDER. No.
    Mr. POMEROY. Excellent. I would ask the Department of Labor 
what is your take on the shape of pension--when I say 
``pension,'' I am talking about defined benefit plans; what is 
the shape of pension plan funding at the present time?
    Mr. CAMPBELL. The shape of pension plan funding has 
improved in the past year for a combination of factors, 
including the deficits of the Pension Benefit Guarantee 
Corporation (PBGC), which have also improved. I think the 
implementation of the Pension Protection Act will further 
improve the funding status.
    Mr. POMEROY. Well, let's not go there yet. We are over 100 
percent funded on average and that the cries of insolvency that 
drove the Pension Protection Act have largely gone away in 
light of the mark to market accounting capturing higher stock 
market values and a higher interest rate environment, is not 
that correct?
    Mr. CAMPBELL. I do not know that I would necessarily agree 
that they have gone away. I think the situation has----
    Mr. POMEROY. No, what is the status of plan funding? The 
status of plan funding you said was improved. Indeed, in fact, 
there have been several studies, including the Millman study, 
that shows it is over 100 percent on average and that the 
solvency of plans is a substantially improved circumstance from 
2 years ago, is that correct?
    Mr. CAMPBELL. I believe that is correct, but the 
distinction I would make is the difference between funding at a 
particular point in time and the overall solvency of the system 
and whether in the long term it provides that same benefit.
    Mr. POMEROY. Do you have a concern that rate shock, funding 
rate shock could precipitate a significant number of freezes of 
existing pension plans?
    Mr. CAMPBELL. No, sir, I believe Congress struck the 
appropriate balance in the Pension Protection Act.
    Mr. POMEROY. I am interested that you say that. Do you take 
issue then with the McKenzie study that showed 50 to 75 percent 
of anticipated freezes over the next 3 years?
    Mr. CAMPBELL. I am afraid I have not reviewed that study, 
sir.
    Mr. POMEROY. You have not reviewed the study? Interestingly 
enough, PBGD told us they had not assessed whether the Pension 
Protection Act requirements would likely cause plan freezing. 
It seems to me that this is something you would want to look 
at. Do you accept as a concern that rate shock could freeze 
plans?
    Mr. CAMPBELL. Well, I certainly agree that that was a 
concern in the construction of the Pension Protection Act, 
which is why it was constructed as it was with a phased in sort 
of glide path to full funding.
    Mr. POMEROY. Well, the glide path starts January 1st 
relative to many items of plan funding and would you then 
accept the proposition that it is important employers know what 
the new funding requirements will be?
    Mr. CAMPBELL. Indeed, sir.
    Mr. POMEROY. Are the funding requirements largely going to 
be determined upon regulations to be developed by Labor and 
Treasury?
    Mr. REEDER. If it is okay with you, I will step in there. I 
think it is mostly Treasury's bailiwick, and we have been 
working hard since the enactment of PPA, and we have been 
issuing pretty regular guidance on the issues of funding 
beginning the day after the law was signed.
    Mr. POMEROY. Well, I am interested to hear that because, as 
I understand it, there has yet to be final regulatory 
disposition of the following issues: the yield curve, asset 
smoothing rules, at risk rules, credit balance rules, the 
mortality table, lump sum valuation rules and benefit 
restrictions. Some of those have been preliminarily exposed, 
but none of them has been finally disposed. What is more 
important, something as critical as asset smoothing has yet to 
even be preliminarily addressed exposed. So, if you have been 
working on this from the beginning, you do not have much to 
show for heading it into late in the calendar year. Look, I am 
from Congress, we do not have much to show for the time either, 
but the problem is we are about to have a very significant 
development, and, Mr. Chairman, I am going to ask leave to 
continue this questioning if I might because I think it is very 
important we get to the bottom of this.
    Mr. MCDERMOTT. We are going to have three votes in a very 
short period of time, and I would like to get a couple more 
Members in.
    Mr. POMEROY. But this may be the only opportunity we have 
in forum to get from the Administration.
    Mr. MCDERMOTT. Go ahead.
    Mr. POMEROY. When is it anticipated that there will be 
proposed rules in the various areas I have just mentioned?
    Mr. REEDER. Well, as you mentioned, nearly all of the rules 
do have--all the areas do have proposed rules out, and we have 
provided in those proposed rules that taxpayers can rely on 
those proposed rules as interpretations of the statue and with 
a minor correction also that on the yield curve, final guidance 
is out on the yield curve.
    Mr. POMEROY. What kind of public comment was sought on the 
yield curve?
    Mr. REEDER. Well, that is one of the problems with issuing 
final guidance is----
    Mr. POMEROY. Yes, exactly right. There was none. The first 
word from the Treasury was the last word from the Treasury or 
yield curve, and the yield curve will substantially impact plan 
funding. Is it anticipated that asset smoothing will also be 
the first word and final word?
    Mr. REEDER. No, that will come out in a proposed 
regulation.
    Mr. POMEROY. Come in a proposed rule, so at what time will 
this period of comment run, how can it possibly be concluded by 
January 1st?
    Mr. REEDER. It cannot. As Mr. Campbell pointed out, the 
regulatory process, because it requires input from the public, 
this will take more than the time that we have before it goes 
into effect.
    Mr. POMEROY. Mr. Chairman, I raise these series of 
questions not to kind of poke partisan blame any direction 
whatsoever. I just think we need to take note as a Committee 
that plans have recovered in terms of the snapshot of their 
funding and that yet substantial new funding requirements are 
about to descend on plans as of January 1st, and they do not 
even know what the funding levels will be because the 
regulations have not been completed yet in critical areas. I 
believe that this weighs toward very much--begs Congress really 
to look at whether or not we want to give an extension before 
implementation of the Pension Protection Act in order not to 
have plans pushed into freezing their benefits--freezing their 
pensions. Thank you, Mr. Chairman.
    Mr. MCDERMOTT. Thank you. We will come back to this issue. 
Mr. Ryan? No questions? Mr. Kind? Oh, excuse me, Ms. Tubbs 
Jones.
    Ms. TUBBS JONES. Sorry, Mr. Kind. I sat down here for a 
long time waiting to ask questions. Let me try to be very quick 
and, Mr. Pomeroy, if you still want some more time, I will be 
glad to yield you some of mine at the end. In conjunction with 
the questions that my colleague was asking, Ms [continuing]. 
Pronounce your last name for me.
    Ms. BOVBJERG. Bovbjerg.
    Ms. TUBBS JONES. Bovbjerg.
    Ms. BOVBJERG. Like ``iceberg.''
    Ms. TUBBS JONES. Okay, what do plans and investors or 
employees really need to know to guide them through the 
situations or concerns that have been raised by my colleague, 
Mr. Pomeroy?
    Ms. BOVBJERG. For defined benefit plans?
    Ms. TUBBS JONES. Yes, ma'am.
    Ms. BOVBJERG. Well, they will need to know how their 
funding status will be measured. I would like to think that if 
they are at 100 percent now, they probably do not have a lot to 
worry about under the Pension Protection Act, but they will 
need to know what sorts of interest rates they need to use and 
the yield curve.
    Ms. TUBBS JONES. How will that affect them if they do not 
have that information?
    Ms. BOVBJERG. It will be hard to plan ahead.
    Mr. POMEROY. Will the gentle lady yield?
    Ms. TUBBS JONES. I will yield.
    Mr. POMEROY. Thank you very much for that because it gets 
to what our witness said. Actually, the new funding 
requirements will attach irrespective of whether they are 100 
percent funded. There will be a category, yet to be finally 
defined, called at-risk that might be deemed to be less than 
100 percent funded, and they are going to have higher 
requirements and higher requirements yet.
    Ms. BOVBJERG. I was thinking about the at-risk plans 
status.
    Mr. POMEROY. But even fully funded 100 percent funded plans 
are going to have substantially higher funding requirements 
under the Pension Protection Act and in an unforeseeable way 
because the final rules have yet to be developed.
    Ms. TUBBS JONES. Are you done?
    Mr. POMEROY. Yes.
    Ms. TUBBS JONES. Okay. Let me ask--taking back some time 
that I have, it always seems that at a time when employees are 
at the risk of losing access to pensions, in my congressional 
district, I am looking at companies closing and saying, ``Okay, 
here you have got $50,000, and I am going to send you back to 
school after you work 30 years.'' In this environment, it seems 
awful that it would be that now companies and plans do not have 
information that they really need to operate to help these poor 
folks who are getting $50,000 for a lifetime of work. Do you 
believe that the current law provides adequate information to 
enable employers and employees to make informed choices among 
plans? I am going to start with you, and I will probably get 2 
seconds left from everybody else.
    Ms. BOVBJERG. Well, in terms of 401(k)s----
    Ms. TUBBS JONES. Yes.
    Ms. BOVBJERG [continuing]. Where employees do have choice, 
it will depend on what kind of plan they are in and what kind 
of information the sponsor provides, but what we found was that 
it is just not uniform, that people do not always have the 
information they need, particularly with regard to fees. Now, 
we do want to say that fees are not the only thing, the only 
piece of information that a participant would need. You also 
want to know----
    Ms. TUBBS JONES. If you will yield just for a moment, it 
may not be the only piece of information that they need, but it 
could be a significant factor in making the decision whether 
you choose one plan over another.
    Ms. BOVBJERG. Yes, we agree, absolutely, and they are not 
all getting that information.
    Ms. TUBBS JONES. Any other gentleman, any of you want to 
tackle any of the questions I have asked?
    Mr. CAMPBELL. Well, I would just say that it is precisely 
because we believe both participants and plan fiduciaries need 
additional information that we embarked on these regulatory 
projects.
    Ms. TUBBS JONES. That is wonderful that you say you 
embarked on the regulatory project, but if they do not have the 
information they need within a timely fashion, the fact that 
you embarked--the ship has already gone to sea.
    Mr. CAMPBELL. We began these projects in order to get them 
moving as quickly as we can. They are well advanced. I can only 
pledge again that it is my desire----
    Ms. TUBBS JONES. Do you need more employees to help you do 
it?
    Mr. CAMPBELL. We have the staff necessary to carry out the 
process, it is just that, as I am sure you aware, there are 
legal requirements to the regulatory process, notice and 
comments, et cetera, that take time. We are doing it as 
expeditiously as we can.
    Ms. TUBBS JONES. So, my last question, since I know I am 
almost out of time, when are we going to have them?
    Mr. CAMPBELL. Well, again, we will have the final Form 5500 
regulation disclosures to the public within the next several 
weeks. We will have a proposal on the----
    Ms. TUBBS JONES. You know that is not an answer, the next 
several weeks, next year?
    Mr. CAMPBELL. No, quite literally the final regulation will 
be published in the ``Federal Register'' within the next 
several weeks.
    Ms. TUBBS JONES. Okay, there are 7 weeks left in this year. 
There are 8 weeks left to this year. Those eight could be 
included in several, so you are making a commitment to me and 
the public that we are going to have it before the end of the 
year?
    Mr. CAMPBELL. Yes, ma'am.
    Ms. TUBBS JONES. Okay. Thank you, Mr. Chairman.
    Mr. MCDERMOTT. Mr. Kind?
    Mr. KIND. Well, thank you, Mr. Chairman. I know we have got 
a vote pending so I am going to try to be brief. I want to 
thank our panelists for your testimony here today but also 
thank the Committee for having this hearing on a very important 
issue. I think we can all agree sitting here and stipulate that 
better transparency is what is going to drive competition in 
the fund market, which is good, but also hopefully better 
investment decisions too at the end of the day. But the key, 
and I think, Mr. CAMPBELL, you alluded to this in your earlier 
opening statement, is to not get too cumbersome or complicated 
or legalese, I think is the term you used, so that plan 
participants are not just glancing at it and throwing it away 
and not reading it and not really being informed with the 
decisions and whether we do that through rulemaking or the 
regulatory process, you are involved in the legislation I think 
is going to be the key to striking the right balance. But my 
question or my concern really, because it seems clear listening 
or reading through some of the written testimony and talking to 
a variety of people in regards to this hearing, is that what 
additional burden we ultimately end up with is going to be 
expenses ultimately passed on to the plan participants. My 
concern right now, because I have been working on this issue, 
is how do we simplify or make it easier for small businesses to 
be participating and to be offering a menu of retirement 
options too without driving them away? I do not know if that is 
a concern that Labor has been focused on as you move forward 
with your own regulatory scheme that you are coming up with but 
what can we do in order to make sure that small businesses 
still see this as a viable option, that we are not becoming too 
burdensome or too expensive for them to be able to offer these 
plans because I think that is kind of the great missing bulk of 
workers out there right now that we need to get into these 
plans and to be offering more options rather than driving them 
away. I think that is one of the concerns that I have that is 
shared with a variety of others. I do not know, Mr. CAMPBELL, 
if you want to address that or, Mr. Reeder, too if you have a 
thought on the subject?
    Mr. CAMPBELL. Obviously, one of our concerns at the Labor 
Department is to increase the availability of plans and the 
adoption of plans by particularly small employers. We focus a 
lot of education and outreach on small employers and compliance 
assistance programs to help them better comply and reduce that 
burden. For example, in the Form 5500 filing regulation I have 
mentioned, there is a reduced filing burden on small employers, 
steps of that nature we are on an ongoing basis taking.
    Mr. REEDER. I would just like to reiterate, our emphasis is 
on increasing the use of standardized plans that small 
employers can pull off the shelf and establish and maintain a 
very, very low cost.
    Mr. KIND. Great, thank you, thank you all. Thank you, Mr. 
Chairman. I yield back.
    Mr. MCDERMOTT. I am going to ask the panel, I am sorry for 
this interruption, but we do have three votes and we have 5 
minutes left to get over and vote. We should be back some time 
close to 5 minutes to 12:00. If you could wait for us, there 
are still some Members who would like to question you, so for 
the moment I will hold the meeting in suspense.
    [Recess.]
    Mr. MCDERMOTT. The Committee will come back to order. Mr. 
Pascrell from New Jersey will inquire.
    Mr. PASCRELL. Thank you, Mr. Chairman. I have a question, 
my first question is for Mr. Donohue. Mr. Donohue, you noted in 
your testimony that Americans invest over $3 trillion in 
defined contribution plans and over half of that amount is 
invested in mutual funds, is that correct?
    Mr. DONOHUE. That is correct.
    Mr. PASCRELL. What role do you think can the Securities and 
Exchange Commission (SEC) play in ensuring that Americans are 
making informed investments? I am going to ask you what do you 
think is an ``informed investment''?
    Mr. DONOHUE. I will start off by saying that we have an 
initiative underway that I discussed previously that is 
intended to assist investors, whether they are investors 
investing directly or investors who are investing indirectly 
through their 401(k)s to have information available to make 
informed choices about their investment needs and the choices 
that are available to them. This initiative we have been 
working in conjunction with the Department of Labor to see how 
this type of disclosure, this type of simplified information 
could be utilized in the 401(k) area also. So, it is something 
that is very, very important for investors. It is a top 
priority in my division.
    Mr. PASCRELL. So, you have information available?
    Mr. DONOHUE. The information that we are talking about is 
currently available but, as was noted previously, is included 
in rather lengthy documents that people wind up receiving. This 
is a very simplified form that we are contemplating, which is 
two or three pages long, and provides information about 
investment strategies, objectives, costs, expenses, and 
performance.
    Mr. PASCRELL. Mr. Donohue, what do you consider to be an 
informed investment in your estimation?
    Mr. DONOHUE. In my experience, an informed investment is 
someone making a choice, understanding what their investment 
goals are, appreciating the risks and returns that might be 
available from the investment choices they are making, taking 
into account appropriate diversification of their investments 
and seeking to really achieve their goals, understanding the 
attributes of those investments, including expenses.
    Mr. PASCRELL. But you know yourself, Mr. Donohue, that as 
you say, most of the information that is available is multi-
pages. The average citizen does not read it obviously. Ninety 
percent, 85 percent, 80 percent do not know what they are 
getting into in the first place, which does not say much about 
us, does it? It is like when you get to be 70 years of age, and 
you have to be prepared, if you have invested in certain plans, 
you have got to prepare to file and you have to know who to 
call. A lot of people are not prepared to make those decisions, 
and I really have some question about it.
    But I want to ask the next question of Ms. Bovbjerg?
    Ms. BOVBJERG. ``Bovbjerg.''
    Mr. PASCRELL. Bovbjerg, I am sorry.
    Ms. BOVBJERG. It is hard, there are a lot of consonants.
    Mr. PASCRELL. Ms. Bovbjerg, we have responsibilities here, 
I just talked to the SEC, but the primary responsibilities are 
with the Labor Department of oversight and the Treasury 
Department. I want you to take a step back now because I know 
already Mr. Reeder said the Labor Department is best qualified 
to do this particular job of oversight, so I would imagine that 
we have had good oversight from the Labor Department on these 
issues, do they work together?
    Ms. BOVBJERG. They do work together, and I understand that 
they have been working together on this particular issue. It 
sounds like you are familiar with some of our other reports 
where we have talked about the need to work together more 
closely, and that often, particularly with Labor and SEC, it 
has been an informal relationship.
    Mr. PASCRELL. But you do not have any question that the 
major effort should be, oversight should be Labor not Treasury, 
why would it not be Treasury? Why would not the Treasury 
Department have the major responsibilities of guarding people's 
investments and the decisions they make about those 
investments, tell me?
    Ms. BOVBJERG. Well, under ERISA, IRS is responsible for 
determining the tax qualification status of plans, and they 
want to see certain things from sponsors in order to assure 
themselves that the plans are tax qualified. Labor is really 
responsible for employer-sponsored plans and assuming that the 
employers are behaving as responsible fiduciaries and doing 
prudent things that are in the best interest of the 
participants. Labor has the primary responsibility for 
fiduciary enforcement.
    Mr. PASCRELL. Well, Labor has been in front of us many 
times on many different issues and that is one of the things we 
talk about is whether they are fulfilling their obligations of 
oversight and what that means. So, Mr. CAMPBELL, if I may, 
according to your testimony, the number of active 401(k) plans 
has risen almost 500 percent since 1984 and has increased by 
11.4 percent since 2000. To what do you attribute this great 
explosion in growth of 401 plans, 401(k) plans, what is your 
estimate?
    Mr. CAMPBELL. I think there are a variety of factors that 
go to what plans suit the mutual needs of employers and 
workers. Defined benefit plans offer many very positive 
attributes, but they generally are not as portable for example 
so in a more mobile workforce, increasingly as we see workers 
with more than one career, more than one employer for workers, 
the 401(k) option may be more appropriate for some workers. 
Ultimately, our view is that both plans are very valuable, both 
basic designs, and it should be up to the employers and workers 
in a given industry sector to pick the plan that best works for 
them.
    Mr. PASCRELL. Mr. Chairman, could I ask one more quick 
question, please?
    Mr. MCDERMOTT. Well, we have kept them here waiting so.
    Mr. PASCRELL. Okay, quick.
    Mr. MCDERMOTT. Fine.
    Mr. PASCRELL. Has Federal regulation, Mr. Campbell, kept 
pace with the explosion in the use of 401(k) plans in your 
estimation?
    Mr. CAMPBELL. I believe that we have responded as changes 
are made and the three regulations we are doing in this area 
are an example of that.
    Mr. PASCRELL. I thought you would say that. Thank you. 
Thank you, Mr. Chairman.
    Mr. MCDERMOTT. Ms. Schwartz will inquire.
    Ms. SCHWARTZ. Thank you, Mr. Chairman. Thank you for 
staying and thank you for a number of things from my colleagues 
on both sides of the aisle here, really saying to some extent 
very much the same thing, which is good and not so usual for 
us, and that is that we do believe that employees need more 
information and the question is how to get that to them in a 
way that is comprehensible and will make a difference in some 
of the choices they make and assure that with the continued 
growth of 401(k) plans and our interest in helping to make sure 
that people save, that Americans save. They are not saving 
enough, this is a great way for them to do it. But with the 
enormous growth, the recent growth, there are two areas that I 
think we are sort of zeroing in on as I hear from some of my 
colleagues.
    I wanted to start first with the information. Ms. Bovbjerg, 
if you could just be a little more specific if you can about 
not only the kind of information that would get to employees, 
but I am interested in how an employee would even know what 
else is out there and how to really compare both what is being 
offered to them by their employer, but potentially what are 
other--what else might be out there that they might even ask 
about? One of my colleagues asked about index funds and whether 
that is offered or not, how would an employee even say to their 
employer, well, how do I compare this to what else might be 
offered in some other business or another employer situation, 
how do I compare what the average fees might be? If they just 
tell them exactly what is being offered, I believe it is very 
elaborate, how do they even know how to make some comparison or 
ask the questions?
    Ms. BOVBJERG. Well, of course, it is difficult to compare 
fees for different types of investment vehicles because the 
investment vehicles themselves might be different.
    Ms. SCHWARTZ. Is there an average? In the marketplace, is 
there some way to sort of average what the fees are in 
different kinds of offerings? Is there a way to do that that 
someone can say why are we paying above the industry average? 
If you are looking for more competition here, for more ways to 
make judgment, is there a way to do that?
    Ms. BOVBJERG. There is probably a way to do almost anything 
but bench marking is really difficult in this area. There is 
not a lot of good information about what is being paid in fees. 
It would depend on the type of investment option you were 
looking at, but that is why we at GAO think it is important 
that, whatever is provided to people, it not only be simple,e 
but it be consistent. It is not just so you might compare to 
your neighbor's plan, that is not really what we were thinking 
about as much as instances where people move, people change 
employers. If they move from one employer to another, it would 
be helpful to them not to have to start all over to understand 
how the new employer is reporting fees.
    Ms. SCHWARTZ. I think that is very important for us to look 
at consistencies so that there is that ability. How often do 
you think an employee should get this information, just when 
they enroll, annually, any time they ask? How often should an 
employee get this kind of information?
    Ms. BOVBJERG. You want to trade off frequency with how 
burdensome it is on those providing the information. We have 
called for disclosures annually and at sign up, but you could 
do it a number of other ways.
    Ms. SCHWARTZ. Is this a plan sponsor's responsibility to 
provide this information or is it one of the investment 
advisors, who provides this information? Then who would check 
to see that it is consistent and appropriate?
    Ms. BOVBJERG. Well, it is fundamentally the plan sponsor's 
responsibility. They are the fiduciary. They are the employer, 
and so they are responsible for providing accurate information 
clearly under the law. Then it would be the Department of 
Labor's responsibility in almost any structure that we would 
set up for fee disclosure to assure that it is being done and 
that it is being done appropriately.
    Ms. SCHWARTZ. Certainly if the employer were to re-
negotiate the agreement they have, would they have to tell the 
employees about that even if it is not annual or at sign up 
because they have a contract potentially with the people who 
are the plan sponsors?
    Ms. BOVBJERG. If it is a fee that affects the employee, 
yes, I think they should.
    Ms. SCHWARTZ. So, that would be another moment when they 
might need to have to disclose that we just re-negotiated this 
contract and your fees are going up or they are changing in 
some way?
    Ms. BOVBJERG. That is right. If we are expecting people to 
make decisions with their money, they need to know what their 
money is being used for.
    Ms. SCHWARTZ. One other question, I do not know if you 
would know this or whether this would be Mr. Campbell, whether 
in fact is there a difference in terms of how much information 
is provided depending on how big the employer is? I would 
imagine that large employers have human resource departments, 
they have people who could give this information for a small 
employer who might be offering a 401(k), is that much harder 
for them to handle that fiduciary responsibility and does that 
prevent them from engaging in 401(k) plans, do you know?
    Ms. BOVBJERG. There is a variety of fairly simple 
approaches to this that I believe Mr. Reeder referred to 
earlier that are particularly helpful to small business. When 
you think about disclosure, if you keep it simple, direct and 
narrow, I think everybody should be providing that information.
    Ms. SCHWARTZ. One last question, if I may, for Mr. 
Campbell. You talked a little bit before about reviewing the 
Form 5500. Could you be any more explicit about how you could 
use that as a tool for enforcing fiduciary responsibility and 
being able to make sure, I think some of my colleagues talked 
about this, it is very difficult for individual employees to 
make some of these judgments. We want to get them information 
where they can be able to compare, but really the employer, the 
plan sponsor has enormous responsibility here to be making 
certain judgments, and the only one really looking over their 
shoulder is I guess the Department of Labor really and 
Treasury, so maybe between the two of you, I would think that 
many employees would be just trusting that somebody is watching 
and that the information they are getting from their employer 
is accurate and full disclosure. Can you speak to the specifics 
of how many times you have had to enforce or call on a plan 
sponsor who is not doing the job right? Can you give us any 
numbers on that, the number of people you had to shut down or 
change?
    Mr. CAMPBELL. Sure. With respect to our overall enforcement 
efforts, in the last fiscal year, fiscal year '06, we had about 
$1.4 billion in total monetary results and about 106 criminal 
indictments that flowed from our investigations. I had said 
earlier that we have had somewhere in the order 350 cases in 
recent years that deals more specifically with fee issues and 
all of this together helped us come to the conclusion that a 
regulatory structure needed to be improved and expanded upon 
rather than solely relying on enforcement or solely relying on 
education and outreach.
    Ms. SCHWARTZ. Well, that actually speaks to our--well, I 
know you got beat up a little bit earlier about not moving on 
regulation fast enough, and I think that certainly from my 
point of view, we need to see that move much more quickly to 
respond. That is a lot of complaints, a lot of concerns and 
with this enormous growth in this, we want to make sure that 
people have the information they need, and they are not being 
taken advantage of and have lots of savings at the end of the 
day, right?
    Mr. CAMPBELL. Well, I can assure that is our goal as well, 
and we are moving as quickly as the regulatory process allows 
us to.
    Ms. SCHWARTZ. Alright, and I think my time is up. Thank 
you, Mr. Chairman.
    Mr. MCDERMOTT. I want to thank the panel for both your 
testimony and for being patient with our schedule here in the 
House. Thank you.
    Mr. CAMPBELL. Thank you, sir.
    Mr. MCDERMOTT. Our next panel is Mr. Burgess Thomasson, who 
is President and CEO of DailyAccess Corporation; Harold 
Jackson, who is the President and CEO of Buffalo Supply of 
Lafayette, Colorado; Allison Klausner, Assistant General 
counsel for Honeywell, she is the benefits coordinator for 
Honeywell; and Lew Minsky, who is the Senior Attorney for 
Florida Power & Light; and Paul Schott Stevens, who is 
President and CEO of Investment Company Institute. As I said 
before, your testimony will be entered into the record in full, 
and we would appreciate you making your comments within the 5-
minute time limit. Mr. Thomasson?

STATEMENT OF BURGESS A. ``TOMMY'' THOMASSON, JR., PRESIDENT AND 
CEO, DAILYACCESS CORPORATION, MOBILE, ALABAMA, ON BEHALF OF THE 
AMERICAN SOCIETY OF PENSION PROFESSIONALS & ACTUARIES, AND THE 
          COUNCIL OF INDEPENDENT 401(k) RECORDKEEPERS

    Mr. THOMASSON. Thank you, Mr. Chairman, and Members of the 
Committee. My name is Tommy Thomasson, and I am the CEO of 
DailyAccess Corporation of Mobile, Alabama. My firm is the 
leading provider of retirement plan services to small 
businesses throughout the country. As an independent service 
provider, we support and actually practice full fee disclosure.
    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 (ASPPA), which has 
thousands of members nationwide.
    I am also here on behalf of the Small Business Council of 
America, which represents thousands of small businesses across 
the country.
    ASPPA and CIKR strongly support the Committee's interest in 
shining a light on 401(k) fees. We are encouraged by the two 
currently pending fee disclosure bills in the House of 
Representatives, including a bill introduced earlier this month 
by Congressman Neal and cosponsored by Congressman Larson of 
this Committee. We support both bills' uniform application of 
new disclosure rules to all plan service providers, and we 
encourage you to stay on this path.
    The 401(k) plan industry delivers investment and services 
to plan sponsors and their participants using two primary 
business models commonly known as bundled or unbundled. 
Generally, bundled providers are large financial services 
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 
non-proprietary investment alternatives. Bundled and unbundled 
providers have different business models, but for any company 
choosing a plan, the selection process is exactly the same. The 
company deals with just one vendor and one model is just as 
simple as the other.
    Plan sponsors 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 cost 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 same service.
    The retirement security of employees is completely 
dependent upon the businessowner's choice of retirement plan 
service provider. If the fees are unnecessarily high, the 
worker's retirement income will be severely impacted. It is 
imperative that the businessowner have the best information to 
make the best choice.
    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 appreciate 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 or 
participants. Without uniform disclosure, plan sponsors 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 plan sponsors to 
evaluate whether certain plan services are sensible and 
reasonably priced. In addition, if a breakdown of fees is not 
disclosed, plan sponsors will not be able to evaluate the 
reasonableness of fees as participants' account balances grow 
over time. Take a $1 million plan service 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, the fee 
doubles to $25,000, although the level of plan services and the 
cost of providing such services have 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 
is no such thing as a free 401(k). In reality, the cost 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 plan 
sponsors 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 sponsor 
disclosure would look. By breaking down plan fees into only 
three simple categories: investment management, recordkeeping 
and administration, and selling cost and advisory fees, we 
believe plan sponsors will have the information they need to 
satisfy their ERISA duties.
    The retirement system in our country is the best in the 
world and competition has fostered innovations and investment 
and service delivery. However, important changes are still 
needed to ensure that the retirement system in America remains 
robust and effective into the future. By enabling competition 
and supporting plan sponsors through uniform disclosure of fees 
and services, American workers will have a better chance of 
building retirement assets and living the American dream.
    Thank you again, and I look forward to your questions.
    [The prepared statement of Mr. Thomasson follows:]
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    Mr. MCDERMOTT. Thank you for your testimony.
    Mr. Jackson.

  STATEMENT OF HAROLD L. JACKSON, PRESIDENT AND CEO, BUFFALO 
   SUPPLY, INC., LAFAYETTE, COLORADO, ON BEHALF OF THE U.S. 
                      CHAMBER OF COMMERCE

    Mr. JACKSON. Thank you, Mr. Chairman, Ranking Member, and 
Members of the Committee for this opportunity to appear before 
you today to discuss the appropriateness of retirement plan 
fees. My name is Harold Jackson. I am President and CEO of 
Buffalo Supply, a 25 employee, woman-owned small business, 
specializing in the sale and distribution of medical equipment. 
We are located in Lafayette, Colorado.
    I am pleased to testify today on behalf of the United 
States Chamber of Commerce where I am a member of the Small 
Business Council. I am here to bring a small business 
perspective to the issues. Buffalo Supply has been in the 
medical equipment and supply business since 1983. We 
implemented our 401(k) in 2005. The plan we have in place has a 
1 year waiting period and covers full-time employees. The 
company puts in 3 percent of salary, whether or not the 
employee contributes, and for the past two years, we have 
included an additional 2 percent profit sharing contribution. 
Currently, 17 employees are enrolled in our plan and 15 of 
those make personal contributions. The company pays the 
administration fees for the plan and the participant pays the 
quarterly investment fees.
    Prior to the 401(k) plan, the company sponsored a simple 
IRA. Before upgrading to the 401(k), we spent a lot of time 
debating internally the additional administrative burdens. 
Basically, we asked ourselves whether, it was worth the benefit 
to the employees that would be offset hassle. Fortunately, our 
majority owner has a Ph.D. in taxation and chair of the School 
of Business at the University of Colorado and had a lot of 
input on this subject. We determined that even though the 
administration would be a significant burden, it would be worth 
the benefit for the employees to be able to put additional 
savings away in a 401(k).
    Upon deciding to implement the 401(k), we did extensive 
research on our options with respect to service providers. We 
looked at different providers, researched various arrangements, 
including both bundled and unbundled packages. We concluded 
that separate pricing worked better for us because of the 
relatively small asset base in our plan. Once the assets in the 
plan grow, however, the bundling option becomes more attractive 
because of the pricing changes to accommodate the greater asset 
value. From my perspective, this is much like me giving a large 
customer a better deal because he is a large customer.
    Given our experience, I want to particularly stress the 
importance of Congress not mandating one type of service 
arrangement over another. Although we currently use unbundled 
services, we anticipate growth in our company and growth in our 
plan and can envision a time when bundled services would be a 
better option for us. As we have made our decisions, we have 
been doing so looking at both bundled and unbundled 
arrangements. Our decision was based on the needs of our 
company at that point in time, and those needs change. I would 
like for our company to be able to have as many choices as 
possible in order to find an arrangement that is a best fit. 
That will not happen if Congress mandates the choice for us.
    Finally, I would ask that Congress proceed cautiously in 
its decision to implement additional notice requirements. We, 
of course, want our plan participants to have information that 
is helpful in making their investment decisions. However, 
notices that include unnecessary information and are overly 
burdensome in volume will only increase administrative burden 
and cost. Although the administration of the notices would be 
handled by our service provider, we have been told that if 
Congress implements additional notice requirements, the cost of 
administering the plan will increase. An increase in cost that 
does not help participant investment seems contrary to the goal 
of plan fee disclosure.
    As a participant of a small business plan, I appreciate the 
concerns and issues being addressed here today, and I hope you 
find my comments useful. I look forward to answering any 
questions.
    [The prepared statement of Mr. Jackson follows:]
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    Mr. MCDERMOTT. Thank you for your testimony.
    Ms. KLAUSNER.

 STATEMENT OF ALLISON R. KLAUSNER, ASSISTANT GENERAL COUNSEL, 
   BENEFITS, HONEYWELL INTERNATIONAL, INC., MORRISTOWN, NEW 
       JERSEY, ON BEHALF OF THE AMERICAN BENEFITS COUNCIL

    Ms. KLAUSNER. Thank you. Good afternoon, Chairman and 
Members of the Committee. My name is Allison Klausner, and I am 
Assistant General Counsel of Benefits in the New Jersey office 
of Honeywell International, Inc. We are a member of the 
American Benefits Council, on whose behalf I am testing today.
    I appreciate the opportunity to present testimony with 
respect to 401(k) plan fees. Like you, Honeywell and the 
Council want a voluntary, employer-based 401(k) system to 
successfully provide workers with a reasonable opportunity to 
save for retirement. A successful 401(k) system requires that 
the cost of operating the system not outweigh the benefits. 
This in turn requires plan sponsors and service providers and 
other fiduciaries to engage in meaningful dialog. This will 
ensure, one, that plan sponsors implement services appropriate 
to maintain and operate plans; and, two, that the cost of such 
services is reasonable and appropriate. Finally, this dialog 
should enable plan sponsors to disclose to participants, 
appropriate information regarding the key elements of the plan, 
the services supporting the plan, and the cost of such 
services.
    At Honeywell, we have obtained the fee information from our 
401(k) service providers, and we are confident that the process 
enables us to provide our participants with a plan that 
successfully supports their retirement savings goals. We do 
believe, however, that the dialog between plan service 
providers and plan sponsors generally can be improved.
    There are three key points that I would like to note in my 
remaining time: First, Honeywell, like the other members of the 
Council, does not support legislative or other mandates that 
would increase the cost born by participants and would deter 
employers from offering 401(k) plans. We strongly believe that 
the fee disclosure to 401(k) participants should supplement and 
complement financial education regarding the benefits of 
savings within the parameters of a 401(k) plan. We encourage 
fee disclosure to be a part of financial education, as that 
coupling will ensure that plan participants consider fees 
together with other important investment considerations, such 
as diversification among asset classes, historical investment 
performance, and risk and return factors. The fee disclosure 
should not leave participants to mistakenly believe that 
choosing the lowest cost investment vehicle will result in the 
greatest savings.
    The information disclosed to participants must not be too 
complicated, too burdensome or too costly. If the information 
provided is overly detailed, the information will not be 
useful. The fee disclosure to participants should be designed 
to encourage participants to consider fees when making all 
their 401(k) decisions, including participation, rates of 
contributions, loans, withdrawals, and investments. The bottom 
line is that neither Congress nor the Department of Labor 
should require 401(k) plans to operate in a system that places 
a disproportionate focus on plan fees.
    Second, plan sponsors know their employee population and 
know what plan designs and features are important to encourage 
employees to maximize retirement savings within the employer's 
401(k) plan. Although plan features may be viewed as 
unnecessary bells and whistles, the decision to offer a robust 
401(k) plan may be what is best for the employer's population. 
Robust 401(k) plans require services to support them and these 
services will add to the total fees paid to run the plans. But 
if the 401(k) plan features are stripped down, employees may 
not participate at all. Thus, a focus on minimizing fees alone, 
without consideration of the overall 401(k) plan design, may 
result in fewer 401(k) plan participants and fewer retirement 
dollars saved.
    Third, plan sponsors, like Honeywell, diligently consider 
the capabilities and qualities of vendors engaged to support 
our 401(k) plan. Not all 401(k) service providers could support 
our 401(k) plan, which has a significant amount of complexity 
due to Honeywell's high volume of corporate acquisitions, 
mergers and divestitures. We cannot simply select a 
recordkeeper strictly on the basis of who bids the lowest fee. 
We need to engage a recordkeeper who can quickly and correctly 
implement necessary plan changes due in part to corporate 
activity. Honeywell must determine which vendors are capable of 
providing quality support for our 401(k) system and fees are 
only one component of that determination.
    In conclusion, Honeywell and the Council are pleased to 
support enhanced disclosure of plan fees, but undue focus on 
fees relative to other factors may simply result in additional 
cost being born by plan participants and fewer retirement 
savings in the employer-sponsored voluntary 401(k) system.
    I will be pleased to answer any questions that you may 
have.
    [The prepared statement of Ms. Klausner follows:]
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    Mr. MCDERMOTT. Thank you, Ms. Klausner.
    Mr. MINSKY.

 STATEMENT OF LEW I. MINSKY, SENIOR ATTORNEY, FLORIDA POWER & 
  LIGHT COMPANY, JUNO BEACH, FLORIDA, ON BEHALF OF THE ERISA 
                       INDUSTRY COMMITTEE

    Mr. MINSKY. Thank you for the opportunity to discuss this 
complex and important topic that directly affects the 
retirement security of millions of Americans who participate in 
defined contribution retirement plans. Let me begin by making 
three key points: First, major employers urge Congress to defer 
legislative action until after the DOL completes its current 
fee disclosure projects and the results of these efforts can be 
evaluated.
    Second, major employers support efficient and effective fee 
disclosure and take their responsibilities for ensuring the 
reasonableness of plan fees very seriously. Our efforts have 
resulted in widespread access to the financial markets at fees 
typically lower than otherwise available.
    Third, major employers are concerned that missteps on fee 
disclosure could inadvertently damage the defined contribution 
system and threaten the retirement security of millions of 
American workers. We strongly urge Congress to defer 
legislative action until after the DOL completes its regulatory 
projects, which are already well underway. Adding new 
legislative requirements at this point would likely result in 
the substantial delay before enhanced disclosures become 
available to plan sponsors and participants.
    We believe that the flexibility inherent in the regulatory 
process makes it a more appropriate avenue for adopting new 
disclosure requirements. Adding rigid fee disclosure 
requirements to ERISA would inhibit the ability of plan 
sponsors and service providers to work together and create new 
investment options and administrative solutions that ultimately 
improve retirement security. That said, we want to be clear 
that we strongly support effective and efficient fee 
disclosure. ERIC, PSCA, the Chamber, NAM, and eight other 
organizations worked together to develop a comprehensive set of 
principles that should be embodied in any new fee disclosure 
requirements. We urge that any new legislation be measured 
against these basic principles, which are contained in our 
written testimony.
    The cost of any disclosure requirements must be justified 
by their benefits. The disclosure requirements currently being 
proposed would dramatically increase the administrative cost 
plan participants pay while overwhelming them with information 
that is of little practical value to them.
    With all of the current discussion surrounding the need for 
new disclosure requirements, it is important to remember that 
employers and plan fiduciaries are already playing an important 
role in controlling fees paid by 401(k) plan participants. The 
existing structure of ERISA requires that plan fiduciaries 
ensure that plan fees are reasonable. Major employers take this 
responsibility very seriously. We believe that a new set of 
rigid rules that govern the fiduciary process will ultimately 
lead to less appropriate decisions being made. In meeting their 
duty to ensure that fees are reasonable, plan fiduciaries take 
into account the unique needs of the participants in their 
plan. In considering the range of services and fees that make 
sense for their plan participants, prudent fiduciaries may come 
to different conclusions about what plan investments, services 
and service providers are appropriate. For example, employers 
with a more financially sophisticated workforce may choose a 
largely self-directed program, while employers with employees 
more apt to leave their investments unattended may select a 
program which focuses more on life cycle funds and managed 
accounts. The cost of these programs will vary significantly, 
but as long as the fees paid are reasonable for the services 
provided, plan sponsors should have the flexibility to create 
401(k) plans that work for their workforces.
    We are extremely concerned about the misuse of fee 
disclosure requirements as the basis for litigation fishing 
expeditions. To date, more than a dozen lawsuits have been 
filed against employers with vague claims of fiduciary breaches 
related to plan fee disclosure. These often groundless 
allegations do great damage to the 401(k) system by diverting 
funds from employer contributions to increased legal and 
administrative expenses.
    In conclusion, we strongly believe that the regulatory 
process is the appropriate place to address 401(k) fee 
disclosure. We encourage the Committee to allow DOL to continue 
its work, evaluate the results and determine if new legislation 
is needed. It would be a tragic irony if legislation intended 
to improve the ability of plan participants to make good 
investment decisions ultimately leads to higher costs and lower 
participation in the retirement system.
    Thank you for the opportunity to testify on this important 
topic. I look forward to your questions.
    [The prepared statement of Mr. Minsky follows:]
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    Mr. MCDERMOTT. Thank you very much for your testimony.
    Mr. Stevens.

STATEMENT OF PAUL SCHOTT STEVENS, PRESIDENT AND CEO, INVESTMENT 
                       COMPANY INSTITUTE

    Mr. STEVENS. Thank you, Mr. Chairman and Members of the 
Committee. I am pleased to take part in today's hearing on 
behalf of the Investment Company Institute (ICI), the national 
association of U.S. mutual funds. Mutual funds have helped 
foster the growth of the defined contribution retirement 
system. They manage more than half of the $4.1 trillion that 
Americans have invested in 401(k) and other DC plans. For more 
than two decades, funds have sought to improve the services and 
investment options available to retirement savers, and ICI has 
advocated a regulatory framework that best serves America's 
workers and employers.
    Today, I would like to cover three topics: First, I want to 
emphasize, based on our research and that of others, that the 
401(k) system shows every sign of success and it will work even 
better as automatic enrollment and other recent reforms take 
hold. Secondly, I will discuss how we need to further improve 
the 401(k) system by addressing gaps in current disclosure. 
Finally, I will discuss the servicing of 401(k) plans and urge 
that Congress resist calls to dictate one business model for 
401(k) service providers over another.
    With respect to the success of the 401(k), one must bear in 
mind that this system is only 26 years old. No worker in 
America has enjoyed a full career with 401(k) plans. But the 
system does warrant the confidence that American workers and 
businesses are placing in it.
    Our organization is a leading center of research on the 
401(k) system. With the Employee Benefit Research Institute, we 
have developed the Nation's largest database on 401(k) 
accounts. We have used this database to analyze the savings 
power of 401(k) plans, how workers use their accounts and how 
they allocate their investments. We have also used it to 
project how today's young workers will fare when they retire 25 
or 30 years hence. Our projections, based on typical career 
paths and worker behavior, indicate that participants at all 
income levels can expect 401(k) savings to replace a 
substantial portion of their pre-retirement income.
    Research indicates that 401(k) plans are working. Can they 
work even better? Yes. Better disclosure practices would help. 
It is high time we close gaps in disclosure rules and provide 
clear information to workers and employers.
    Research on investor behavior suggests that workers need a 
clear, concise summary of five items for each of the investment 
options available under a 401(k) plan. These items include the 
investment's objectives, its historical performance, its risks, 
and information about the investment manager, and fees. Of all 
the investment options available in 401(k) plans today, mutual 
funds provide the most complete disclosure, including all of 
those items I just mentioned and much more. But required 
disclosure of this kind should not be limited to mutual funds. 
It should embrace, but does not today, every investment option 
available to workers in all defined contribution plans.
    Now, fees are important, and they claim much of the 
attention in today's debate. It is a further indication of the 
success of the 401(k) system that workers investing in mutual 
funds have concentrated their assets in lower-cost funds. On 
average, 401(k) participants paid less than three quarters of 1 
percent in mutual fund expenses in 2006. But fees are not the 
whole story. That is why a more complete approach to disclosure 
is vitally important. The low-cost option in the Enron 401(k) 
plan undoubtedly was Enron's own stock. It also turned out to 
be the most expensive. Focusing on fees alone could lead 
workers to make decisions that would hurt, not help, their 
retirement savings.
    Money market mutual funds and stable value funds certainly 
have a place in one's portfolio. They are also low-cost 
options, but not ones best suited to long-term investment 
horizon.
    Employers who sponsor plans also need effective disclosure. 
They should be informed of all payments that a service provider 
receives, whether directly from plan assets or indirectly from 
third parties. This will assist them, as fiduciaries, to judge 
the reasonableness of total fees and identify any potential 
conflicts of interest.
    Finally, with respect to the servicing of 401(k) plans, a 
highly competitive market has given rise to different business 
models. In some plans, the employer itself, or a consultant on 
its behalf, assembles the needed components: recordkeeping, 
investment management, participant services, compliance, and so 
forth. In other plans, the employer engages a full service 
provider to supply all these services. A recent survey by 
Deloitte Consulting found that three quarters of plan sponsors 
used the full-service or bundled approach. This approach has 
many advantages: the employer incurs a lower cost of 
contracting, gains easy access to additional services, and can 
hold one party accountable for the quality of the service.
    Now, some 401(k) recordkeepers, who bundle a part, but not 
all of the services required by a plan, want Congress to 
legislate their business model for the entire industry. They 
are seeking a law to require full-service providers to disclose 
separate prices for recordkeeping and investment management, 
even if both services are offered for a single fee. This is 
akin to a travel agent that only books airfare lobbying you to 
require its package tour competitors to break out hotel, 
transfers and other charges separately. We join numerous other 
organizations concerned about the success of the 401(k) system 
in urging you to reject this special pleading. The ICI looks 
forward to assisting the Committee and the Congress on these 
and other issues as you work to improve the Nation's retirement 
system. Thank you.
    [The prepared statement of Mr. Stevens follows:]
Statement of Paul Schott Stevens, President and CEO, Investment Company 
                               Institute
    My name is Paul Schott Stevens. I am President and CEO of the 
Investment Company Institute, the national association of U.S. 
investment companies,\1\ which manage about half of 401(k) and IRA 
assets. The Institute has long called for effective disclosure to 
participants in individual account plans and the employers that sponsor 
those plans. I want today to reiterate the mutual fund industry's 
support for rules giving participants and employers the information 
they need for the decisions they are required to make. We are pleased 
to testify before the Ways and Means Committee as it considers these 
important matters.
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    \1\ ICI 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 
ICI have total assets of approximately $11.339 trillion (representing 
98 percent of all assets of U.S. mutual funds).
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    My testimony today will be as follows. First I will address how 
research looking at 401(k)s from various angles demonstrates the 
success and bright future of the 401(k) system. I will show that 
confidence in the 401(k) system is warranted and that under current 
regulations employers \2\ and participants are able to make reasonable 
decisions in the areas in which they are called upon to act. I will 
then discuss how we can make the 401(k) system even better by 
addressing the gaps in current 401(k) disclosure and I will recommend 
principles that should guide reform. These principles, briefly stated, 
are that disclosure to participants should be simple, straightforward 
and focused on the key information, including but not limited to fees 
and expenses. This disclosure should apply to all investment products 
offered in 401(k) plans in a way that allows comparability. Finally, 
disclosure by service providers to employers should focus on the 
information employers need to fulfill their obligations as plan 
fiduciaries. Congress should not mandate rules to favor one business 
model over another.
---------------------------------------------------------------------------
    \2\ For convenience, we refer to ``employer'' to mean the employer 
acting in its role as fiduciary to the plan.
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Success of the 401(k) System
Growth in Retirement Savings
    Any discussion of the 401(k) system should begin by recognizing how 
successful 401(k) plans have been in helping Americans save for 
retirement. Assets in the U.S. retirement system--all the tax-
advantaged investments earmarked for retirement that supplement Social 
Security--have steadily increased as a share of household financial 
assets, from 12% of household financial assets when ERISA was passed in 
1974 to nearly 40% at year-end 2006.\3\ 401(k) plans, which have been 
around only 26 years, numbered 30,000 in 1985 and have grown to almost 
half a million plans (450,000) in 2006.\4\ In 1985, there were about 10 
million active participants compared with 50 million active 
participants now. 401(k) plans, which are now the predominant defined 
contribution plan, held $2.7 trillion in assets in 2006, which 
surpasses the assets held in all private defined benefit plans. The 
$2.7 trillion held in 401(k) plans does not count 401(k) assets that 
have been rolled into IRAs. In fact, estimates suggest about half of 
the $4.2 trillion in IRAs in 2006 came from 401(k) and other employer-
sponsored retirement plans.
---------------------------------------------------------------------------
    \3\ See 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\ U.S. Department of Labor, Employee Benefits Security 
Administration, Private Pension Plan Bulletin Historical Tables (March 
2007); Cerulli Associates, ``Retirement Markets, 2006,'' Cerulli 
Quantitative Update (2006).
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Critical Role of Mutual Funds
    Mutual funds play an important role in 401(k) and similar defined 
contribution plans. At year-end 2006, slightly more than half of the 
$4.1 trillion held in all defined contribution plans--which include 
401(k), 403(b) and 457 plans--were invested in mutual funds.
Defined Contribution Plan Assets and Amounts Held in Mutual Funds
    Billions of dollars, year-end, 1994-2006

    [GRAPHIC] [TIFF OMITTED] 49691A.086
    

    [GRAPHIC] [TIFF OMITTED] 49691A.087
    

    e=estimated
    Other defined contribution plans include Keoghs and other defined 
contribution plans (profit-sharing, thrift-savings, stock bonus, and 
money purchase) without 401(k) features.
    Note: Components may not add to the total because of rounding.
    Sources: Investment Company Institute, Federal Reserve Board, 
National Association of Government Defined Contribution Administrators, 
and American Council of Life Insurers

    401(k) Participants Asset Allocation Varies with AgePercent of 
assets, year-end 2006
    Overall, mutual funds represent about 55% of the assets in 401(k) 
plans, 53% of 403(b) plan assets, and 45% of 457 plan assets. These 
percentages have grown significantly over time relative to most other 
investment products. Both retirement savers and employers have come to 
rely on mutual funds because of the easy access to professional 
management, diversification, transparency, and liquidity.\5\ The 
remaining assets in defined contribution plans are held primarily in 
pooled investment vehicles that are similar in many respects to mutual 
funds, including insurance company separate accounts, collective 
trusts, and stable value funds. Separately managed accounts, guaranteed 
investment contracts, and employer stock also are often available in 
401(k) plans.
---------------------------------------------------------------------------
    \5\ For example, in 1994, only about 27% of 401(k) assets were 
invested in mutual funds. See Brady and Holden, supra note 3.
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Ability of the 401(k) System to Provide Americans' Retirement Security
    Some observers of the 401(k) system question the capacity of 401(k) 
plans to provide adequate retirement security. Some also question 
whether employers, acting as plan fiduciaries, obtain sufficient 
information to fulfill their obligations to keep plan costs reasonable 
and whether plan participants are equipped to make reasonable 
investment decisions for their accounts. Research by the Institute and 
others shows that these fears are largely unfounded.
    It is commonly reported that the median 401(k) account balance is 
about $19,000.\6\ Unfortunately, it is not commonly understood that the 
median account is not a meaningful number for assessing whether 401(k) 
savers will be prepared for retirement. By definition, the median 
account includes the newest and youngest participants (who are nowhere 
near retirement and whose accounts are understandably quite small) and 
those whose 401(k) accounts supplement a defined benefit plan. It does 
not account for employees who have 401(k) balances with both current 
and previous employers. Similarly, the median account balance does not 
reflect the $4.2 trillion held in IRAs. Finally, it is important to 
remember that the 401(k) system is still new enough that no one has had 
a full career with a 401(k) as the primary retirement savings 
vehicle.\7\
---------------------------------------------------------------------------
    \6\ 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.
    \7\ Many more individuals in today's workforce will have career-
long exposure to 401(k) plans. Academic research shows a trend towards 
greater participation, especially among younger age groups. The 
participant rate for workers between 25 and 29 increased from about 50% 
in 1984 to close to 85% in 2003. See Poterba, Venti, and Wise, New 
Estimates of the Future Path of 401(k) Assets, NBER Working Paper, No. 
13083 (May 2007).
---------------------------------------------------------------------------
    The Institute has undertaken extensive research on 401(k) plans. In 
a collaborative research effort, ICI and the Employee Benefit Research 
Institute (EBRI) created the largest and most representative repository 
of 401(k) account data. At year-end 2006, our database includes 
information on 20 million participants in almost 54,000 employer-
sponsored 401(k) plans, holding $1.2 trillion in assets.\8\ The EBRI/
ICI database, along with the extensive data we collect and analyze from 
mutual funds, allows us to examine the 401(k) system from many angles.
---------------------------------------------------------------------------
    \8\ See Holden, VanDerhei, Alonso and Copeland, supra note 6.
---------------------------------------------------------------------------
    The 401(k) system warrants the confidence that Congress, employers, 
and American workers have placed in it. Even in today's workplace, 
where no one has had a 401(k) plan for a full career, the 401(k) system 
has demonstrated its savings power:

      401(k) account balances rise considerably with 
participant age and tenure. For example, the average account balance 
for participants in their 50s with between 20 to 30 years of tenure is 
$174,272. Almost 50% of participants in this group have an account 
balance of greater than $100,000.
      Consistent participation builds and strengthens account 
balances and allows participants to weather bear markets. When we 
examined consistent participants in the EBRI/ICI database--those who 
held an account balance at least during the seven-year period from 1999 
to 2006 (which included one of the worst bear markets for stocks since 
the Great Depression):

        The average 401(k) account balance increased at an 
annual growth rate of 8.7% over the period, to $121,202 at year-end 
2006.
        The median 401(k) account balance increased at an 
annual growth rate of 15.1% over the period, to $66,650 at year-end 
2006.

      Participants also generally use their 401(k) accounts for 
their intended purpose--providing income in retirement.\9\ In 2000, ICI 
surveyed recent retirees about their distribution decision from a 
defined contribution plan.\10\ One-quarter deferred some or all of the 
distribution, leaving a balance in the plan. About one-quarter received 
an annuity, and about 10 percent chose installment payments. About half 
of the recent retirees took a lump-sum distribution of some or all of 
their balance.\11\ Of those that took a lump-sum distribution, 92 
percent of respondents said they reinvested all or some of the 
proceeds, in most cases in an IRA. Only 8 percent spent all of the 
proceeds. Those who spent all of the proceeds tended to have small 
distributions. In most instances, the proceeds were used for practical 
purposes, such as a primary residence, debt repayment, healthcare, or 
home repair.
---------------------------------------------------------------------------
    \9\ Participants' loan activity is modest. In 2006, only 18 percent 
of 401(k) participants eligible for loans had taken one. On average the 
loans amounted to only 12 percent of the remaining account balance. See 
Holden, VanDerhei, Alonso and Copeland, supra note 6.
    \10\ Investment Company Institute, Financial Decisions at 
Retirement, ICI Fundamentals, vol. 9, no. 6 (November 2000), available 
at http://www.ici.org/pdf/fm-v9n6.pdf.
    \11\ These percentages add to more than 100 percent because some 
respondents with multiple options chose to receive a partial lump-sum 
distribution with either a reduced annuity or reduced installment 
payments, or chose to defer receiving part of the proceeds. See 
Investment Company Institute, supra note 10.

    We also have examined in collaboration with EBRI whether a full 
career with 401(k) plans can produce adequate income replacement rates 
at retirement.\12\ The EBRI/ICI 401(k) Accumulation Projection Model 
examines how 401(k) accumulations might contribute to future retirees' 
income based on decisions workers make throughout their careers. The 
model looks at participants of varying income levels, modeling future 
accumulations under a range of market outcomes and using typical (and 
often imperfect) individual behaviors. For example, among individuals 
who were in their late twenties in 2000, after a full career with 
401(k) plans, the median individual in the lowest income quartile is 
projected to replace half of his or her income using 401(k) 
accumulations. Social Security replaces the other half for the median 
person in this quartile. The model also demonstrates that when workers 
move into jobs that do not offer a 401(k) plan, median replacement 
rates fall significantly--by about half for workers in the lowest 
income quartile. In short, the worst thing that can happen to a worker 
is to be in a job that does not offer retirement savings plan coverage.
---------------------------------------------------------------------------
    \12\ 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.
---------------------------------------------------------------------------
Decision Making by Participants and Employers
    Our research suggests that under the current 401(k) regulatory 
system participants and employers have been able to make reasonable 
decisions in the areas in which they are called upon to act. Our 
research with EBRI has demonstrated that participants generally make 
sensible choices in investing their accounts. For example, older 
participants have a lower concentration in equities compared with 
participants in their twenties and a greater concentration in fixed-
income securities.
401(k) Participants Asset Allocation Varies with Age
    Percent of assets, year-end 2006

    [GRAPHIC] [TIFF OMITTED] 49691A.088
    

    *Includes mutual funds and other pooled investments.
    Source: Tabulations from EBRI/ICI Participant-Directed Retirement 
Plan Data Collection Project
    Research also suggests that both employers and participants are 
cost conscious when selecting mutual funds for their 401(k) plans. The 
Institute has combined our extensive research on trends in mutual fund 
fees with our tracking of 401(k) plan holdings of mutual funds.\13\ Our 
research studies mutual fund fees in 401(k) plans because comparable 
information for other products offered in 401(k) plans is not readily 
available.
---------------------------------------------------------------------------
    \13\ 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.
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401(k) Mutual Fund Investors Tend to Pay Lower-Than-Average Expenses
    Percent of assets, 1996-2006

    [GRAPHIC] [TIFF OMITTED] 49691A.089
    

    \1\ The industry average expense ratio is measured as an asset-
weighted average.
    \2\ The 401(k) average expense ratio is measured as a 401(k) asset-
weighted average.
    Note: Figures exclude mutual funds available as investment choices 
in variable annuities and tax-exempt mutual funds.
    Sources: Investment Company Institute; Lipper; Value Line 
Publishing, Inc.; CDA/Wiesenberger Investment Companies Service; CRSP 
University of Chicago, used with permission, all rights reserved 
(312.263.6400/www.crsp.com); Primary datasource; and Strategic Insight 
Simfund

    We found that 401(k) savers tend to concentrate their assets in 
lower-cost funds. In 2006, the average stock mutual fund had an expense 
ratio of 1.50%. This is the simple average that does not reflect 
investment concentration: 77% of stock mutual fund assets in 401(k) 
plans were invested in funds with a total expense ratio of less than 
1.00% at year-end 2006. On an asset-weighted basis, the average expense 
ratio incurred by all mutual fund investors in stock mutual funds was 
0.88%. And the asset-weighted average expense ratio for 401(k) stock 
mutual fund investors was even lower: 0.74%.
    Similar results can be seen in each broad category of stock fund, 
as well as in bond funds. Overall, the asset-weighted average expense 
ratio across all mutual funds in 401(k) plans was 0.71% in 2006.\14\
---------------------------------------------------------------------------
    \14\ These expense ratios include any payments a fund makes to 
recordkeepers to defray the cost of 401(k) plan administration.
---------------------------------------------------------------------------
    There are several factors that contribute to the relatively low 
average fund expense ratios incurred by 401(k) plan participants.\15\ 
Employers, acting as plan fiduciaries, play a vital role in selecting 
and regularly evaluating the plan's investment line-up to ensure that 
each option's fees and expenses provide good value. Easy access to 
comparable and transparent mutual fund fee information helps employers 
and employees in selecting investments for their accounts.
---------------------------------------------------------------------------
    \15\ 401(k) investors in mutual funds also tend to hold funds with 
below-average portfolio turnover, which also helps keep down the costs 
of investing in mutual funds through 401(k) plans. See Holden and 
Hadley, supra note 13.
---------------------------------------------------------------------------
Improving Disclosure
    The employer-based 401(k) system has been a great success and has a 
bright future, but we also agree that it is time to ask whether we can 
build on the system to make it even better. Congress took a big step in 
the Pension Protection Act of 2006 by codifying into law the automatic, 
or autopilot, 401(k) plan, with appropriate default investments 
designed for long-term saving.\16\ In the Institute's view, the 401(k) 
system could be further strengthened with appropriate disclosure 
reform.
---------------------------------------------------------------------------
    \16\ Academic research demonstrates the power of automatic 
enrollment to increase participation rates, particularly among lower 
income workers. See Choi, James J., David Laibson, Brigitte Madrian, 
and Andrew Metrick, For Better or For Worse: Default Effects and 401(k) 
Savings Behavior, NBER Working Paper, No. 8651 (December 2001); and 
Madrian, Brigitte C., and Dennis F. Shea. The Power of Suggestion: 
Inertia in 401(k) Participation and Savings Behavior, NBER Working 
Paper, No. 7682 (May 2000).
---------------------------------------------------------------------------
    Meaningful and effective disclosure to 401(k) participants and 
employers remains an Institute priority. In 1976--at the very dawn of 
the ERISA era--the Institute advocated ``complete, up-to-date 
information about plan investment options'' for all participants in 
self-directed plans.\17\ We also have consistently supported disclosure 
by service providers to employers about service and fee 
arrangements.\18\ In January 2007, the Institute's Board of Governors 
adopted a Policy Statement on Retirement Plan Disclosure that reaffirms 
and chronicles the Institute's long record in support of better 
disclosure.\19\ The Policy Statement calls upon the Department of Labor 
to require clear disclosure to employers that highlights the most 
pertinent information, including total plan costs, and to require that 
participants in all self-directed plans receive simple, straightforward 
explanations about the key information on each of the investment 
options available to them, including information on fees and expenses.
---------------------------------------------------------------------------
    \17\ Letter from Matthew P. Fink, Associate Counsel, Investment 
Company Institute, to Morton Klevan, Acting Counsel, Plan Benefit 
Security Division, Department of Labor (June 21, 1976).
    \18\ See Statement of Investment Company Institute on Disclosure to 
Plan Sponsors and Participants Before the ERISA Advisory Council 
Working Group on Disclosure, September 21, 2004, available at http://
www.ici.org/statements/tmny/04_dol_krentzman_tmny.html.
    \19\ See http://www.ici.org/pdf/ppr_07_ret_disclosure_stmt.pdf.
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Current Gaps in Disclosure Rules
    Fundamentally, there are two gaps in the current 401(k) disclosure 
rules. First, the Department of Labor's rules produce unequal 
disclosure to participants. The Department of Labor's rules cover only 
those plans relying on an ERISA safe harbor (section 404(c)); no rule 
requires that participants in other self-directed plans receive 
investment-related information. In plans operating under the safe 
harbor, the information participants receive depends on the investment 
product. Participants receive full information on products registered 
under the Securities Act of 1933, such as mutual funds, because the 
Department requires that participants receive the full SEC-mandated 
prospectus. For other investment products, such as bank collective 
trusts and separately managed accounts, key information, including 
annual operating expenses and historical performance, is required to be 
provided only upon request and only if that information has been 
provided to the plan. This disclosure gap is particularly important 
because many 401(k) plans use pooled products that look and operate 
much like mutual funds, but which do not have disclosure requirements 
comparable to SEC requirements. The ERISA Advisory Council recently 
found that while mutual funds are the ``easiest investment to 
understand,'' they have the ``heaviest burden'' when it comes to 
disclosure and ``less regulated and harder to understand investments 
might not even provide information regarding fees and performance.'' 
\20\
---------------------------------------------------------------------------
    \20\ Report of the 2006 ERISA Advisory Council's Working Group on 
Prudent Investment Process, available at http://www.dol.gov/ebsa/
publications/AC_1106A_report.html.
---------------------------------------------------------------------------
    The second gap in current rules is that there is no specific 
requirement on service providers to disclose to an employer information 
on services and fees that allows the employer to determine the 
arrangement is reasonable and provides reasonable compensation. The 
Institute supports disclosure of payments a service provider receives 
directly from plan assets and indirectly from third parties in 
connection with providing services to the plan. Information on direct 
and indirect compensation allows employers to understand the total 
compensation a service provider receives under the arrangement. It also 
brings to light any potential conflicts of interest associated with 
receiving payments from another party, for example, when a plan 
consultant receives compensation from a plan recordkeeper.
Efforts Underway to Improve Disclosure Rules
    The Department of Labor is taking steps to enhance 401(k) plan 
disclosure. As Assistant Secretary Bradford Campbell testified before 
the House Education and Labor Committee and the Senate Aging Committee, 
the Department of Labor has a three-pronged regulatory agenda to 
improve fee disclosures to participants, plan fiduciaries, and the 
government.\21\ These projects, in various stages of regulatory 
development, are intended to close the disclosure gaps described above. 
In addition, both Chairman George Miller and Subcommittee Chairman 
Richard Neal have introduced legislation (H.R. 3185 and H.R. 3765, 
respectively) addressing disclosure in the 401(k) and defined 
contribution market.
---------------------------------------------------------------------------
    \21\ See Written Testimony of Assistant Secretary of Labor Before 
the Committee on Education and Labor (October 4, 2007), available at 
http://edworkforce.house.gov/testimony/
100407BradfordCampbellTestimony.pdf. See also Written Testimony of 
Assistant Secretary of Labor Before the Special Committee on Aging 
(October 24, 2007), available at http://www.dol.gov/ebsa/newsroom/
ty102407.html.
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Principles for Disclosure Reform
    Initiatives to strengthen the 401(k) disclosure regime should focus 
on the decisions that plan participants and employers must make and the 
information they need to make those decisions. The purposes behind fee 
disclosure to employers 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, or focusing on fees 
to the neglect of other important information, such as investment 
objective, historical performance, and risks. On the other hand, 
employers, as fiduciaries, must consider additional factors in hiring 
and supervising plan service providers and selecting plan investment 
options. Information to employers should be designed to meet their 
needs effectively. Finally, disclosure reform should be carefully 
considered so as to avoid imposing unnecessary costs, which often are 
borne by participants.
1. Participants in all self-directed plans need simple, straightforward 
        disclosure focusing on key information, including information 
        on fees and expenses.
    Our extensive research into the information that mutual fund 
investors prefer and use in making investment decisions tells us that 
shareholders do not consult fund prospectuses or annual reports, which 
they find too long and difficult to understand. This is especially true 
among shareholders with less education: 75% of mutual fund shareholders 
with less than a four-year college degree say that a mutual fund 
prospectus is very or somewhat difficult to understand.\22\ 
Overwhelmingly (80%), shareholders prefer a concise summary rather than 
a detailed description. In making a fund purchase, mutual fund 
shareholders take into account certain key factors, including the 
historical performance (69% of investors considered this), fund risk 
(61%), types of securities held by the fund (57%), and the fees and 
expenses (74%).
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    \22\ Investment Company Institute, Understanding Investor 
Preferences for Mutual Fund Information (2006), available at http://
www.ici.org/pdf/rpt_06_inv_prefs_full.pdf. The Institute surveyed 737 
randomly selected fund owners who had purchased shares in stock, bond, 
or hybrid mutual funds outside workplace retirement plans in the 
preceding five years.
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    Based on this research, we believe that 401(k) participants should 
receive the following key pieces of information for each investment 
product available 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
      Identity of the investment adviser that manages the 
product's investments

    Participants also need information about the plan fees that they 
pay, to the extent those fees are not included in the disclosed fees of 
the investment products. Finally, participants should be informed of 
any transaction fees imposed at the time of purchase (brokerage or 
insurance commissions, sales charges or front loads) or at the time of 
sale or redemption (redemption fees, deferred sales loads, surrender 
fees, market value adjustment charges). Disclosure reform should also 
leverage cost-effective new technologies like the Internet.
    Fees and expenses are only one piece of necessary information and 
must be disclosed in the context of other key information. The lowest 
fee option in many plans is the option with relatively low returns 
(such as the money market fund) or relatively higher risk (such as the 
employer stock) but it is not appropriate for most employees to invest 
solely in these options. For example, any disclosure of fees associated 
with employer stock also should describe the risks of failing to 
diversify and concentrating retirement assets in shares of a single 
company. In short, it is not enough to tell participants that fees are 
only one factor in making prudent investment decisions--they must be 
shown this by presenting fees in context.
    Streamlining disclosure to mutual fund investors to focus on key 
information is underway at the Securities and Exchange Commission.\23\ 
The SEC expects to propose this fall a new summary mutual fund 
prospectus that will focus on the information investors need to know, 
in a form they will use. With half of defined contribution plan assets 
in mutual funds, any changes to the disclosure system for plan 
participants should be consistent with the summary prospectus that the 
SEC develops for mutual funds; otherwise, 401(k) investors will bear 
the costs of mutual funds operating under different disclosure regimes. 
Both the SEC and the Department of Labor have indicated that the new 
summary fund prospectus, the work of years of study by regulators and 
the investment management community, could serve as a model for 
disclosure of other products.
---------------------------------------------------------------------------
    \23\ See Statement of 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_(6-26-
07).pdf. The SEC's efforts are consistent with efforts to streamline 
mutual fund disclosure globally; both Canada and the European Union 
have proposed to amend their relevant disclosure documents to focus on 
key information. See Joint Forum of Financial Market Regulators, Point 
of Sale Disclosure for Mutual Funds and Segregated Funds (Proposed 
Framework 81-406, June 2007) (Canada); Committee of European Securities 
Regulators, Consultation Paper on Content and Form of Key Investor 
Information Disclosures for UCITS (CESR/07-669, October 2007) (European 
Union).
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2. Disclosure should apply to all investment products regardless of 
        type in a way that allows comparability.
    Any disclosure reform must ensure that participants receive basic 
information that allows them to evaluate and compare all investment 
options available under the plan. Disclosure of the key information we 
recommend is appropriate for mutual funds, insurance separate accounts, 
bank collective trusts, and separately managed accounts. In discussing 
fees and expenses, for example, the disclosure for any of these options 
should disclose the operating expenses of the fund or account. In 
discussing the principal risks, the disclosure should explain the risks 
associated with the stated investment objectives and strategies.
    The same key pieces of information also 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 fixed rate of return. In describing principal risks of 
these products, the summary should explain that the risks associated 
with the fixed rate of return include, for example, the risks of 
interest rate changes, the long-term risk of inflation, and the risks 
associated with the product provider's insolvency.
3. Employers should receive clear information about plan services and 
        fees, including total costs, that allows them to fulfill their 
        fiduciary duties.
    Employers should receive 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 third parties in connection with providing services to the plan. 
These payments from third parties, sometimes inaccurately referred to 
as ``revenue sharing'' but which are really cost sharing, often are 
used to defray the expenses of plan administration. We support 
requiring their disclosure by service providers.
    ERISA imposes clear responsibilities on employers, in their roles 
as fiduciaries, in entering into any service arrangement. Under ERISA 
section 404(a), fiduciaries must act prudently and for the exclusive 
purpose of providing benefits and defraying the ``reasonable'' expenses 
of administering the plan. Under section 408(b)(2), fiduciaries must 
ensure no more than reasonable compensation is paid for a contract for 
services. If a service arrangement does not meet these standards, 
section 4975(d)(2) of the Internal Revenue Code imposes an excise tax 
against the service provider. Effective disclosure by service providers 
to employers is essential to enabling employers to enter into and 
maintain reasonable 401(k) service arrangements.
    While a wide variety of practices exist, many plans contract with a 
recordkeeper to receive both administrative services and access to an 
array of investment products from which plan fiduciaries construct the 
menu of investments offered under the plan. The recordkeeper is 
compensated for its services to the plan, in whole or in part, by 
asset-based fees paid in connection with the plan's investment choices, 
which can either be proprietary or third party investment products. The 
Department of Labor has stated that ``many of these arrangements may 
serve to reduce overall plan costs and provide plans with services and 
benefits not otherwise affordable.'' \24\
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    \24\ Testimony of Robert J. Doyle, Director of Regulations and 
Interpretations, Employee Benefits Security Administration, Before the 
Working Group on Fiduciary Responsibilities Update and Revenue Sharing, 
Advisory Council on Employee Welfare and Benefit Plans (July 11, 2007).
---------------------------------------------------------------------------
    There are several reasons plans use asset-based fee arrangements. 
Using asset-based fees to cover administrative services effectively 
spreads the costs of acquiring necessary services over a shareholder or 
participant base. All mutual fund investors, whether in a 401(k) plan, 
IRA, or taxable account, experience ``mutualization.'' Some costs of 
administering a mutual fund shareholder's account are relatively fixed, 
such as the costs of printing prospectuses, maintaining shareholder 
accounts, and sending shareholder statements. Because mutual funds 
charge asset-based fees, shareholders with larger accounts subsidize 
those with smaller accounts. Similarly, wrap fees in separately managed 
accounts or other brokerage accounts and M&E charges in insurance 
products mutualize certain costs in those products.
    In plans, asset-based fees allow new participants and those with 
lower wages or smaller accounts to participate without their fixed 
share of administration costs falling disproportionately, as a 
percentage of account balance, on them.\25\ Asset-based fee 
arrangements also help pay for plan start-up or service provider 
transition costs, which can be significant. To avoid the plan incurring 
all those expenses in the first year, asset-based fees allow a provider 
to recoup its expenses over several years as plan assets grow.
---------------------------------------------------------------------------
    \25\ For example, if a plan has $50 annual per-participant fixed 
cost and charges every participant the same $50 charge, a new or lower-
paid participant with an account balance of only $1000 would pay 5% of 
his or her account balance in administration fees in a year. A 
participant with an account balance of $100,000 would only pay 0.05% of 
his or her account balance. ``Mutualizing'' the fixed cost by charging, 
for example, every participant 0.1% of his or her account, can help 
encourage participation by new and lower-income workers.
---------------------------------------------------------------------------
    There are practical reasons why plans, especially smaller plans, 
contract with one party--a recordkeeper--to receive all the services 
the plan requires. Using a single full-service provider to obtain 
administrative services and access to plan investments eliminates the 
cost to an employer of dealing with and monitoring multiple providers, 
and provides a single responsible party for all aspects of the 
arrangement. A recent survey by Deloitte Consulting and others found 
that 75% of plan sponsors used a ``bundled'' arrangement.\26\ In many 
of these arrangements, a service provider offers access for plan 
clients to its proprietary mutual funds, or bank or insurance products.
---------------------------------------------------------------------------
    \26\ Deloitte Consulting, LLP, International Foundation of Employee 
Benefit Plans and the International Society of Certified Employee 
Benefit Specialists, Annual 401(k) Benchmarking Survey 2005/2006 
Edition.
---------------------------------------------------------------------------
    We recommend that a service provider that offers a number of 
services in a package be required to identify each of the services and 
the total cost, but not to break out separately the fee for each of the 
components of the package. If the service provider chooses not to offer 
services separately, requiring the provider to assign a price to the 
component services will produce artificial prices that are not 
meaningful to the employer in making comparisons. Many products and 
services are ``bundles'' of individual components that might not be 
offered separately at the same total price. So-called ``package'' 
vacation tours--often including airfare, hotel, ground transportation 
and entertainment and amenities all for a single price--are examples of 
bundled services. Components of the package are not separately priced, 
are more easily and conveniently secured as a group, and typically cost 
less in total than they would if purchased individually. Nonetheless, 
consumers can, and do, shop for vacations on an unbundled basis.
    If a recordkeeper offers to provide participant accounting, 
compliance services, and participant communications in a single 
package, it should not have to attribute separate fees to those 
components. Similarly, if a provider offers proprietary investment 
products as well as recordkeeping, it should not be required to price 
these separately if they are offered as a package for a total cost that 
is disclosed.
    In economic terms, products and services are bundled together 
because the provider believes it is efficient to do so, and it would 
not be efficient to track and disaggregate accurately the cost of any 
one component. Any attempt to ``price'' each component would be 
artificial. Mutual fund organizations are able to provide 401(k) 
administrative services efficiently in part because some of these 
services are similar to those they already provide to retail 
shareholders of their own funds.
Proposals to Favor One Business Model
    One trade group whose members bundle many, but not all, of the 
401(k) service components offered by other providers has asked Congress 
to mandate rules to favor its members' business model. The American 
Society for Pension Professionals & Actuaries (ASPPA), along with its 
subsidiary, the Council of Independent 401(k) Recordkeepers, has asked 
Congress to mandate that service providers offering proprietary 
investment options disclose to employers a price for recordkeeping and 
administration and a separate price for investment management, even if 
this ``price'' has to be generated artificially and thus will be of 
questionable accuracy.\27\ This approach favors one business model--
firms that just bundle together recordkeeping and other administrative 
services--over another business model--firms that offer recordkeeping 
and administration as well as investment management services, by 
imposing additional disclosure burdens on the full-service model.
---------------------------------------------------------------------------
    \27\ See Testimony of Tommy Thomasson on behalf of American Society 
of Pension Professionals & Actuaries and the Council of Independent 
401(k) Recordkeepers Before the U.S. House Education and Labor 
Committee (October 4, 2007).
---------------------------------------------------------------------------
    All 401(k) recordkeepers bundle together a variety of recordkeeping 
services, including transaction processing, participant statements, web 
access, and participant education. ASPPA's recommendation is not that 
Congress mandate unbundling the price for the wide variety of 
administrative services its members provide. Rather, ASPPA seeks 
unbundling of investment management expenses from administrative and 
recordkeeping fees by providers that offer proprietary products.
    Numerous stakeholders, including those representing employer 
groups, service providers, and investment providers, have urged 
Congress not to mandate this unbundling.\28\ This disclosure is 
unnecessary, artificial, and would favor one business model over 
another. The breakout of investment management and recordkeeping 
expenses is not required by ERISA. As the Department of Labor has made 
clear, the key for plan fiduciaries is to compare the total cost of 
recordkeeping and investments of one provider with the total costs of 
recordkeeping and investments of another provider or group of 
providers.\29\
---------------------------------------------------------------------------
    \28\ For example, see Testimony of Lew Minsky on behalf of the 
ERISA Industry Committee, the Society for Human Resource Management, 
the National Association of Manufacturers, the United States Chamber of 
Commerce, and Profit Sharing/401k Council Of America Before the U.S. 
House Education and Labor Committee (October 4, 2007); Testimony of 
Robert G. Chambers on behalf of the American Benefits Council, the 
American Council of Life Insurers and the Investment Company Institute 
Before the U.S. Senate Special Committee on Aging (October 24, 2007).
    \29\ The Department of Labor's model ``401(k) Plan Fee Disclosure 
Form'' encourages employers to ask about the services included in a 
bundled arrangement, and the total cost, but does not require that the 
``price'' for each service be disclosed. See http://www.dol.gov/ebsa/
pdf/401kfefm.pdf. The Department of Labor states in its just released 
``ERISA Fiduciary Adviser'' interactive web tool: ``In comparing 
estimates from prospective service providers, ask which services are 
covered for the estimated fees and which are not. Some providers offer 
a number of services for one fee, also called a ?bundled' services 
arrangement, while others charge separately for individual services. 
Compare all services to be provided with the total cost for each 
provider.'' See http://www.dol.gov/elaws/ebsa/fiduciary/q4g.htm. See 
also ``Meeting Your Fiduciary Responsibilities,'' http://www.dol.gov/
ebsa/publications/fiduciaryresponsibility.html.
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Conclusion
    We applaud the Committee for examining this important topic and 
once again thank you for providing the Institute this opportunity to 
testify. We look forward to continuing to work with this Committee and 
its staff in these and other matters of importance to funds and their 
shareholders.

                                 

    Mr. MCDERMOTT. Thank you very much for your testimony. I 
sort of imagine myself being a member of the public sitting and 
listening to this and realizing that their pension is being 
determined by this kind of a discussion. How many of you handle 
unbundled services? How many of you handle bundled services? 
So, we have got one here. Now, I think in the free enterprise 
system we think that competition is good, nobody ever has 
inferred that we should not have competition, how can you have 
competition without full disclosure of all the fees? How do you 
have that? I would like to hear some discussion from you about 
how anybody could argue against us having regulations that 
require everything to be disclosed because the government plans 
have it, and they are in the bidding prospect. When they go for 
our Thrift Savings Plan, that whole thing is there, so they are 
competitive. Yes?
    Mr. THOMASSON. Thank you, Congressman. I will say that as a 
representative of the Council of Independent 401(k) record 
keepers and also the president and CEO of DailyAccess 
Corporation, we are an unbundled, or what is termed in the 
definition of this hearing, as an unbundled provider. Actually, 
we totally agree with exactly what you just said, how can 
anyone have a decisionmaking process for buying or purchasing 
anything, services, products or anything, without disclosure of 
what is involved in those products or services. I also speak on 
behalf of my own plan, the DailyAccess Corporation 401(k) plan 
and trust, I am the fiduciary of that plan. I also happen to be 
in a reasonable position to understand a little bit about what 
this debate is regarding, and I still have trouble with other 
services that we are buying from other people determining what 
type of fees are associated, and I am a trained fiduciary. I 
have outside training regarding my fiduciary responsibility. 
Without full fee disclosure, competition does suffer.
    In my oral testimony, we talked about certain business 
models being able to claim that services on a bundled basis 
were free in certain cases, in certain circumstances and that 
is not exactly true. So, full fee disclosure does enable 
competition.
    Mr. MCDERMOTT. I heard the lawsuit business here. Now, 
there are some contentious employees out there who may bring a 
lawsuit on their employer. If their employer knows that the 
bundled fees are being slipped through on to the plan 
participant, the employee, and does not tell him that, does he 
get liability in that regard or she? Can they be sued for that?
    Mr. MINSKY. Well, Congressman, you can be sued for 
anything.
    Mr. MCDERMOTT. I know. That was a lawyer's answer. Come on, 
I am not a lawyer, let's talk here.
    Mr. MINSKY. I think that the fair question is what is the 
responsibility of the plan fiduciary to determine what costs 
are out there, and I guess I would differ from Mr. Thomasson a 
little bit in saying that I think I would frame the issue as 
one of transparency, not one of bundled versus unbundled. I 
think that a plan sponsor who is acting as fiduciary has a 
responsibility to make sure that the total fee for what they 
are buying is reasonable, and ERISA provides that obligation 
and so to the extent they do not comply with it, they have 
potential liability. But on the other hand, I think a plan 
fiduciary can comply with that responsibility without breaking 
out services that are not naturally broken out.
    Mr. MCDERMOTT. Can the fiduciary have information that I as 
the employee do not have?
    Mr. MINSKY. Yes, I think, as we have heard from the last 
panel and I think you would hear consistently on this panel, 
there is some information that a plan sponsor, as a buyer of 
services, needs to have that is not necessarily relevant to the 
decision that a plan participant makes, which is, one, whether 
or not to participate in the plan; and then, two, if they 
decide to participate in the plan, which investment option from 
those available or which options is best for that participant. 
So, yes, I do think that there are some things that the plan 
fiduciary, who is negotiating the service contract needs, that 
may not be beneficial for the participant.
    Mr. MCDERMOTT. That may not be beneficial? Yes, Mr. 
Thomasson?
    Mr. THOMASSON. Thank you, Congressman. Mr. Minsky and I do 
agree that the issue is not bundled versus unbundled, it is one 
of uniformity. It is not about the business model, it is about 
plan sponsors as fiduciaries and the participants that they 
serve. So, how can a fiduciary not want more disclosure? Look 
at what the general public does when they go buy a car or they 
go on a trip?
    Mr. MCDERMOTT. Buy a mortgage.
    Mr. THOMASSON. Or a mortgage, they want to know as much 
detail about those decisions as they can even though they do 
want to know the total cost ultimately, but what are the 
decisions that they have to make, what are the cost components 
underneath it that they may be able to do something different 
with? It is the same thing. If you are fiduciary and you are 
handling money and making decisions for your employees 
retirement, how do you not ask for information from that 
perspective. So, we do agree that it is not bundled/unbundled, 
it is not about a business model.
    Mr. STEVENS. Mr. Chairman, could I respond?
    Mr. MCDERMOTT. Yes.
    Mr. STEVENS. It occurs to me that you can think about this 
in very simple terms. You have got two grocery stores on your 
block. You want to buy two apples. You can buy one from each at 
five cents each, and now you know you have got two apples for 
10 cents. Or you can go to one store and get both for 10 cents. 
The important thing is for the fiduciary to know what services 
are being received and what costs are being incurred for them. 
The reason that there is a preference is because going to a 
single provider makes life simpler for the thousands and 
thousands of small businesses who try to sponsor and run 401(k) 
plans.
    But I think it is important to add that Mr. Thomasson's 
organization has been on both sides of this issue. In February 
2005, there was a submission by ASPPA to the Labor Department 
that said, ``We do not believe it is necessary or appropriate 
for each specific fee or expense item to be separately 
disclosed so long as the total costs payable out of the plan 
assets are disclosed.'' That is our position. It was ASPPA's 
position just 2 years ago.
    Mr. THOMASSON. I would really love to respond to that, 
Congressman.
    Mr. MCDERMOTT. As the Chairman, I should not, but I will 
let you answer that, and then we are going to move on.
    Mr. THOMASSON. Thank you, sir. Mr. Stevens and I do agree 
that, yes, our position a few years ago to Labor was that 
response. You know, quite frankly, the two ends of this table 
are not really on different sides of the fence. This argument 
is really related to one thing, that is uniformity of 
disclosure. The reason we are having a problem here is because 
of different business models not wanting to disclose what their 
model differences are versus others.
    Now, in our testimony to Labor, we did talk about the break 
out of fees and components, but we were also coming from this, 
coming at the argument from the standpoint of independent 
unbundled providers. It is natural for us to actually 
illustrate what our fees for our services are. That is the side 
of the business that we come from. So, we are not actually in 
opposition with Mr. Stevens in his opinion. It is about the 
same argument. We are all looking for the same thing, 
uniformity of disclosure.
    By the way, one other thing, it is easy to deal with an 
independent unbundled provider as well because there is usually 
one source of contact for that model, just like there is for a 
bundled model. Thank you, sir.
    Mr. MCDERMOTT. Mr. Herger? I apologize to the Committee for 
stepping on my prerogatives.
    Mr. HERGER. Thank you, Mr. Chairman. For Mr. Jackson, are 
fees for small plan sponsors generally higher or lower than for 
large sponsors?
    Mr. JACKSON. I am not an expert on that subject because I 
have never looked at it from the perspective of a large 
employer. I can tell you that we did shop, and we looked at 
bundled and unbundled packages. I am not an expert on 401(k)s, 
what I wanted to know was what is the total cost given my 
number of employees, my number of assets, and I feel that we 
got a good deal based on that shopping model without me knowing 
the breakdown of all of the various fees that went into that 
component. I was looking for the best overall cost.
    Mr. HERGER. Following up, is there a risk that additional 
legislative requirements could translate into an even greater 
burden for small businesses or worse, a decision by some 
businesses not to offer a 401(k) plan?
    Mr. JACKSON. That is certainly a concern that I have. It 
was a struggle for us to make the reach to go to a 401(k), and 
I do not have any statistics in front of me, but I would 
suggest that there are a few percentage of companies that have 
25 and fewer employees that do have a 401(k) and the more 
burden you put on it, the fewer you are going to have.
    Mr. HERGER. In considering whether to sponsor a retirement 
plan for their workers, what concerns did small businesses 
express with respect to their fiduciary obligations and the 
possibility of lawsuits?
    Mr. JACKSON. Well, certainly that is always a concern. 
While we are at a disadvantage in terms of not being a major 
player in the market in terms of providing the best price, we 
do have an advantage, and I can sit in a room with all 25 of my 
employees and get their input and discuss it and make them a 
part of the decisionmaking process, which I understand in a 
large company would not be a practical answer.
    So, yes, there is concern about lawsuits, but I think as 
long as we are trying to do the best thing that we can for our 
employees, I would point out that contributions do not require 
a matching contribution from the employee, so anything they get 
is above and aboard for them. But we designed the program to 
help us attract employees, that is one of the reasons for going 
to it.
    Mr. HERGER. Mr. Minsky, are you considering that too much 
focus on plan fees may have the unintended effect of 
discouraging employers from sponsoring retirement plans or 
discouraging workers from participating in them?
    Mr. MINSKY. I very much do. I think it likely could do 
that. I think also for people who continue to participate in 
plans, I am concerned that an over focus on fees means an under 
focus on other important issues and ultimately might lead to 
poor decisionmaking. A participant who is focused only on fees 
may select investments that ultimately do not lead to their 
long-term best interest.
    Mr. HERGER. So, you could have a plan that maybe is doing 
better out there, making more money, even if its fees were a 
little higher, it would ultimately give the employee far more 
money than one with lower fees that was not doing as well?
    Mr. MINSKY. Yes, I was struck by the comment earlier about 
the plan or the account that has 1 percent higher fees 
ultimately leading to 7 percent less retirement savings at the 
end of the day and thought, well, if that same plan account had 
2 percent higher return, it would actually lead to 17 percent 
higher balances at the end of the day, so I think fees alone 
are not the right analysis.
    Mr. HERGER. Fees are certainly important, but probably far 
more important is the point that you just made.
    Mr. MINSKY. The total return.
    Mr. HERGER. What trends are occurring even without 
legislative action to increase transparency of plan fees?
    Mr. MINSKY. I can speak first and foremost about in the 
large plan market and tell you that I have been interacting 
with our service providers for several years and the level of 
transparency that we receive has changed significantly over 
that time period, to a point where I am very comfortable today 
saying that our relationship with our service providers is 
completely transparent. I think that that same thing cannot be 
said for smaller plans at this point, but I see the trend 
continuing and slowing down, and I think the advancements made 
by Honeywell and my company and other large companies are 
starting to be felt by smaller companies and ultimately the 
market is getting there.
    Mr. HERGER. Thank you. Thank you, Mr. Chairman.
    Mr. MCDERMOTT. Thank you. Mr. Neal will inquire.
    Mr. NEAL. Thank you, Mr. Chairman. Mr. Thomasson, I 
appreciate your kind comments and your testimony regarding my 
bill on fee disclosure. I agree with you that both bundled and 
unbundled providers should be disclosing their fees. As you 
suggested in your testimony, it need not be item by item, but 
it can be done in broad categories and that is precisely what 
my legislation mandates. We have heard some testimony today 
though that says it is not possible for bundled providers to 
break out major categories of cost. My staff has given you a 
copy of a sales proposal from a great Massachusetts-based 
provider, Fidelity, comparing their cost to a competitor, which 
breaks out recordkeeping costs from expense ratio. Can you 
discuss how this type of information helps a small 
businessowner make decisions about their employees' retirement 
plan?
    Mr. THOMASSON. Yes, sir, thank you, Congressman Neal. To 
answer the question fairly directly, the more information a 
fiduciary has regarding the selection of services for their 
participants in a plan that they would provide, there are an 
enormous number of details that are involved in how you process 
a plan. We know it, every other provider knows it, anybody that 
provides operations. So, what is relevant to a decisionmaking 
process is the summary of three main categories, which are 
investments, the investment expense, the management expense, it 
costs money to manage money, nobody is arguing that concept, it 
costs money to operate a plan for the generation of participant 
statements, recordkeeping, administration, trust, custody 
trading, all the operational components that are the same 
regardless of business model, and then any selling or advisory 
fees or outside third party fees that are associated with 
delivering services to that plan that may be compensated from 
plan assets or via some other mechanism. Those three categories 
will enable fiduciaries to make reasonable apples to apples 
comparison amongst providers.
    One of the basic premises that we are arguing here is 
business model differences should dictate non-uniformity of fee 
disclosure. Well, if you have specific categories under that 
disclosure scenario that are uniform across the marketplace, 
than fiduciaries of every plan size, small and large, will be 
able to differentiate between providers and the services that 
they are paying for.
    Mr. NEAL. Mr. Minsky, you seem to place great faith in the 
Department of Labor and the regulatory process, indicating that 
whatever they do must be satisfactory. Are you prepared to say 
today that you will forfeit any effort down the road to seek 
legislative relief if, in fact they, come back with a bad 
proposal?
    Mr. MINSKY. No, Congressman, not at all.
    Mr. NEAL. Are you saying you might shop for the best deal?
    Mr. MINSKY. I am not saying that either. What I am saying 
is that I think the DOL is first of all well advanced in their 
initiatives, my hope is that they will get guidance out 
relatively soon. That I think the best approach for Congress is 
to wait and see what DOL does and if what DOL does is 
satisfactory, great. If not----
    Mr. NEAL. Emphasis on the word ``guidance''?
    Mr. MINSKY. Say it again, I am sorry?
    Mr. NEAL. Are you emphasizing the word ``guidance,'' that 
Congress ought to wait and seek guidance from the Department of 
Labor on this issue?
    Mr. MINSKY. No, no, what I am saying is I think the 
regulatory process by its nature is more flexible and 
ultimately will be the better avenue for these important and 
difficult issues to be addressed. However, it is obviously 
Congress' prerogative after--at any point, but particularly 
after the DOL acts, to wait and see and if DOL does not get the 
job done----
    Mr. NEAL. Is it your prerogative to visit with your local 
Member of Congress to seek relief afterward if you do not like 
the proposal that DOL offers?
    Mr. MINSKY. Obviously, that is part of the political 
process.
    Mr. NEAL. Well, thank you. Ms. Klausner, we have heard your 
testimony today that regulations in this area might not come 
until late 2008 or beyond. Many of us feel that there is a need 
to act sooner, and that our companies and workers expect some 
movement toward greater disclosure. You and I have discussed my 
approach, more disclosure in broad, general categories. Is this 
something you think that companies and vendors can work with?
    Ms. KLAUSNER. I do think it is something that vendors and 
plan sponsors can work with. I have found that your bill is one 
which nicely lays out a difference between the dialog between 
plan service providers and plan sponsors and the dialog from 
plan sponsors to the participants. I think that that framework 
can be utilized in concert or cooperation ultimately with 
either working with Mr. Miller and his group to come out with a 
total bill package that is satisfactory to all Members, as well 
as listening to the guidance that comes out of the Department 
of Labor and seeing whether there can be some cooperation 
between all the different avenues of getting to the right 
result, which ultimately for all of us is excellent retirement 
savings and an understanding about the usefulness of a 401(k) 
plan.
    Mr. NEAL. So, you maintain that the process ought to remain 
fluid?
    Ms. KLAUSNER. Absolutely, the process should be fluid, it 
should be cooperative. What we do not want is for any Member of 
either Congress or the Department or plan sponsors or plan 
service providers to feel that they have sole ownership of the 
ability to find the right answer.
    Mr. NEAL. Thank you very much. Thank you, Mr. Chairman.
    Mr. MCDERMOTT. Mr. Pomeroy will inquire.
    Mr. POMEROY. Thank you, Mr. Chairman. I think that the 
testimony today has been very interesting, and it is my hope 
that by the time we are done working on this, we will have a 
clear disclosure format that really is one that the bundled and 
unbundled community can alike find merit in that is going to 
have value to plan participants. Having said that, I want to 
get back on the defined benefit issue because this is the only 
chance really that we have to talk about it. I value having the 
opportunity to question two significant employers in terms of 
what they are thinking about in terms of funding of questions 
with so many unknowns even as the new year and the new 
requirements will begin. So, I would ask Allison and then Lew, 
if you would, to talk about your commitment--do you have a 
defined benefit plan, what is your ongoing commitment to it? Do 
the questions about plan funding leave you anxious about 
whether or not you will be able to continue to support both the 
DC and DB plan?
    Ms. KLAUSNER. Thank you, Mr. Pomeroy. Honeywell does have a 
significant defined benefit plan and other smaller defined 
benefit plans within its universe. At this point in time, we 
are committed to maintaining both a defined benefit plan, as 
well as our defined contribution plan. I personally do not work 
on a regular basis in the defined benefit community, my 
colleague does, but I understand from both Honeywell and other 
members of the American Benefits Council that we continue to 
support the types of plans, that we do support a 1 year delay 
of the PPA funding rules, which I know are of great interest to 
you.
    Mr. POMEROY. I absolutely believe we need--plan funding has 
improved based on this mark to market evaluation. Let's just 
put this on hold for a year, we have done that with other 
pieces of legislation, and make certain we get the 
implementation right because if we get the implementation 
wrong, we may cause perfectly fine plans to be frozen rather 
than have the employers deal with the many uncertainties about 
continuing them. I appreciate very much your comment in support 
of a 1 year delay. I would ask Lew?
    Mr. MINSKY. Thank you, Congressman. FPL Group does sponsor 
a defined benefit plan, and we are committed to providing 
retirement security to our employees through both a defined 
benefit and defined contribution plan going forward. The 
funding issues are somewhat unique in our company because we 
have an extremely well-funded pension plan and are not 
anticipating any funding obligations in the near future. That 
said as a public policy matter, I agree wholeheartedly with the 
points you made earlier and if we were in a position where 
funding was a real prospect in the short term, it would be very 
difficult going forward not knowing what the rules would be.
    Mr. POMEROY. Within the ERISA Industry Committee, are you 
familiar with other members and what their thinking might be on 
this?
    Mr. MINSKY. Yes, well, having been at the ERIC board 
meeting recently, this was a popular topic, and I think there 
is a fair amount of concern and uncertainty about moving 
forward without a clear understanding of what the rules are.
    Mr. POMEROY. This week's Pension and Investments Magazine 
has an article about the former head of PBGC, who is now 
working for a hedge fund that wants to pick up frozen pension 
plans and manage them. Now would you feel comfortable as a 
business that your fiduciary responsibility to plan 
participants would pass entirely to the hedge fund in such a 
laying off proposal, Mr. Minsky?
    Mr. MINSKY. I think that would depend largely on what type 
of framework was set up in order for that transfer to be made. 
This is outside of the area I came to talk about, but I think 
it would be difficult in the current regulatory scheme to do 
that, although I understand it is quite common in the UK, and 
they have a slightly different scheme. I think ultimately that 
is something that Congress may want to look at and something 
the DOL and the PBGC may look at more carefully. It is probably 
not something that is in the purview of my expertise.
    Mr. POMEROY. Well, I think you have teed up the issues 
nicely. I want to put a copy of this article into the record, 
and I would further add I have got serious questions about 
this. My own notion is you cannot just simply shed your 
fiduciary responsibility to plan participants by transferring 
basically a plan to have them run off the assets. It also 
leaves in my own mind a very strong impression that this former 
PBGC official knows darn well these frozen pension plans are 
probably well funded on a realistic mark to market approach and 
that is why they are so comfortable taking on plan liabilities 
with the assets that the plan has to support them. In any 
event, I do not think anyone should be of the impression that 
Congress or the Administration is going to sit quietly by while 
these things just go willy nilly into the hedge funds without 
any government action taken, so thank you, Mr. Chairman, I will 
add this for the record.
    [The information follows:]
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    Mr. MCDERMOTT. Ms. Schwartz.
    Ms. SCHWARTZ. Thank you, Mr. Chairman. Just a couple of 
questions about how we are going to get to the kind of 
information both the plan sponsors and the participants really 
need. In hearing your conversation, one of the things that we 
have not discussed very much today is the fact that--well, one 
of the reasons we are here is we want to encourage the use of 
401(k), we want it to be reasonable for plan sponsors, we want 
to encourage employers to do it, we want that information 
available for participants even not a terribly sophisticated 
workforce. Mr. Minsky suggested that a sophisticated workforce 
can handle some information, and a less sophisticated workforce 
cannot. I will get to that in a moment, I think that is of some 
concern because at least we are concerned about and interested 
in having workers be able to save, regardless of how 
sophisticated they are, and that is really one of the reasons 
we are talking here.
    The other is there is a significant cost to the government 
for 401(k) plans. I think we do not talk about that very much. 
The tax subsidies for 401(k) plans are estimated at almost $4 
billion for 2007 over the next 5 years. We are talking about 
$233 billion in taxpayer subsidies for 401(k) plans, so there 
is a reason in addition to the interest we might have in 
helping Americans to save. There is a substantial public dollar 
in this, and so if all taxpayers are contributing, we want to 
make sure that all workers or many workers have access to this.
    My question has to do with the competitiveness of the 
marketplace here and how well it is working in not only 
reducing fees, but also in providing a wide variety of 
different options for both employers and employees. So, my 
question, and I actually may be able to start with Mr. 
Thomasson, others may want to weigh in on this, do you believe 
that--who is benefiting in the marketplace? When an employer 
starts to go off and look for plan service providers, are there 
a lot of them out there that are available to them? Are they 
all as qualified? Will they be able to provide the kind of 
information they need? Will a small businessowner in 
particular, I think a larger employer has more options, in 
taking the time to do this but for small business in 
particular, how much time and effort goes into a small 
businessperson finding the right service provider and making 
that they actually get the information they need for them for 
themselves as the plan provider, but also for their employees?
    Mr. THOMASSON. Well, to answer your first question 
regarding competition and numbers of providers that are out 
there, there are literally thousands of providers that are out 
there, and they range from shops that provide administrative or 
consulting services only with one to two people all the way to 
the very large bundled providers and large unbundled providers 
or operations providers. Technology, services, product 
development, the marketplace itself, participant in-plan 
sponsor, direction have all added to the competitive nature of 
the entire environment.
    Ms. SCHWARTZ. Do you think this competition has brought 
more qualified----
    Mr. THOMASSON. It happens everyday. There is so much 
pressure on provider fees today that pricing to value is 
probably upside down in many cases for many providers. It is 
under extreme pressure because of a lot of different reasons.
    Ms. SCHWARTZ. When an employer--they actually tend to get 
several different bids and then look at that and how do they 
actually make, how much time can they afford to spend sort of 
to actually do the due diligence obviously they have, a 
fiduciary responsibility to do this once they are involved but 
maybe, Ms. Klausner, it looks like you are anxious to respond 
to this?
    Ms. KLAUSNER. Yes, thank you. I wanted to actually make 
sure the record reflects that although the small providers 
might have more difficulty having leverage and there are a 
large number of service providers available for the plan 
sponsors of small businesses, we find that for Honeywell and 
other members of the Council, there are large providers, large 
plan sponsors, it is actually a smaller market of service 
providers available, and we do go out there and ask for all the 
information that is necessary to look for a competitive bid, 
but we are not only of course looking for the lowest fee 
available, we are recognizing that with a very varied workforce 
and the very complex plans we have, that in order to bring 
value, the cost may be higher than otherwise expected and may 
be higher per head per person than even a small plan, so that 
each plan, large or small, has its unique challenges to finding 
good service and good value.
    Ms. SCHWARTZ. Well, let me just follow up since my time is 
running out here. You have talked about uniformity, but really 
one of the issues here of course is not only for the plan to 
get the right value, but then--maybe I will ask Mr. Minsky 
this, you sort of seemed to be more hesitant about how much an 
individual participant might be able to make the judgment and 
that is exactly why we are asking about what kind--and talking 
about what kind of information has been provided to 
participants. We don't give them information they can use that 
is readable, that is understandable, and in a form that they 
can make decisions. Are you really suggesting that some of the 
workforce is just not going to be able to make these kinds of 
decisions that the employer does and that is good enough?
    Mr. MINSKY. Not exactly, but I agree with the point you are 
making, which is that we have to provide disclosure that is 
helpful to participants in making the decisions that ultimately 
they need to make, which are principally whether or not to 
participate in the plan and then if they choose to participate 
in the plan, how to invest.
    Now, I think the point I was trying to make about 
sophistication of the workforce is that a plan sponsor, acting 
as a fiduciary should, and in my experience does, look like the 
dynamics of its workforce in determining what products make 
sense in a plan so that, for example, a workforce that is maybe 
more likely not to take action, that plan sponsor may see that 
and say that they want to create a default in their plan that 
leads to success for those participants, so that may lead them 
to automatically enroll the participants, and if the 
participants do not elect an investment to default them into an 
age appropriate life cycle fund, for example, or a managed 
account, and that is an appropriate decision for a fiduciary to 
make, which may add cost, but still leads to better results.
    Ms. SCHWARTZ. I think our time is up but you raise some 
interesting points, but I think really one of the things that 
many of us understand is that as difficult it is to understand 
some of the information that employees are going to get, we are 
all going to have to learn a lot more about this and be able to 
provide information, those who understand it better, in a way 
that can work.
    Mr. MCDERMOTT. Mr. McCrery will inquire.
    Ms. SCHWARTZ. Thank you.
    Mr. MCCRERY. Thank you, Mr. Chairman. Ms. Klausner, 
according to the information on our list of witnesses, you are 
the assistant general counsel for benefits for Honeywell, is 
that right?
    Ms. KLAUSNER. That is correct.
    Mr. MCCRERY. So, your job, you are a lawyer?
    Ms. KLAUSNER. That is also correct.
    Mr. MCCRERY. Your job, among probably others, is to oversee 
the benefits that Honeywell gives to its employees, is that 
right?
    Ms. KLAUSNER. That is correct, that is one of my jobs and, 
just for the record, one of my other jobs is to be a member of 
our Savings Investment Committee, so it is a very specifically 
named fiduciary role as well, and I just wanted to make sure 
you knew that.
    Mr. MCCRERY. Yes, thank you. So, I think you are an 
excellent witness to have before us today because that is what 
you do day in and day out is try to fulfill that fiduciary 
responsibility on behalf of the corporation or the employer or 
the sponsor of the plan. Do you think that plan sponsors are, 
under the current laws and regulations, able to meet your 
fiduciary obligations?
    Ms. KLAUSNER. I think that under today's law, we are able 
to meet our fiduciary obligations and that is as a basis--as a 
product of training. On a regular basis, individuals do need to 
be trained to understand how to fulfill their fiduciary role. 
In the purchasing of vendor services for a 401(k) plan, they 
need to understand that although typically they might think of 
it as a business purchase, the same as business purchases or 
pencils or paper, that in fact that might be a starting point 
for the discussion, for the selection of a vendor service, but 
it goes much further and needs to be looked at from a fiduciary 
eye. So, with the training and with the understanding of the 
balance, that we are standing in the shoes of participants of 
making these choices, I do believe we can fulfill our function.
    Mr. MCCRERY. Including with respect to keeping plan fees 
reasonable?
    Ms. KLAUSNER. Yes, I do. In terms of keeping plan fees 
reasonable, of course ``reasonableness'' is also based upon its 
relative comparison to the value being provided. So, we respect 
the idea that a service provider could offer something which 
has a higher dollar value, but can allow us to do our job 
better in terms of providing the retirement savings for 
individuals. So, by way of example, we have a recordkeeper who 
today we have been partnering with for some time, and we have 
placed tremendous value on their ability to very quickly 
address acquisitions, divestitures, changes in statutory 
language, change in regulation. We rely upon them very heavily 
to be able to in a very sophisticated and timely manner, get 
the information to us so we can get it to our plan 
participants.
    Mr. MCCRERY. How often do you review what fees are being 
charged to your plan?
    Ms. KLAUSNER. On the recordkeeping and on the 
administration side, fees are reviewed regularly, I would say 
probably annually. However, there are intermittent 
conversations because as the services change and as our needs 
change, and we have to add them and therefore add a fee, we 
look at the picture as a whole. On the investment side, we meet 
no less frequently than quarterly. However, given today's 
investment market and the financial market, I think we have met 
probably more than once a week to determine the impact of 
changes by investment managers and in the marketplace and how 
those may or may not impact our choices that we offer to our 
participants in the 401(k).
    Mr. MCCRERY. I assume you also have occasion to interact 
with regulatory agencies with respect to these plans, is that 
right?
    Ms. KLAUSNER. That is correct.
    Mr. MCCRERY. Do you think the appropriate government 
agencies are giving adequate attention to plan fee disclosure?
    Ms. KLAUSNER. I am very pleased, Honeywell is pleased, the 
American Benefits Council and its members are very pleased to 
see that there is this attention by both the Department of 
Labor, to a smaller degree, but necessary degree, the SEC, and 
of course many Members of Congress. Again, as I said a couple 
of times in the testimony and in the prepared written 
testimony, we do want to continue to see the cooperation among 
all the different sectors.
    Mr. MCCRERY. Thank you very much. Mr. Stevens, quickly, do 
investors within a 401(k) plan pay more or less in investment 
fees generally than investors in the retail market?
    Mr. STEVENS. The research that we have done, Congressman, 
suggests that in the 401(k) market, they pay lower fees than 
they do in the retail market for mutual funds. I should say 
that there is a lot of information about mutual funds. I cannot 
necessarily make the same comparison between other investment 
options in a 401(k) plan and the retail market, but our numbers 
are very clear. They get a lower price.
    Mr. MCCRERY. What is the trend with respect to cost for 
401(k) investments?
    Mr. STEVENS. I think, again looking at the mutual fund 
component, it has been downward as investors move to lower-
priced funds.
    Mr. MCCRERY. Is that due to competition, more competition?
    Mr. STEVENS. Enormous competition has driven that, and I 
think a high degree of transparency around how much the mutual 
fund costs. That has been something that has been a subject to 
detailed SEC disclosure for our industry for a very long time.
    Mr. MCCRERY. One last question, Mr. Chairman, there is a 
bill in Congress pending that would mandate that all 401(k) 
plans provide at least one index fund among the choices 
available to employees; what is your opinion on Congress 
mandating that?
    Mr. STEVENS. Well, index funds are terrific investments. 
Our industry really brought them to the fore and helped to 
popularize them, and they are certainly available in many, many 
plans as a result of the process that witnesses here have just 
described of employees selecting investment options. But I 
think it would be a dangerous precedent, Congressman, that 
legislation would begin to select investment options in 401(k) 
plans.
    In particular, I would say that there is no single index 
that is the perfect solution for every investor's need over his 
or her investing lifetime. It has got to be mixed with other 
assets, other types of funds, and that is really what has given 
rise to the life cycle or lifestyle fund that tracks an 
investor over time and where the investments change, because 
there is no one index fund solution to the investor's needs.
    Mr. MCCRERY. Thank you.
    Mr. MCDERMOTT. I want to thank the panel for your 
informative testimony, and we will perhaps talk to some of you 
again. Thank you very much.
    Our third panel has been waiting for a while. 
Unfortunately, we are going to have a couple of votes here 
shortly, but we will try and begin the panel and begin the 
process. Bertram Scott, who is the Executive Vice-President for 
Strategy, Integration and Policy for TIAA-CREF, which is an 
educational fund; Mindy Harris, who is President of the 
National Association of Government Defined Contribution 
Administrators; David Wray, who is the President of the Profit 
Sharing/401(k) Council of America; Lisa Tavares, who is a 
Partner of the Venable Law Firm here in D.C.; Norman Stein, who 
is a Professor from the University of Alabama School of Law, on 
behalf of the Pension Rights Center; and David Certner, who is 
Legislative Counsel and Legislative Policy Director for AARP.
    Your testimony will be entered fully in the record, and we 
would like you to stick to the 5 minutes. Although we do not 
sometimes stick to 5 minutes, we would like you to.
    Mr. Scott?

   STATEMENT OF BERTRAM L. SCOTT, EXECUTIVE VICE PRESIDENT, 
STRATEGY, INTEGRATION AND POLICY, TIAA-CREF, NEW YORK, NEW YORK

    Mr. SCOTT. Chairman McDermott, Ranking Member McCrery, and 
Members of the Committee, I am Bert Scott, Executive Vice-
President of TIAA-CREF, and I am very happy to be invited here 
to speak with you today.
    I want to start my testimony by telling you a little story 
if I can that I think is indicative of the 403(b) marketplace. 
I want to tell you about one of our customers, who worked for 
30 years as a maintenance employee in the physical plant of a 
Big 10 university in the Midwest, someone you might not expect 
to have a large retirement savings, but because he participated 
in TIAA-CREF's retirement plan where his contributions were 
matched by his employer, he ended up retiring as a millionaire. 
He enjoyed the power of compounding. Unfortunately, there are 
many people today who are not able to realize the same level of 
comfort, partially because of barriers that relate to 
increasing cost-of-living pressures faced by retirees and 
barriers facing plan sponsors. That is why TIAA-CREF is glad to 
be here today because it is important to eliminate barriers to 
saving for retirement.
    At TIAA-CREF, we believe in creating an income stream that 
will support everyone as long as they live. We are a market 
leader in 403(b) plans, a primary conduit for providing 
employer-based retirement for employees of not-for-profit 
institutions. We specialize in annuities, a key vehicle to 
achieving retirement security. We also hope this Committee will 
consider addressing issues surrounding limits on contributions, 
the impact of taxes, whether it makes sense to have incentives 
and enhancements that benefit both employers and employees. We 
believe there are public policy benefits to making it easier 
for employers to encourage savings and employees to save more.
    We were instrumental in working with Congress and the IRS 
in developing the original 403(b) plans or regulations. We pay 
out more than $10 billion annually in retirement income to over 
one half million people. Based on this expertise, let me 
explain how the 403(b) plans work and their distinction. The 
403(b) plans were created as a primary means of providing 
employer-based retirement income to employees of not-for-profit 
institutions with a defined contribution pension plan design to 
pay lifetime income. The 403(b) plans are historically simpler 
to administer, which has led to wider adoption of employer-
sponsored plans.
    The 403(b) market was not conceived as a supplemental 
savings or profit sharing program. Plan sponsors typically 
provide diverse investment options for employees in a 403(b) 
plan via multiple full-service providers. A typical 403(b) plan 
may have three or four full-service pension providers at the 
institutions, and they all compete for individual plan 
participants offering choice.
    In the 403(b) space, individuals typically save two to 
three times the industry average. We believe that is because 
our clients understand that this is a retirement plan, not just 
a short-term savings vehicle. Plan providers must offer a full 
complement of high-quality investment products, covering 
various asset classes to help their employees reach their 
retirement objectives. Investment choices include cash 
equivalence, equities, fixed income, guaranteed returns, and 
investment styles such as active and passively managed funds, 
index funds.
    Diverse investment options such as these allow participants 
within a plan to design a portfolio which best meets their 
investment goals, risk tolerance and time horizon. A unique 
feature of the 403(b) market is not only helping employers and 
employees build savings, but also a robust suite of pay-out 
options when they retire unlike the 401(k) market, which has 
historically been focused only on the accumulation phase.
    For a defined contribution plan to be successful, employees 
need advice about savings for retirement, asset allocation, 
managing risk and return. TIAA-CREF has a long history of 
providing education and guidance to plan participants to help 
them evaluate investment alternatives before they make 
decisions so that they know what they are getting. This year 
our non-commission consultants will hold more than 110,000 one-
on-one counseling sessions with clients throughout the group, 
some will be your constituents.
    One of the most important variables considered by plan 
sponsors is the cost of expense of providing a 403(b) 
retirement plan. The range of costs in the market can vary 
significantly from vendor to vendor. At TIAA-CREF, we provide 
meaningful disclosure that helps people make informed decisions 
about that selection. We disclose all fees associated with 
investing in our registered investment products, in our annual 
prospectuses for the CREF variable annuity, and TIAA-CREF 
mutual funds. We break the expenses out into the categories of 
investment advisory expenses, administrative expenses, 
distribution expenses or 12(b)(1) fees is something you may be 
more familiar with, mortality and expense risk charges and 
acquired fund fees and expenses. In that same prospectus, we 
also provide individual investors with the impact of expenses 
on a hypothetical investment of $10,000 over a one, three, five 
and 10 year period. Our fund performance and prices are posted 
on our Web site.
    Once again, I want to commend the Committee for examining 
the ways to eliminate barriers to help individuals save for 
retirement and provide for a lifetime income stream. Some of 
the barriers we see are increasing cost for retiree health, 
inflation, complexity, tax incentives, coordination with 
defined contribution rates and a lack of financial literacy. We 
hope you will consider establishing incentives that eliminate 
some of these barriers.
    We want to make it easier----
    Mr. MCDERMOTT. If you could sum up.
    Mr. SCOTT. Yes, I am right now. We want to make it easier 
for individuals to save more for retirement. We want that 
individual that we talked about at the beginning--everyone to 
understand the benefit of compounding. Thank you for inviting 
me, and I look forward to your questions.
    [The prepared statement of Mr. Scott follows:]
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    Mr. MCDERMOTT. Ms. Harris.

 STATEMENT OF MINDY L. HARRIS, PRESIDENT, NATIONAL ASSOCIATION 
 OF GOVERNMENT DEFINED CONTRIBUTION ADMINISTRATORS, PORTLAND, 
                             OREGON

    Ms. HARRIS. Thank you, Mr. McDermott and Mr. McCrery and 
Members of the Committee for having us here today. On behalf of 
NAGDCA, I would like to thank you for this opportunity to 
testify today on this most important issue that touches so many 
Americans, who may or may not have adequate income for their 
retirement needs. I also want to extend NAGDCA's appreciation 
to this Committee and to Congresswoman Schwartz and Congressman 
Johnson for your Resolution for National Save for Retirement 
Week, which we celebrated last week. This is very helpful to 
plan sponsors across the country in helping us promote 
education and awareness to our participants and our employees, 
some of whom are prospective participants.
    We also applaud Congress and the Federal Government for its 
increasing interest in fee disclosure and transparency, and we 
really believe that these efforts will lead to higher levels of 
understanding by plan sponsors and participants of the fees 
being charged for the administration and investment of their 
retirement savings. We look forward to working with you as you 
review the issue of fees in defined contribution plans. As 
governmental entities ourselves, we always welcome and open and 
transparent process when it comes to managing and investing our 
public employees' retirement savings.
    The very nature of local control and open government laws 
dictates a great deal of oversight in State and local 
government plans. There is also a significant amount of 
collaboration between the employees and the employers in 
developing these plans. Not only do our plans have elected 
officials who are accountable to the public and to our plans, 
but we also have rules affecting procurement, requiring most 
contracts to be reviewed with a prescribed regular frequency.
    NAGDCA believes that to achieve retirement security and to 
assure that millions of public sector employees will be self-
supporting during their retirement years, that it is imperative 
to maintain a shared responsibility between employers and 
employees to fund retirement income. We believe that this is 
best accomplished through the combination of defined benefit 
retirement plans and our voluntary supplemental defined 
contribution plans. It is in this spirit that NAGDCA advocates 
for policies that enhance defined contribution plans to 
encourage public employees to save for retirement and to 
supplement their defined benefit pensions. The goal of any 
proposal to alter or significantly change employer-sponsored 
supplemental retirement savings plans should be to enhance or 
simplify the current procedures and to assure that the 
administrative costs to employers and participants are 
reasonable.
    It is in this vein that we recently undertook a survey of 
our membership regarding how fees are determined and how they 
are disclosed to employees. We have also surveyed our members 
regarding their views on the reasonableness of fees and how 
they evaluate them, and I look forward to sharing our findings 
with you today. I will provide you with an overview and submit 
my testimony, including our actual survey in its entirety, for 
the record.
    About our fee disclosure survey, in summing up our survey 
findings, NAGDCA plan sponsor members indicated that they 
understand the importance of fees very well. When selecting a 
service provider for plan administration, fees are evaluated in 
plan decisions a great deal. Eighty-6 percent of our State 
government respondents and 55 percent of local and smaller 
governmental entities reported receiving fee disclosure 
information through quarterly website updates, participant 
statements and general communication brochures.
    Some additional questions were also raised as a result of 
our findings. For example, are participants receiving enough 
fee disclosure and education or are they receiving too much, 
which may lead to possible confusion? What should the 
expectations be for plan sponsors to monitor and understand 
fees and what should participants have to monitor and 
understand?
    It is our position that plan sponsors and plan participants 
have different levels of need for detailed fee information, and 
our plan sponsors recognize and work very hard to uphold their 
fiduciary responsibility by engaging in a higher level of 
education about fees and related issues in order to make 
careful, informed decisions on behalf of their participants.
    Seventy percent of our survey respondents also indicated 
that they review their plan's administrative and investment 
management fees at least annually and, in some cases, multiple 
times throughout the year. Plan sponsors also indicated that 
they have a pretty good understanding of assessed fees. One 
area for possible improvement, however, is the understanding of 
fees that are not always included in every plan. Perhaps 
requiring a better explanation of this terminology would help 
increase the understanding of these types of fees. We found 
that passively managed index funds are perceived as being a 
lower cost option by plan participants, and the survey also 
found that these lower cost index funds are already available 
in most plans.
    Plan fees and plan disclosure is just one piece of the 
overall equation. Education should takes a holistic approach, 
providing information about the plan fees, as well as overall 
investment performance and how the two factors relate to one 
another.
    Over the past few years, with greater plan-sponsored 
education on fees, all government market segments responding to 
our survey agreed that fees have generally decreased. The 
public market is different from the private market in that bids 
for services and investment products are generally mandated to 
be reviewed or competitively bid within a normal cycle of time, 
typically three to five years. There is also a greater degree 
of public access for review of fees and disclosure of plan-
related information, and, finally, there is a greater degree of 
accountability in the public market as consensus is reached and 
elected bodies publicly agree to contracts and their terms.
    Regarding reasonableness of fees, what plan sponsors acting 
as fiduciaries consider reasonable can be very subjective. The 
fiduciary has to consider many variables in determining what he 
or she believes to be reasonable. In governmental plans, what 
is considered reasonable is commonly a collective decision by 
board members after an overall evaluation of many factors, 
including plan services and investment performance. The public 
sector has the advantage of open disclosure of fees during the 
public procurement process, which may have a positive impact on 
the amounts of fees that are charged in our plan.
    NAGDCA, in surveying our membership, found out the majority 
of plans have benchmarks to evaluate whether their fees are 
reasonable and have negotiated reasonable fees according to 
these benchmarks for their participants. In the end, trying to 
define what reasonable fees are may ultimately be a plan by 
plan and a local decision.
    In summary, I would like to emphasize the ongoing 
importance of education so that individuals and families will 
understand what their needs for retirement will be. Again, I 
would like to thank this Committee and this Congress for 
passing the Resolution for National Save for Retirement Week, 
which many of us celebrated last week. Your leadership on this 
issue has enabled us to plan retirement fairs and events, 
ensure significant advertising regarding saving for retirement, 
and has also encouraged the involvement of both the public and 
the private sectors in educating our participants about this 
important issue.
    We look forward to continuing to work with you as you 
review all of these issues, and I would be pleased to answer 
any questions that you may have today. Thank you very much.
    [The prepared statement of Ms. Harris follows:]
   Statement of Mindy L. Harris, President, National Association of 
    Government Defined Contribution Administrators, Portland, Oregon
    Good morning Mr. Chairman and members of the Committee. I am Mindy 
Harris, President of the National Association of Government Defined 
Contribution Administrators (NAGDCA). I am also the Chief Financial 
Officer for Multnomah County, in Portland Oregon.
    On behalf of NAGDCA, I thank you for this opportunity to testify 
today on this most important issue that touches so many Americans who 
may or may not have adequate income for their retirement needs. We 
applaud Congress and the Federal Government for its increasing interest 
in fee disclosure and transparency and believe that these efforts will 
lead to higher levels of understanding by plan sponsors and 
participants of the fees being charged for the administration and 
investment of their retirement savings. We look forward to working with 
you as you review the issue of fees in defined contribution plans, and 
as governmental entities ourselves, we always welcome an open and 
transparent process when it comes to managing and investing our public 
employee's retirement savings.
    The very nature of ``local'' control and ``open government'' laws, 
dictates a great deal of oversight in state and local government plans. 
There is also a significant amount of collaboration between the 
employees and the employers in developing the plans. Not only do our 
plans have elected officials who are accountable to the public and to 
our plans, but we have rules affecting procurement requiring most 
contracts to be reviewed with prescribed regular frequency.
    Ongoing education of plan sponsors is one of NAGDCA's key missions, 
and as plan sponsors and administrators, we encourage and engage in 
counseling and education of participants as a matter of course.
    NAGDCA believes that to achieve retirement security--and to assure 
that millions of public employees will be self-supporting during their 
retirement years--it is imperative to maintain a shared responsibility 
between employers and employees to fund retirement income. We believe 
that this is best accomplished through the combination of defined 
benefit retirement plans and voluntary supplemental defined 
contribution plans.
    It is in this spirit that NAGDCA advocates for policies that 
enhance defined contribution plans to encourage public employees to 
save for retirement and to supplement their defined benefit pensions. 
State and local governments are proud of the supplemental retirement 
savings plans that have been created by working jointly with the 
federal government, the resulting high savings rates in our plans, and 
the increased retirement preparedness of our employees. The goal of any 
proposal to alter or significantly change employer sponsored 
supplemental retirement savings plans should be to enhance or simplify 
the current procedures, and to assure that the administrative costs to 
employers and to participants are reasonable.
    It is in this vein that we undertook a recent survey of our 
membership to determine how fees are determined and how they are 
disclosed to employees. We have also surveyed our members regarding 
their views on the ``reasonableness'' of fees and how they evaluate 
them. Finally, we have asked our members to describe the make-up and 
structure of their boards, including the ratio of employees to 
employers (who are typically in the plans themselves) and the roles of 
labor and other key decision makers.
    I look forward to sharing our findings with you today. I will 
provide you with an overview and submit my testimony, including our 
actual survey, in its entirety, for the record.
About NAGDCA:
    NAGDCA was founded in 1980 and is the leading professional 
association representing public employer sponsored deferred 
compensation and defined contribution plan administrators. NAGDCA 
represents administrators from all 50 states and over 150 local 
governmental entities, as well as private industry plan providers. 
These states have, under their auspices, over 5,000 local government 
deferred compensation plans. NAGDCA also represents nearly 100 
industrial members that provide services to public plan sponsors.
    NAGDCA is an organization in which its members work together to 
improve state and local government defined contribution plans including 
Sec. 457(b), Sec. 401(k), Sec. 401(a), and Sec. 403(b) plans through a 
sharing of information on investments, marketing, administration and 
laws relating to public sector defined contribution plans.
    Our members administer state and local government plans that are 
regulated under section 457 of the Internal Revenue Code (IRC). These 
plans, which supplement state and local defined benefit programs, 
provide a convenient vehicle for public employees across the country to 
save for retirement. In all cases, full time employees of the entity 
offering the plan are eligible to participate (and, in many cases, part 
time employees are also eligible to participate). Altogether state and 
local defined contribution plans administer approximately three 
trillion dollars in assets across the country.
About NAGDCA's Fee Disclosure Survey:
    The following results document the information gathered from our 
member survey conducted in August 2007 regarding fee disclosure in 
defined contribution plans.
    In summing up our findings, our survey shows that NAGDCA plan 
sponsor members understand the importance of fees, relative to the plan 
participants they represent. When selecting a service provider for plan 
administration, fees are evaluated in plan decisions ``a great deal'' 
(which was the answer by approximately 70% of all survey respondents).

      When plan sponsors were asked how well their participants 
understood fees, the majority response was ``somewhat'' across all 
market segments (as opposed to ``understands very well,'' ``understands 
very little'' or ``not at all''). This is despite the wide array of 
education/communication vehicles currently being utilized to disclose 
fees on a quarterly basis.
      86% of state government respondents and 55% of local and 
smaller governmental entities (55%) reported receiving fee disclosure 
information through quarterly web-site updates, participant statements, 
general communication brochures, and/or phone system updates.In 
addition, government members gave the industry an overall rating of 4 
(with 5 being the highest) for providing education to plan sponsors on 
fees. Some additional questions were raised as a result of these 
findings. For example, are participants receiving enough fee 
disclosure/education, or are they receiving too much, which may lead to 
possible confusion? And, what should the expectations be for plan 
sponsors to monitor and understand fees, and what should plan 
participants monitor and understand? It is our position that plan 
sponsors and plan participants have different levels of need for 
detailed fee information, and our plan sponsors recognize and uphold 
their fiduciary responsibility by engaging in a higher level of 
education about fees and related issues in order to make careful and 
informed decisions for the benefit of their participants.
      70% of our respondents indicated that they review their 
plans' administrative fees and investment management fees (also known 
as expense ratios) at least annually and in some cases multiple times 
throughout the year. Larger entities indicated that they reviewed their 
fees more frequently than smaller entities.
      Most governmental entities, approximately 70%, use an 
independent consultant to assist with the disclosure and understanding 
of fees. It is interesting to note that our survey revealed that 
smaller plans actually use Consultants more frequently than larger 
state plans. This is likely due to the availability of additional 
resources in larger governmental entities.
      Plan sponsors indicated that they have a good 
understanding of assessed fees. One area for possible improvement, 
however, is the understanding of fees that are not always included in 
every plan (i.e., Mortality and Expense risk fees, Sub-transfer agency 
fees, and Finders fees). Perhaps a better explanation of this 
terminology would increase the understanding of these types of fees.
      The opinion of our survey task force, based on our survey 
results, is that passively managed index funds are perceived as being a 
lower cost option by plan participants. The survey found that these 
lower cost index funds are already available. Of those entities 
responding to the survey, 100% of state entities and 93% of local 
government entities indicated that they currently offer a passively 
managed index fund. This raises additional concerns. Is a lower cost 
option or a higher cost option (with better performance) the optimum 
retirement solution for plan participants? Plan fees and fee disclosure 
is just one piece of the overall equation. Education should take a 
holistic approach, providing information about plan fees, overall 
investment performance, and how the two factors relate to one another.
      Conflicts of interest with regard to provider 
relationships were also explored in our survey as well as plan sponsor 
understanding of revenue sharing arrangements. Over 70% of plan 
sponsors responding to our survey stated that specific information 
about revenue sharing arrangements is provided at least annually, with 
more than 40% of these employers receiving a report on the total 
revenues that result from reimbursements and fees. With regard to other 
types of relationships, however, there appears to be less of an 
understanding of these arrangements; approximately 50% of plan sponsors 
require disclosure only when renewing contracts or bidding for a new 
contract/vendor.
      Most plan sponsor respondents, across all market 
segments, indicated they were concerned with roll-overs out of 
government sponsored plans and into higher priced option sat the 
recommendation of outside financial advisers who were not affiliated 
with existing plans. The majority of all Government entities responded 
that they are ``very'' or ``somewhat'' concerned about this.
      Over the past several years, with greater plan sponsor 
education on fees, all government market segments agreed that fees have 
generally decreased(assuming similar assets and services). The public 
market is different from the private market, in that bids for services 
and investment products are generally mandated to be reviewed or 
competitively bid within a normal cycle of time (typically every three 
to five years). There is also a greater degree of public access for 
review of fees and disclosure of plan related information. Finally, 
there is a greater degree of accountability in the public market as 
consensus is reached and elected bodies publicly agree to contracts and 
their terms.

    While some issues regarding fee disclosure were identified as being 
in need of improvement or further discussion, there were also positive 
findings from the survey that showed most defined contribution plan 
sponsors are aware of and understand plan costs. The survey also showed 
that industry partners are informing participants about fees associated 
with their account in a variety of formats including periodic account 
statements and customized plan Web-sites and newsletters.
Regarding ``Reasonableness'' of Fees:
    What plans sponsors, acting as fiduciaries, consider ``reasonable'' 
is very subjective. The fiduciary has to consider many variables in 
determining what he/she believes is reasonable. Some of the factors may 
include federal, state, and local laws. Labor contracts and plan design 
may also impact what the fiduciary considers ``reasonable.'' These are 
just a few of the factors. In governmental plans, what is considered 
``reasonable'' is commonly a collective decision by the board members 
after an overall evaluation of many factors, including plan services 
and investment performance. Often, when making the decision, 
fiduciaries listen to the advice of consultants that have been hired 
because of their expertise and knowledge of the industry standards then 
prevailing. The public sector has the advantage of open disclosure of 
fees during the public procurement process, which may have a positive 
impact on the amounts of fees that are charged in our plans.
    Additionally, there is a ``Prudent Man'' standard. This is the 
standard under which the fiduciary must act. The fiduciary is required 
to act ``with the care, skill, prudence, and diligence under the 
circumstances then prevailing that a prudent man acting in a like 
capacity and familiar with such matters would use, in the conduct of an 
enterprise of a like character and with like aims.''
    NAGDCA, in surveying our membership found the following from direct 
questions regarding ``reasonableness'' of fees:

      Sixty-six percent of total respondents have a standard 
they rely on to determine whether fees are reasonable.
      Seventy-six percent of total respondents have compared 
the fees in their plan against fees charged to individual investors for 
similar investment products.
      Seventy-eight percent of total respondents rated their 
administrative fees at least a 4 out of 5 with 5 being ``very 
reasonable''.
      Sixty-eight percent of total respondents rated their 
investment fees at least a 4 out of 5 with 5 being ``very reasonable''.
Regarding Board Structure:
    NAGDCA, through surveying our membership, has found the following 
thirty-five percent response rate

      Respondents have an average of 8 members on their defined 
contribution (DC) Board of Directors. Very few respondents have 
indicated that they do not have a Board of Directors.
      For those with a Board of Directors, we found the 
following results.

        Thirty-five percent of respondents require Board 
members to be participants in their plan.
        Forty-one percent have at least 50% of their Board 
members who are considered employee representatives.
        Sixty-four percent of respondents have Board members 
that are not employees. Those board members represent retirees, 
taxpayers, elected officials, and financial planners.
        Seventy-one percent indicated their board members are 
appointed by the Governor, Executive Director, or by plan participants. 
Twenty-two percent indicated their board members are both appointed and 
elected. Seven percent indicated are all elected.

    In the end, trying to define what ``reasonable'' fees are may 
ultimately be a plan by plan and a ``local'' decision.
    In summary, I would like to emphasize the ongoing importance of 
education so that individuals and families understand what their needs 
for retirement will be. That is why NAGDCA is so pleased that this 
Committee and this Congress passed a resolution calling for a National 
Save for Retirement Week, which many NAGDCA plan sponsors celebrated 
just last week. Your leadership on this issue has enabled us to plan 
retirement fairs and events, to ensure significant advertising 
regarding saving for retirement, and has encouraged the involvement of 
both the public and private sectors in educating our participants about 
this important issue.
    NAGDCA looks forward to continuing to work with you as you review 
all of these issues, and I would be pleased to answer any questions you 
may have today.
    Thank you.

                                 

    Mr. MCDERMOTT. The Committee will stand in recess for two 
votes. We will be back somewhere around two o'clock. Thank you.
    [Recess.]
    Mr. MCDERMOTT. Mr. Wray?

 STATEMENT OF DAVID L. WRAY, PRESIDENT, PROFIT SHARING/401(k) 
             COUNCIL OF AMERICA, CHICAGO, ILLINOIS

    Mr. WRAY. Chairman McDermott, Ranking Member McCrery and 
Members of the Committee, I appreciate the opportunity to 
appear today and discuss retirement plan fees and expenses. The 
employer defined contribution system is a great success story. 
The automatic enrollment provisions and the pension permanency 
provisions included in the Pension Protection Act of 2006 have 
positioned the DC system to move to a new level, a level that 
will help expand the system and reach out to major groups that 
lack other workers in the system, low-income workers and small 
employers. The amount of money in the system is expanding 
rapidly, and that is why paying attention to these fee 
disclosures is so important. We strongly support improving 
disclosure at all levels.
    As you have heard today, the Department of Labor is 
undertaking 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 this is the best approach to enhance 
fee transparency in a measured and balanced manner. We urge 
Congress to delay taking legislative action until the DOL has 
completed its work. Legislation at this time would re-start the 
regulatory process and significantly delay the implementation 
of the changes that we all seek in disclosure for participants 
and fiduciaries.
    To comply with ERISA, plan administrators must ensure that 
the aggregate price of the services in a bundled arrangement is 
reasonable at the time the plan contracts or the services and 
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 
cost, such as plan administration and participant 
recordkeeping. The plan administrator should be fully informed 
of all the services included in bundled arrangements to make 
that assessment.
    Many plan administrators, especially small companies, 
however, prefer reviewing costs in an aggregate manner. 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. For example, if a person buys a car, they do 
not need to know the price of the engine if it were sold 
separately. They do need to know the horsepower and warranty. 
Small businesses in particular prefer the simplicity in many 
cases of the bundled fee arrangement. Congress should consider 
the need to increase plan sponsorship by small companies if it 
considers legislating changes to bundled fee disclosure 
arrangements.
    The defined contribution plan system is very successful. As 
an example, I refer to Martin Tractor Company, a small company 
in Topeka, Kansas, that fixes farm equipment. In 2006, they had 
five non-management workers retire from their plant. These 
people had worked their entire career at this company. The 
average pay for these people was $45,000 and the average lump 
sum was $485,000. These people had almost 11 times final pay to 
supplement--to use to supplement their Social Security wages. 
These people are going to have higher levels of income in 
retirement when they were working. The defined contribution 
plan system has incredible potential for American workers. We 
very much appreciate the fact that the legislative process is 
paying attention to the system because it is going to be so 
important to America's workers. At the same time, we prefer to 
work through the regulatory process when we are actually 
implementing the changes that are needed. Certainly, if the 
Department of Labor does not come out with appropriate 
direction, we would envision that the legislative process would 
immediately take hold and kick in.
    Thank you very much. I would be delighted to answer any 
questions that you have.
    [The prepared statement of Mr. Wray follows:]
Statement of David L. Wray, President, Profit Sharing/401(k) Council of 
                       America, Chicago, Illinois
    Established in 1947, the Profit Sharing / 401k Council of America 
(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.
    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 ERISA Industry Committee (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 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.
    We strongly support concise, effective, and efficient fee 
disclosure to participants. We also support increased fee transparency 
between service providers and plan sponsors. We commend Chairman Rangel 
for conducting this hearing to gain further insight into the employer-
provided defined contribution retirement plan system and the critical 
role that plan fees play in retirement asset accumulation.
DEFINED CONTRIBUTION PLANS WORK FOR EMPLOYEES, EMPLOYERS, AND AMERICA
    Employers offer either a defined benefit or defined contribution, 
and sometimes both types, of retirement plan to their workers, 
depending on their own business needs. According to the Investment 
Company Institute, Americans held $16.6 trillion in retirement assets 
as of March 30, 2007.\1\ This is nearly 17% of the $97.9 trillion in 
investible assets worldwide.\2\ Government plans held $4.2 trillion. 
Private sector defined benefit plans held $2.3 trillion. Defined 
contribution plans held $4.2 trillion in employment based defined 
contribution plans and $4.4 trillion in IRAs. Employer-based savings 
are the source of half of IRA assets. Ninety-five percent of new IRA 
contributions are rollovers, overwhelmingly from employer plans.
---------------------------------------------------------------------------
    \1\ The U.S. Retirement Market, First Quarter 2007, Investment 
Company Institute, October 2007.
    \2\ Tapping Human Assets to Sustain Growth: Global Wealth 2007, 
Victor Aerni, Christian de Juniac, Bruce M. Holley, Tjun Tang, October 
12, 2007.
---------------------------------------------------------------------------
    There are questions about the ability of the defined contribution 
system to produce adequate savings as it becomes the dominant form of 
employer provided retirement plan. Some claim America is facing a 
retirement savings crisis. To answer this question, a baseline for 
comparison is required. The Congressional Research Service reports that 
in 2006, 23.6% of individuals age 65 and older received any income from 
a private sector retirement plan. The median annual income from this 
source was $7,200.\3\ This income stream represents a lump-sum value of 
$90,000, assuming the purchase of a single-life annuity at an 8% 
discount rate. Individuals age 65-69 had higher median annual income 
from a private sector retirement plan, $9,600 ($120,000 lump sum 
value), but only 19.9% of those age 65 or older received any income 
from this source. Overall, however, the elderly are not impoverished. 
In 2006, 9.4% of Americans 65 and older had family incomes below the 
federal poverty rate, the lowest rate for any population group. How 
will the next generation of retirees fare compared to current retirees?
---------------------------------------------------------------------------
    \3\ Income and Poverty Among Older Americans in 2006, Congressional 
Research Service, September 24, 2007.
---------------------------------------------------------------------------
    We hear about a negative savings rate in America, with some noting 
that Americans are saving less now than during the Great Depression. 
Intuitively, something must be wrong with this statistic as the total 
amount set aside for retirement has almost tripled in 12 years.\4\ A 
2005 analysis by the Center for Retirement Research sheds considerable 
light on the matter. They discovered that the NIPA (National Income and 
Products Account) personal savings rate for the working-age population 
was significantly higher than the overall rate, which was then 1.8%. 
Working-age Americans were saving 4.4% of income, consisting almost 
exclusively of savings in employment-based plans. This does not include 
business savings, which, of course, are owned by individuals. Those 65 
and older were ``dissaving'' at negative 12% because they were spending 
their retirement assets, which are not considered income. The report 
accurately predicted that, as baby-boomers begin to retire, they will 
consume more than their income and the savings rate as currently 
defined would go even lower.\5\
---------------------------------------------------------------------------
    \4\ The U.S. Retirement Market, First Quarter 2007, Investment 
Company Institute, October 2007.
    \5\ How Much are Workers Saving?, Alicia Munnell, Francesca Golub-
Sass, and Andrew Varani, Center for Retirement Research at Boston 
College, October 2005.
---------------------------------------------------------------------------
    The Congressional Research Service reports that married households 
in which the head or spouse was employed and the head was age 45-54 
held median retirement account assets of $103,200 in 2004. Similar 
unmarried households held $32,000. An identical married household 
headed by an individual age 55 and older held median retirement account 
assets of $119,500 in 2004.\6\
---------------------------------------------------------------------------
    \6\ Retirement Savings: How Much Will Workers Have When They 
Retire?, CRS Report For Congress, January 29, 2007.
---------------------------------------------------------------------------
    While some workers have enjoyed a full working career under a 
defined contribution plan such a as profit sharing plan, 401(k)-type 
plans in which the employee decides how much to save have existed for 
only slightly over twenty years, and most participants have 
participated in them for a much shorter period of time. The typical 
participant in 2000 had only participated in the plan for a little over 
seven years.\7\ Policymakers must be wary of statistics citing average 
401(k) balances and balances of those approaching retirement because 
they have not saved over their full working career and some balances 
belong to brand new participants. For example, a recent Investment 
Company Institute report stated that at the end of 2006, the average 
401(k) balance was $61,346 and the median balance was $18,986.\8\ The 
median age of the participants in the study was 44 and the median 
tenure in their current 401(k) plan was eight years. But when the study 
looked at individuals who were active participants in a 401(k) plan 
from 1999 to 2006 (including one of the worst bear markets since the 
Depression) the average 401(k) balance at the end of 2006 was $121,202 
and the median balance was $66,650. Long-tenured (30 years with the 
same employer) individuals in their sixties who participated in a 
401(k) plan during the 1999-2006 period had an average account balance 
of $193,701 at the end of 2006. The study does not reflect that many 
individuals and households have multiple 401(k)-type accounts or assets 
rolled over into an IRA.
---------------------------------------------------------------------------
    \7\ Rise of 401(k) Plans, Lifetime Earnings and Wealth at 
Retirement, James Poterba, Steven F. Venti, and David A. Wise, NBER 
Working Paper 13091, May 2007.
    \8\ 401(k) Plan Asset Allocation, Account Balances, and Loan 
Activity in 2006, Investment Company Institute, August, 2007.
---------------------------------------------------------------------------
    The lesson is clear--long term participation in a 401(k) plan will 
result in the accumulation of assets adequate to provide a secure 
retirement. The Congressional Research Service estimates that a married 
household that contributes ten percent of earnings to a retirement plan 
for 30 years will be able to replace fifty-three percent of pre-
retirement income. If they save for forty years, they will replace 
ninety-two percent of income.\9\ A ten percent savings rate is 
realistic given average contribution rates of seven percent and average 
employer contributions of three percent. These estimates do not 
consider Social Security payments
---------------------------------------------------------------------------
    \9\ Retirement Savings: How Much Will Workers Have When They 
Retire?, CRS Report For Congress, January 29, 2007.
---------------------------------------------------------------------------
    These statistics mean little if a worker is not saving for 
retirement. And one fact is abundantly clear--whether or not a worker 
saves for retirement is overwhelmingly determined by whether or not a 
worker is offered a retirement plan at work. In March of 2007, sixty-
one percent of private sector workers had access to a retirement plan 
at work and fifty-one percent participated. Seventy percent of full-
time workers had access and sixty percent participated. Seventy-eight 
percent of workers in establishments employing 100 or more workers had 
access and sixty-six percent participated. Only forty-five percent of 
workers in establishments of less than 100 workers had access to a plan 
and thirty-seven percent participated. Three-quarters of workers 
earning at least fifteen dollars per hour had access and sixty-nine 
percent participated. Only forty-seven percent of workers making less 
than fifteen dollars per hour had access and only thirty-six percent 
participated. Seventy-seven percent of all workers chose to participate 
when offered a defined contribution plan at work, with seventy percent 
of those making less than fifteen dollars per hour opting to 
participate.\10\ Policymakers should consider that these participation 
rates are at a single point in time. They are not indicative of whether 
or not a individual or household will choose to participate in a 401(k) 
plan for a substantial period of a working career.
---------------------------------------------------------------------------
    \10\ National Compensation Survey: Employee Benefits in Private 
Industry in the United States, March 2007, U.S. Department of Labor, 
August 2007.
---------------------------------------------------------------------------
Opportunities for improvement
    What do all these data tell us? First, the employer provided 
defined contribution system has demonstrated that it can provide asset 
accumulation adequate for a secure retirement for workers at all income 
levels as long as individuals participate. The participation rate when 
offered a plan is encouraging, but can be improved. There are two areas 
in which to concentrate our efforts on improvement; lower-paid workers 
and small business plan coverage. We also need to increase 
participation by African-Americans and some ethnic groups, as revealed 
by some very recent studies. Small business owners need simplicity and 
meaningful benefits for themselves to compensate for the costs of 
providing a plan to their workers. Congress should keep this in mind as 
they examine plan fees.
    We believe that making the 2001 EGTRRA pension provisions permanent 
in the Pension Protection Act of 2006 will help convince small business 
owners to offer a plan. Permanency removed a cloud of uncertainty that 
likely would have frozen small business plan growth in its tracks. We 
commend Congress for enacting this very important provision.
    We also believe that the growth of automatic enrollment plans will 
substantially increase retirement plan participation by lower and 
middle income workers that are most likely to be induced to save by 
this type of plan design. Ninety percent of workers that are 
automatically enrolled chose not to opt out of the plan.\11\ A 2005 
ICI/EBRI study projects that that a lowest quartile worker reaching age 
65 between 2030 and 2039 who participates in an automatic enrollment 
program with a 6% salary deferral (with no regard for an employer 
match) and investment in a life-cycle fund will have 401(k) assets 
adequate for 52% income replacement at retirement, not including social 
security that provides another 52% income replacement under today's 
structure.\12\
---------------------------------------------------------------------------
    \11\ Hewitt Study Reveals Impact of Automatic Enrollment on 
Employees' Retirement Savings Habits, Hewitt Associates, October 25, 
2006.
    \12\ The Influence of Automatic Enrollment, Catch-Up, and IRA 
Contributions on 401(k) Accumulations at Retirement, EBRI Issue Brief 
no. 238, July 2005..
---------------------------------------------------------------------------
    The important automatic enrollment provisions in the Pension 
Protection Act are already producing results. In the latest PSCA survey 
of 2006 plan year experience, 23.6% of plans have automatic enrollment, 
compared to 16.9% in 2005, 10.5% in 2004, and 8.4% in 2003. 41% of 
plans with more 5,000 or more participants reported utilizing automatic 
enrollment in our survey. A recent Hewitt survey indicated that 36% of 
respondents offered automatic enrollment in 2007, up from 24% in 2006. 
55% of the other respondents are ``very likely or somewhat likely'' to 
offer automatic enrollment in 2007.\13\ Vanguard reports that 80% 
percent of plans that implemented automatic enrollment in 2007 elected 
a ``full autopilot design'' that includes automatic deferral increases, 
a marked departure from earlier automatic enrollment plans.\14\
---------------------------------------------------------------------------
    \13\ Survey Findings: Hot Topics in Retirement 2007, Hewitt 
Associates
    \14\ How America Saves 2007, Vanguard
---------------------------------------------------------------------------
DOL REGULATORY FEE AGENDA
    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 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 DOL has completed its work.
    We believe that the regulatory scheme of soliciting input and 
issuing proposed and final rules based on comments from all affected 
parties will result in carefully-structured rules that will avoid 
unintended consequences. Moreover, regulatory guidance is dynamic. It 
can be more readily 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 totally 
unrelated to core issues when pension issues are consolidated into 
larger bills.
    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, in 
the very near future. The modifications will significantly expand fee 
disclosure to plan sponsors, including all asset-based fees and service 
provider revenue-sharing. The final regulations implementing the new 
Form 5500 are expected to first be applicable to the 2009 plan year. 
The DOL will also require that the Form 5500 be filed electronically 
for plan years beginning in 2009. This change will make it possible for 
extensive ``data-mining'' of the expanded fee information in the 
revised Form in a short period of time. We expect that this new 
information will be very useful for fee benchmarking that it will help 
reduce some plan fees.
    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. We filed individual comments and also 
all issued a joint response with seven other trade associations. The 
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.
THE ERISA FRAMEWORK
    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.
    To comply with ERISA, plan administrators must ensure that the 
aggregate price of 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. For example, if a person buys a car, they don't 
need to know the price of the engine if it were sold separately. They 
do need to know the horsepower and warranty. Small business in 
particular may prefer the simplicity of a bundled fee arrangement. 
Congress should consider the need to increase plan sponsorship by small 
business if it considers legislating changes to bundled fee disclosure 
arrangements.
    It is important that as it considers new legislation, Congress 
fully understand the realities of fees in 401(k) plans. There are 
significant recordkeeping, administrative, and compliance costs related 
to an employer provided plan, which do not exist for individual retail 
investors. And net performance compared to an appropriate benchmark is 
more important than a fund's investment management fees. Nevertheless, 
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 Investment Company Institute reports that the average overall 
investment fee for stock mutual funds is 1.5% and that 401(k) investors 
pay half that amount.\15\ 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. Congress should also realize that employer 
provided plans are often the only avenue of mutual fund investment 
available to lower-paid individuals who have great difficulty 
accumulating the minimum amounts necessary to begin investing in a 
mutual fund or to make subsequent investments. Finally, to the degree 
an employer provides a matching contribution, and most plans do, the 
plan participant is receiving an extraordinarily higher rate of return 
on their investment that a retail product cannot provide.
---------------------------------------------------------------------------
    \15\ The Economics of Providing 401(k) Plans: Services, Fees, and 
Expenses, 2006, Investment Company Institute, September 2007.
---------------------------------------------------------------------------
    A study by CEM Benchmarking Inc. of 88 U.S. 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 considers any legislation to 
enhance disclosure of these fees, that they fully understand the lower-
than-retail fees many employees are already enjoying in their 401(k) 
plans.
PRINCIPLES OF REFORM
    As we stated earlier, we do not oppose effective and efficient 
disclosure efforts. We believe that the following principles should be 
embodied in any effort to enhance fee disclosure in employer-provided 
retirement plans.

      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.
      New Disclosure Requirements Should Not Require the 
Disclosure of Component Costs That Are Costly to Determine, Largely 
Arbitrary, and Unnecessary to Determine Overall Fee Reasonableness. 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. These costs will ultimately 
be passed on to plan participants through higher administrative fees. 
The increased burden for small businesses could inhibit new plan 
growth.
      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 any new 401(k) fee-
related legislation be measured against these principles.
CONCLUSION
    We support effective fee disclosure. However, 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 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.
    We appreciate the opportunity to present our views on this very 
important matter.

                                 

    Mr. MCDERMOTT. Ms. Tavares?

   STATEMENT OF LISA A. TAVARES, ESQ., PARTNER, VENABLE, LLP

    Ms. TAVARES. Good afternoon to the Members of the 
Committee. Thank you for inviting me to testify today. My name 
is Lisa Tavares, and I am a Partner in the Employee Benefits 
and Executive Compensation Group at the law firm of Venable, 
LLP, here in Washington, D.C. I have practiced employee 
benefits law for 12 years in both the public sector and in 
private practice. In private practice, I regularly advise 
retirement plan sponsors and administrators of all sizes about 
their obligations under ERISA and the Internal Revenue Code.
    Today, I was asked to provide my perspective on the real 
and practical day to day issues facing small- and medium-sized 
plan sponsors in two respects: First, in obtaining fee 
information from service providers; and, second, in providing 
fee information to participants.
    My comments are not focused on the plan sponsors that I 
represent that can afford legal counsel, but are focused on 
those plan sponsors that have limited resources and tools to 
satisfy the multitude of requirements of ERISA. I am testifying 
on my own behalf and not on behalf of any particular client or 
clients.
    The key points that I want to express are that many small- 
and medium-size plan sponsors currently do not have the tools 
to, one, effectively evaluate and compare plan fees in deciding 
between service providers or, two, to pass fee information 
along to plan participants.
    Plan sponsors need investment and fee arrangement 
education, as well as cooperation from service providers in 
order to evaluate costs when choosing between service providers 
and to provide effective disclosure to plan participants 
regarding fees.
    My testimony will cover four areas: First, the burden of 
the existing compliance requirements on plan sponsors; second, 
the difficulty in plan sponsors obtaining fee information; 
third, the necessity of uniform disclosure; and, fourth, the 
need to provide simplified disclosure to plan participants.
    With respect to the existing burden of complying with ERISA 
and the Internal Revenue Code, many plan sponsors have become 
overburdened while trying to run their businesses. While plan 
sponsors do not have any excuse for failing to fulfill their 
fiduciary responsibility, in reality some plan sponsors simply 
do not know what the rules are. As a result of limited time, 
expertise and resources, some plan sponsors must rely solely 
upon the service providers to provide necessary plan compliance 
information. They turn to experienced legal counsel only when a 
big problem arises.
    The second point is that it is also very difficult for the 
average plan sponsor to obtain fee information without the 
assistance of a professional investment consultant who can 
evaluate and identify what is behind the numbers. The most 
typical example that I can give is that of a plan sponsor who 
commonly receives a zero fee proposal. What this really means 
is that other administrative costs are being financed by 
investment fees charged on plan assets. However, some plans' 
sponsors do not realize that the plan is not in fact ``free''. 
Without assistance from an investment consultant, the plan 
sponsor may not be able to decipher fee proposals.
    My third point is that I believe that uniform service 
provider disclosure might be the most useful way to assist the 
plan sponsor who cannot afford to hire an investment consultant 
to analyze this information. Any service provider disclosure 
provided to plan sponsors must be simple enough to be 
understood, but it must be sufficiently complete in order to 
enable the plan sponsor to evaluate whether to retain the 
service provider.
    Finally, a fourth point about disclosure to participants: 
The Committee should consider the proper disclosure to plan 
participants given the fact that workforces are made up of 
employees with varying education levels who ultimately will all 
receive the same fee disclosure statement. To the extent this 
plan sponsor has to disclose fees to participants, the 
participant level notice must be simple enough to be understood 
by the average participant. Any legislative or regulatory 
action related to disclosure of fees must consider the existing 
burdens and obligations with respect to small- and medium-sized 
plan sponsors and must be coordinated with existing ERISA 
notice requirements in order to minimize new burdens.
    In closing, the goal of any legislative or regulatory 
action should be to control cost for both participants and plan 
sponsors while balancing the need to provide necessary 
information to plan participants in an understandable format.
    I am happy to take questions. Thank you.
    [The prepared statement of Ms. Tavares follows:]
   Statement of Lisa A. Tavares, Esq., Partner, Venable Law Firm, LLP
    Good morning, Chairman Rangel and Committee members. Thank you for 
inviting me to testify today. My name is Lisa Tavares and I am a 
partner in the Employee Benefits and Executive Compensation Group at 
the law firm of Venable LLP in Washington, D.C. I have practiced 
employee benefits law for 12 years in both the public sector as an 
Attorney in the Office of Chief Counsel of the Internal Revenue 
Service, Tax Exempt and Government Entities, and now in private 
practice for 7 years. In private practice, I regularly advise 
retirement plan sponsors and administrators about their obligations 
under the Employee Retirement Income Security Act of 1974, as amended 
(``ERISA''), and the Internal Revenue Code (the ``Code'').
    The Employee Benefits and Executive Compensation Group of Venable 
represents employers of all sizes. The firm is the primary ERISA 
counsel for a number of small, medium and large public and private 
sector plan sponsors. And, of course, we represent numerous clients 
with respect to one-time issues.
    I was asked to provide a perspective of a practitioner who works 
with small and medium size plan sponsors and to discuss the unique 
practical issues that small and medium size plan sponsors face in both 
obtaining fee disclosure from service providers and providing 
disclosure of fees to participants. My perspective on small and medium 
size employers is not predicated on surveys or commissioned analysis 
but is based upon a perspective of the real and practical day-to-day 
issues facing plan sponsors. My comments are not focused on my clients 
that can afford legal counsel, but are focused on those plan sponsors 
that have limited resources and tools to satisfy the multitude of ERISA 
and Code requirements. I am testifying on my own behalf, and not on 
behalf of any particular client or clients.
    My testimony addresses the fact that plan sponsors need investment 
and fee arrangement education, as well as cooperation from service 
providers in order to evaluate costs when choosing service providers 
and to provide effective disclosure to plan participants regarding 
fees. My testimony will cover four areas: first, the burden of the 
existing compliance requirements on plan sponsors; second, the 
difficulty in plan sponsors obtaining fee information; third, the 
necessity for uniform disclosure; and fourth, the need to provide 
simplified disclosure to plan participants.
    The key point that I want to express is that small and medium size 
plan sponsors currently do not have the tools to effectively evaluate 
and compare plan fees or the service provider marketplace. As a result, 
small and medium size plan sponsors cannot pass along plan fee 
information to participants.
Plan Sponsor Compliance Burden
    Many have testified in various hearings that additional disclosure 
will ultimately mean greater cost to plan participants. However, it 
will also add to the costs of plan sponsors. The goal should be to 
control costs for both participants and plan sponsors while balancing 
the need to provide necessary information to plan participants in an 
understandable format.
    Employers sponsor 401(k) plans \1\ to help their employees save for 
retirement and to attract and retain employees. 401(k) plans are 
heavily regulated and impose significant fiduciary responsibilities on 
employers. As a result of the complexity of complying with ERISA and 
the Code, some plan sponsors have become overburdened while trying to 
focus on running their businesses.
---------------------------------------------------------------------------
    \1\ I will refer only to 401(k) plans in my testimony. However, 
similar considerations apply with respect to 403(b) plans and 457 
plans.
---------------------------------------------------------------------------
    Plan sponsors are already feeling the burden of various disclosure 
and reporting requirements, to name the most common--summary plan 
descriptions, summary material modifications, summary annual reports, 
Form 5500 filings, safe harbor notices, and blackout notices.
    As more employers sponsor plans, the 401(k) world has morphed into 
a ``do-it-yourself'' environment where plan sponsors have been 
encouraged to essentially purchase ``off-the-shelf'' prototype plans 
from service providers and operate them on auto-pilot. Overall, this 
serves the greater good because more employers can afford to sponsor 
plans for their employees. However, a natural by-product of this 
environment is the fact that a large number of plan sponsors turn to 
experienced employee benefits legal counsel only when a big problem 
arises.
    As a result of limited time, expertise, and resources, some plan 
sponsors must rely solely upon service providers to provide necessary 
plan information. Of course, most of the service provider material 
clearly advises employers to consult with legal counsel; however, many 
plan sponsors simply do not have the budgets to obtain regular legal 
assistance with their 401(k) plans nor an appreciation for the special 
rules that apply to retirement plans.
    Not surprisingly, the quality of service providers varies. Most do 
a good job of helping employers comply and enable employers to provide 
a 401(k) plan on a cost-effective basis, which otherwise would not be 
possible. Too often, however, with respect to fees, some service 
providers fail to give employers the full picture upfront.
    I have worked extensively with 401(k) plans acquired through 
mergers and acquisitions, and through this experience I have seen for 
myself that many inexperienced plan sponsors simply do not have 
knowledge of the ERISA fiduciary requirements. Often times, plans with 
significant amounts of assets in a fast growing company will grow and 
thrive at a pace that exceeds the resources to handle the existing 
ERISA and Code requirements. During acquisitions, we find that plan 
documents are not in order and service contracts with fee information 
are not available. Based upon my experience with small plans picked up 
in acquisitions, it is obvious that some small unrepresented plan 
sponsors operating on a ``do-it-yourself'' basis are missing important 
legal requirements, including the responsibility to review and monitor 
plan fees. These well-meaning plan sponsors simply want to provide 
their valued employees with a mechanism for retirement savings.
    While plan sponsors do not have any excuse for failing to fulfill 
their fiduciary responsibility, in reality, some plan sponsors simply 
do not know what the rules are. I acknowledge that additional fee 
disclosure is necessary, but it must be simple and have limited costs 
to be useful to both participants and plan sponsors.
    In short, small plan sponsors would have to devote significant 
resources to comply with enhanced fee disclosures. This may have 
unintended and undesirable consequences of discouraging some small plan 
sponsors from sponsoring 401(k) plans.
Difficulty in Obtaining Fee Information
    Many small or medium size plan sponsors will have great difficulty 
in preparing and providing 401(k) fee disclosure to participants 
without professional assistance, which is another cost for the plan 
sponsor. First, smaller plan sponsors may not be able to use asset size 
or number of participants to leverage the best fee arrangement.
    It is also very difficult for the average plan sponsor to assess 
the structure of fees without the assistance of a professional 
investment consultant or adviser who can evaluate and identify what is 
behind the numbers, assuming complete numbers are provided. It is 
equally difficult for legal practitioners to assist their clients 
because the responses to Requests for Proposals or contract bids do not 
always include a complete analysis of all of the fees. Efforts to dig 
deeper and to obtain more detail as to fees may be met with resistance 
and, ultimately, the plan sponsor has to make a decision based on what 
information has been provided.
    The most typical example that I can give is that of clients who 
commonly receive ``zero fee'' proposals. The only costs that may be 
listed are participant transaction fees such as plan loans, 
distributions or qualified domestic relations orders. What this means 
is that other administrative costs are being financed by investment 
fees charged on plan assets. However, many plan sponsors do not realize 
that. Even if they do, plan sponsors would have to ask specific 
questions in order to obtain information about the ``hidden'' fees. 
Similarly, if ``bundled'' services are involved, which is often the 
case, plans sponsors need to request a breakout of fees, which may be 
difficult to obtain.
    The Department of Labor (``DOL'') has done a good job of providing 
plan sponsors with publications regarding plan fees, including the 
401(k) Plan Fee Disclosure Tool. However, this is only useful for the 
plan sponsors who know that it exists and have the time, knowledge and 
skills to go through the process of doing a fee analysis. And even DOL 
publications can be too technical and complicated for an 
unsophisticated plan sponsor.
    Plan sponsors also need education about the questions to ask to 
service providers. For example, the plan sponsor needs to ask service 
providers to compare per participant versus asset-based costs. The plan 
sponsor will need to ask the service provider about fees annually or 
negotiate a multi-year agreement. In my experience, a smaller plan 
sponsor also has to negotiate one-time fees such as setup fees and 
termination fees when switching providers or terminating plans. With 
respect to investment options, plan sponsors need to evaluate whether 
redemption fees or sales charges are assessed to specific investment 
options. It would also be useful for plan sponsors to request fee 
benchmarking comparisons for similar employers based upon plan asset 
size and number of participants. Most plan sponsors need an investment 
adviser to assist in fully obtaining this information and understanding 
it.
Uniform Disclosure
    One of the current legislative proposals is to require service 
providers to provide fee information to plan administrators (i.e., the 
employer) in advance of a new contract. This would reduce the burden of 
deciphering the sales contract for the plan administrator who does not 
have the benefit of a professional investment adviser who understands 
fees and the pricing proposal in the current market. This proposed 
legislation also requires service providers to provide additional 
disclosure of the same types of information to plan sponsors each year 
of the contract.
    The service provider disclosure provided to plan sponsors must be 
simple enough to be understood, but it must be sufficiently complete in 
order to enable the plan sponsor to evaluate whether to retain the 
service provider.
    With an eye toward the ``do-it-yourself'' plan sponsor, a uniform 
disclosure format might be the most effective solution. Otherwise, some 
plan sponsors will still be forced to decipher the information 
themselves and provide disclosure on their own. This clearly would be 
more difficult for the plan sponsor who cannot afford to hire an 
investment consultant to analyze this information. A general notice 
prepared by the service provider would assist plan sponsors in 
understanding the service provider's fees. In addition, to the extent 
the plan sponsor in turn has to disclose fees to participants, a 
similar notice prepared by the service provider could be used.
Simplified Disclosure Needed for Participants
    The required disclosure statement for participants must be in a 
generic format and suitable to allow the average person responsible for 
day-to-day plan administration to be able to communicate to 
participants.
    Effective participant communication drafting is a critical part of 
my practice and more importantly of a well-run and effective 401(k) 
plan. A communication with too much irrelevant information or 
unfamiliar terms will not serve participants well. I have learned that 
communications generally have to be limited to one or two pages in 
order to be effective. It would seem that a reasonable compromise would 
be to make more comprehensive information available upon request. Any 
disclosure must be brief and easy to understand.
    One factor for consideration in determining the scope of the 
appropriate disclosure is the fact that employer workforces are made up 
of employees with varying education levels who ultimately will all 
receive the same fee disclosure statements. Outside of per participant 
fees for administrative costs and expense ratios for investment funds, 
it would generally be very difficult for a plan sponsor to provide fee 
information in an understandable format for the average participant.
    It would also be very costly for small or medium size plan sponsors 
who want to provide adequate fee disclosure that could be understood by 
the entire workforce. Without a simplified disclosure document that is 
prepared by the service provider, the plan sponsor would need to hire 
outside assistance in order to comply with any participant level 
disclosure requirements.
    Without a simplified format for disclosure, many participants may 
just receive additional information that they can not accurately 
interpret or effectively use to make decisions about the investment of 
their retirement benefits.
    The Committee also should consider the need to coordinate any 
proposed fee disclosures with existing notice requirements, including 
benefits statements required by the Pension Protection Act of 2006. 
Without coordination, plan participants will be overwhelmed by various 
notices with different types of information.
    Any legislative or regulatory action related to disclosure of fees 
must consider the existing burdens and obligations with respect to 
small and medium size plan sponsors. Such action must focus on the 
effective delivery of fee disclosure by service providers to plan 
sponsors who have the responsibility for providing simplified 
disclosure to plan participants.
    Thank you for inviting me to testify. I am happy to take questions.

                                 

    Mr. MCDERMOTT. Thank you very much.
    Dr. Stein, how did you get to be a professor?

STATEMENT OF NORMAN P. STEIN, PROFESSOR, UNIVERSITY OF ALABAMA 
       LAW SCHOOL, ON BEHALF OF THE PENSION RIGHTS CENTER

    Mr. STEIN. We lawyers are fake professors.
    Mr. MCDERMOTT. Okay.
    Mr. STEIN. Mr. Chairman, Mr. McCrery, Mr. Johnson, I am 
Norman Stein, a Professor at the University of Alabama School 
of Law and this year I am a visiting professor at Catholic 
University here in Washington, D.C., which actually has been 
very nice for me because I have a son who just started at the 
Naval Academy, which is only 30 miles down the road.
    I am appearing today on behalf of the Pension Rights 
Center, the Nation's only consumer organization dedicated 
solely to promoting and protecting the security of workers, 
retirees and their families. We thank you for the opportunity 
to testify today.
    Our testimony today will focus on three issues: the 
effectiveness of fees on retirement savings and 401(k) plans, 
disclosure of fees to participants, and disclosure of fees to 
fiduciaries. Our written testimony covers three other issues, 
which we think are equally important, but not equally important 
enough to be included in our oral testimony.
    In recent years, think tanks, commentators, consumer 
organizations, the government Accountability Office, `and the 
Department of Labor have developed models and simple 
illustrations of the dramatic effect of fees on retirement 
savings. From the standpoint of entities that provide various 
services to 401(k), a small additional fee can result in 
substantial profits because that fee is typically multiplied by 
the number of participant accounts served and the total amount 
of assets managed. In many markets, a small percentage 
difference in the cost of a product or service is not 
particularly meaningful because it is a one time cost and is 
not compounded over time. But in the area of 401(k) plans, fees 
are charged periodically over an employee's working life, and 
the time value of money can turn a nominally insignificant fee 
into a significant loss in retirement savings. So, fees matter. 
Although fees matter for all investments, they matter even more 
for 401(k) plans. That is because the very nature of these 
plans, where employee contributions flow into the plan each 
period, can conceal the impact of fees. Participants, unaware 
of how much they were paying in fees, see their accounts grow 
and assume that they are earning significant returns.
    Disclosure of fees is keenly important to participants. 
Participants need fee information to determine whether they are 
getting their money's worth for their 401(k) investments and to 
plan realistically for retirement. In addition, participants 
cannot adequately choose among investment options without 
relevant fee information. Finally, there is the fact that 
financially sophisticated participants may be in a position to 
influence plan decisionmakers' choice of investment options 
and, in some cases, the employees, the sophisticated employees, 
may be more focused on high fees than the decisionmakers 
themselves.
    In our view, automatic participant disclosure should be 
simple, direct and uniform across investment options. We agree 
with the many people this morning who have said that too much 
information can overwhelm an unsophisticated participant and 
give even a financially literate participant more information 
than they need.
    We suggest that the 401(k) participants be provided 
automatic fee disclosure statements that provide the following: 
A statement of why fees are important, and that they should be 
considered along with return and risk characteristics in 
selecting among investment options. For each investment option 
offered by the 401(k) plan, the rate of return net of fees 
during the preceding year, and an individual statement of the 
total dollar amount of fees charged to a participant's 401(k) 
account the preceding year, including all record keeping, 
investment load, marketing and other fees, perhaps broken down 
into two or three broad categories, as Mr. Neal's legislation 
suggests.
    Participants need information to help them shape a 
portfolio from the investment options available under the plan. 
Plan decisionmakers, however, have to choose from the entire 
universe of available investment vehicles those options that 
will be made available to plan participants. Moreover, they 
need periodic information about the investments they have 
chosen in order to monitor their continuing appropriateness to 
the plan's participants. Thus, plan decisionmakers require 
detailed information about all fees that are charged to the 
plan so that they can compare one investment option to another, 
particularly within classes of investments and similarly to 
choose service providers.
    In order for them to compare fees across various investment 
items and service providers, the presentation of fees should be 
uniform from vendor to vendor with fees divided into separate 
fees for each broad type of service provided by the vendor. 
This would require that fees for bundled services be unbundled.
    We also note that we believe participants should be able to 
request, affirmatively request, any information on fees that is 
available to the plan.
    Thank you for the opportunity to testify, and I of course 
am willing to take any questions.
    [The prepared statement of Mr. Stein follows:]
 Statement of Norman P. Stein, Professor, University of Alabama School 
             of Law, on behalf of the Pension Rights Center
    Mr. Chairman, Members of the Committee, I am Norman Stein, a 
professor at the University of Alabama School of Law, where I am 
privileged to hold the Douglas Arant Professorship. This semester, I am 
a visiting professor at Catholic University's Columbus School of Law 
here in Washington, D.C. I am appearing today on behalf of the Pension 
Rights Center, the nation's only consumer organization dedicated solely 
to promoting and protecting the retirement security of workers, 
retirees and their families.
    If someone were to look at the discussion of 401(k) plan fees over 
the past decade, they may well compare it to the weather: It is 
something that everyone talks about but about which no one has done all 
that much. It is our hope that this hearing today will put us on the 
road to improvement of both the disclosure and appropriateness of 
401(k) fees. Indeed, we were heartened to see that the topic of this 
hearing was not merely the disclosure of 401(k) fees, an issue on which 
the Center has commented before,\1\ but also on the appropriateness of 
some of those fees. Mere disclosure is often not enough: If fees are 
too high or otherwise inappropriate, the proper remedy is not 
disclosure but prohibition or regulation.
---------------------------------------------------------------------------
    \1\ Pension Rights Center Comments in response to U.S. Department 
of Labor Request for Information dated July 24, 2007 http://
www.pensionrights.org/policy/regulations/401k_fees_RFI/
PRC_comments_on_fee_disclosure_RFI.pdf
---------------------------------------------------------------------------
    Our testimony today will focus on six issues: (1) the effect of 
fees on retirement savings in 401(k) plans; (2) disclosure of fees to 
participants; (3) disclosure of fees to fiduciaries; (4) the 
inappropriateness of charging plan administration fees to participant 
accounts; (5) the inappropriateness of a Department of Labor field 
assistance bulletin that allows a plan to charge extraordinary fees to 
the accounts of individual participants; and (6) the desirability of a 
government-sponsored, low-fee 401(k)-type service provider, which could 
provide an alternative to smaller businesses that often lack sufficient 
bargaining power to negotiate low-fee arrangements with third-party 
administrators.
1. The Effect of Fees on Retirement Savings
    In recent years, think-tanks, commentators, the Government 
Accountability Office (GAO), and the Department of Labor have developed 
models and simple illustrations of the dramatic effect of fees on 
retirement savings. From the standpoint of entities that provide 
various services to 401(k) plans in the market, a small additional fee 
can result in substantial profits, because that fee is typically 
multiplied by the number of participant accounts served. In many cases, 
a small percentage difference in the cost of a product or service is 
not particularly meaningful to the consumer, because it is a one-time 
cost and is not compounded over time. But in the area of 401(k) plans, 
the fee is charged periodically, and sometimes as often as monthly, 
over an employee's working life, and the time value of money can turn a 
nominally insignificant fee into a significant loss in retirement 
savings. The GAO, for example, has shown how a one percentage point in 
fees for an investment with a seven percent before-fee rate of return 
can reduce retirement savings by 17 percent over a 20-year period of 
participation. Fees matter.
    Although fees matter for all investments, they matter even more for 
401(k) plans. That is because the very nature of these plans, where 
employee contributions flow into the plan each pay period, can conceal 
the impact of fees. Participants, unaware of how much they are paying 
in fees, see their accounts grow and assume they are earning 
significant returns.
2. Participant Disclosure
    Disclosure of fees is keenly important to participants. They need 
this information to determine whether they are getting their money's 
worth for their 401(k) investments, and to plan realistically for 
retirement. In addition,participants cannot adequately choose among 
investment options without relevant fee information. Finally, there is 
the fact that financially sophisticated participants may be in a 
position to influence plan decision-makers choice of investment options 
when the plan's current investment options have high fees.
    In our view, automatic participant disclosure should be simple and 
direct. Too much information can overwhelm an unsophisticated 
participant and can give even a financially literate participant more 
information than they need. We suggest that 401(k) participants be 
provided automatic annual fee disclosure statements that at a minimum 
include the following:

    1.  A statement of why fees are important, and that they should 
reconsidered with return and risk characteristics in selecting among 
investment options;
    2.  A listing for each investment option offered by the 401(k) 
plan, the rate of return, net of fees, during for the preceding 
year;\2\
---------------------------------------------------------------------------
    \2\ This could be similar to the format of the ``Rates of Return'' 
chart published by the Federal Thrift Savings Plan in its Highlights 
newsletter http://www.tsp.gov/forms/highlights/high07d.pdf
---------------------------------------------------------------------------
    3.  An individualized statement of the total dollar amount of fees 
charged to a participant's 401(k) account the preceding year, including 
all recordkeeping, investment, load, marketing and other fees.\3\
---------------------------------------------------------------------------
    \3\ This type of total dollar disclosure has recently been 
implemented in Australia. See Corporations Amendment Regulations 2005 
(No.1), March 10, 2005 (Australia), Amendment under Corporations Act of 
2001, Schedule 1, Part 3, Division 2(302), at p. 25, found at http://
www.frli.gov.au/ComLaw/Legislation/LegislativeInstrument1.nsf/0/
5148FBFAB97F8829CA256FC00022EC72/$file/0304600I-050307EV.pdf

    In addition, it would be helpful for the annual statement to also 
---------------------------------------------------------------------------
include

    1.  Expense ratios for (i) aggregate investment management fees and 
(ii) for administrative and advisory costs (to the extent paid by the 
participant);
    2.  Dollar amounts per $1,000 for (i) aggregate investment 
management fees and (ii) for administrative and advisory costs (to the 
extent paid by the participant).
    3.  Transaction-oriented fees that are paid when initially 
purchasing or later disposing of an investment option, with an 
indication of how high these fees would be if ratably charged on annual 
basis for investments held for 1, 5, 10, and 15 years.

    Finally, participants should be able to request more comprehensive 
information about fees for particular investment options, with fees 
disaggregated into uniform categories.
3. Disclosure to Fiduciaries
    Participants need fee information to help them shape a portfolio 
from the investment options available under the plan. Plan decision-
makers, however, have to choose from the entire universe of available 
investment vehicles those options that will be made available to plan 
participants. Moreover, they need periodic information about the 
investment they have chosen in order to monitor their continuing 
appropriateness for the plan's participants. Thus, plan decision-makers 
require detailed information about all fees that are charged to the 
plan, so that they compare one investment option to another, 
particularly within classes of investments. In order for them to 
compare fees across various investment vehicles, the presentation of 
fees should be uniform from vendor to vendor, with fees divided into 
separate fees for each type of service provided by the vendor. This 
would require that fees for bundled services be unbundled. Moreover, it 
may be appropriate for there to be regulation that requires that each 
service be available on a bundled or unbundled basis. Discounts for 
bundled services should be clearly identified.
    We also note that participants should be able to request any 
information on fees that is submitted to the plan.
4. Costs for Administrative Services Should Be Borne by the Plan 
        Sponsor
    It may be time to re-evaluate whether a plan sponsor should be able 
to pass administrative costs on to individual participants or whether 
these costs should be considered a cost of plan sponsorship. There are 
four reasons for our views:

    1.  The employer is the purchaser of plan administrative services 
without being the actual payor for those services (in plans that pass 
those costs on to the participants). This is a recipe for market 
failure, since the employer does not have the maximum incentive to 
bargain for the lowest possible fees and/or the most appropriate 
services for the plan.
    2.  In some cases, particularly with smaller plans, fees can make 
the cost of investing inside a plan more expensive than investing 
outside a plan.
    3.  In defined benefit plans, the employer bears the administrative 
costs of plan management, either directly if the administrative fees 
are paid directly, or indirectly if the fees are charged to the plan, 
since the employer bears the burden of funding the plan. The ability to 
charge back fees to the participant in a defined contribution plan 
creates an uneven playing field between defined benefit and defined 
contribution plans. In our view, the administrative costs of plan 
sponsorship should be a cost of doing business.
    4.  When employees decide among employment opportunities, they will 
generally compare section 401(k) plans based on the employer match and 
not on whether the employer bears the administrative costs of plan 
sponsorship, something that even sophisticated job seekers are unlikely 
to consider (or have the information to consider). Requiring employers 
to bear the administrative costs as a normal cost of doing business 
will increase the accuracy of employee evaluation of 401(k) plans 
offered by different employers.
5. Field Assistance Bulletin 2003-3
    In 2003, the Department of Labor issued a Field Assistance Bulletin 
that reversed long-standing rules on what types of individual costs 
could be charged as fees to individual participants. That Field 
Assistance Bulletin, which did not go through the normal regulatory 
process in which a change of position is first published in the Federal 
Register and comments from all stakeholders solicited and considered, 
adopted positions that in our view were ill-considered and that can 
have unfair and, in some cases, devastating impact on the retirement 
security of some plan participants.
    The most objectionable of the holdings in this Bulletin was that 
the plan's cost of a qualified domestic relations order could be 
charged directly to the account of the participant. These fees can be 
substantial and in some cases could reduce the value of a modest 
retirement account to zero. We urge the Committee to review this 
Bulletin and consider recommending that the Department of Labor 
withdraw it and return to its prior interpretation of when fees can be 
charged solely to the individual accounts of particular participants.
6. Low-Cost Provider
    The economist Christian Weller, and others, have proposed that 
legislation make available to small firms that provide 401(k)s an 
option to access large, governmental third-party service providers. 
This would make available the economies of scale realized by large 
employers. For example, the Federal Thrift Savings Plan or the defined 
contribution plans of state retirement systems might allow 
participation by the employees of private employers. The availability 
of such an alternative might also have ripple effects in the market, as 
service providers lower fees to make their products more competitive to 
smaller employers.

                                 

    Mr. MCDERMOTT. Thank you for your testimony, and we will go 
now to David Certner.

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

    Mr. CERTNER. Mr. Chairman, Mr. McCrery, other Members of 
the Committee, thank you for convening this hearing today. AARP 
appreciates the opportunity to testify on this important 
retirement income issue. 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, now the dominant employer-based pension 
vehicle. Those participating in these plans shoulder the risk 
and responsibility for their investment choices and ultimately 
their retirement security. As a result, better plan information 
is essential. We all have a stake in ensuring that participants 
receive accurate and informative disclosure from the 401(k) 
plans, including expenses. However, plan expense and fee 
information is often scattered, difficult to access or non-
existent. 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 earlier noted, GAO estimated that $20,000 left in a 
401(k) account that had a one percentage point higher fee for 
20 years would result in an over 17 percent reduction or over 
$10,000 in the account balance. But a more realistic period is 
a 30-year period, and we estimate that over a 30-year period, 
the account would be about 25 percent less. In other words, one 
out of every four plan dollars would go to fees. Even a 
difference of only half a percent or 50 basis points would 
reduce the value of the account by 13 percent over 30 years. In 
short, fees and expenses can have a huge impact on retirement 
income security levels.
    AARP recently surveyed 401(k) participants to gauge their 
understanding of plan fees and investment choices. Our survey 
indicates that participants do not have a clear understanding 
of their investments. When asked if they know the names of all 
of the funds in which they have money invested, almost 65 
percent of survey respondents said no. Twenty-7 percent did not 
know whether they had a stock fund, 29 percent did not know 
whether they even had a bond fund.
    In addition, 401(k) participants lack basic knowledge of 
plan fees. When asked whether they pay any fees for their 
plans, less than one-fifth said they do, almost two thirds 
responded that they do not pay fees and 18 percent said they 
did not know. Respondents were questioned in detail about the 
fees they may be charged in mutual funds and other types of 
investments. The answers indicate that 401(k) participants do 
not fully understanding what types of fees their plans charge. 
For example, when asked whether their 401(k) plan charges an 
administrative fee, 24 percent said yes, 21 percent said no, 55 
percent said they did not know.
    Finally, Mr. Chairman, as you noted earlier, when told that 
plans often charge fees, 83 percent said they did not know how 
much they paid in fees. It is clear that better information is 
needed, and we applaud the Committee for taking a harder look 
at the need for acquiring greater transparency of fee and 
expense information for both participants and plan sponsors. To 
start, comprehensive information on plan fees and expenses will 
enable the plan sponsors to fulfill their fiduciary 
responsibility to ensure that fees and expenses are reasonable. 
Employers doing due diligence need to have access to costs 
associated with various components, not just total costs, and 
greater itemization of fee arrangements would provide a clearer 
presentation of cost. I agree with the comments of Mr. McCrery 
earlier today, that employers do have a key role to play, 
requiring that service providers give comprehensive information 
to plan sponsors, because is in turn important to the 
participants since the costs are often passed directly on to 
them.
    Clear information is also necessary for the participants to 
better manage their own accounts. Participants face a range of 
fees, and while these fees vary in size and scope, they have 
one thing in common, they all reduce the level of assets 
available for retirement.
    We support greater transparency to participants of plan 
investment choices, including the risks and fees, and believe 
all individual account plan participants need to have access to 
this information. Lack of participant knowledge and survey data 
suggests that fee information should be distributed on a 
regular basis and in plain language. We also recommend that 
information on an investment is demonstrated how they will 
affect the participant's account balance over time.
    We commend the Committee for examining the need to 
strengthen 401(k) disclosure. The significant impact of fees on 
retirement security highlights the need for clear investment 
and fee information. Greater disclosure will help drive down 
fees, will 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 the Committee to ensure 
that employers and participants have the information they need. 
Thank you for the opportunity to testify. I will be happy to 
answer any questions.
    [The prepared statement of Mr. Certner follows:]
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    Mr. MCDERMOTT. Thank you very much. We will begin with Mr. 
Neal.
    Mr. NEAL. Thank you, Mr. Chairman. Ms. Tavares, you 
testified in support of limited and simple disclosure to plan 
sponsors so that they might evaluate costs and pass along the 
best deal to their employees. As you may be aware, I filed 
legislation to require all providers, including those that 
bundled services to disclose fees in broad categories, emphasis 
on the word ``broad.'' Can you explain why you believe this 
disclosure is helpful and why it needs to be simple and low 
cost?
    Ms. TAVARES. Well, first, I think ``broad'' and ``simple'' 
may work together. That was my intent.
    Mr. NEAL. Mine too.
    Ms. TAVARES. Okay. I think it would be helpful to the 
overall retirement system, in the voluntary system that exists, 
for employees to obtain information, but the cost could 
frustrate the system if a plan sponsor has to spend a lot of 
time deciphering detailed information that is not provided in 
the broad manner that you describe, in order to pass that 
information on the plan sponsor is going to have to hire 
someone to do that.
    Mr. NEAL. Ms. Harris, you explained that some governmental 
plans already use independent consultants to assist in 
understanding plan fees; how can greater fee disclosure, even 
in the simple and broad manner that my bill outlines, assist 
those who manage 403(b) and 457 retirement plans?
    Ms. HARRIS. Thank you. Can you repeat your question, 
please?
    Mr. NEAL. I would be happy to. How can greater fee 
disclosure, even in simple and in the broad manner that my bill 
outlines, assist those who manage 403(b) and 457 retirement 
plans?
    Ms. HARRIS. Speaking primarily on behalf of the 457 
retirement plans, we found that some of the plans in our survey 
did use consultants and that was prevalent in the smaller State 
and local retirement plans. Our plans use the consultants to 
assist them in understanding the fee structures that the 
providers are presenting to them, and as part of our overall 
due diligence process. We take our fiduciary responsibilities 
so seriously, and we rely on the consultants because they have 
a better and broader knowledge of the fee industry than 
typically the smaller plans have. So, I think that if you 
require broader and simpler disclosure, then the plan 
administrators, such as myself and my colleagues, will perhaps 
not need to rely as much on the use of consultants, although it 
is part of our due diligence process, and we do include fee 
review as part of our fiduciary responsibility exercises.
    Mr. NEAL. Thank you. Mr. Stein, I was interested in your 
recommendations regarding disclosure to workers. You recommend 
simple, direct disclosures, including annual personalized 
statements. This is similar, as you know, to the approach I 
have taken in my bill, and can you tell the Committee why you 
believe that while allowing access to more comprehensive 
information is necessary, for most workers hitting the 
highlights will be sufficient? This is very important?
    Mr. STEIN. Yes, well, I want to make clear also that I 
think whatever information the plan has should be available to 
employees who request it, in part because I think part of the 
framework of ERISA is to essentially deputize employees to keep 
track of what is going on their employees and a few employees 
who do that job well can often have an impact on how the plan 
is administered. But generally, I agree that too much 
information can overwhelm an employee and basically what the 
employee needs is enough information, I think one of the 
earlier witnesses said, and I agree with this, whether to 
participate in the plan and presumably the fees will not be so 
high to discourage participation and, second, how to choose 
among various investment options. I do not think you need the 
same information that the plan sponsor needs to make the kinds 
of decisions the plan sponsor has to make.
    Mr. MCDERMOTT. Mr. Johnson, would you like to inquire?
    Mr. JOHNSON. Thank you, Mr. Chairman. Mr. Scott, TIAA has 
been successful in providing income, guaranteed income for life 
participants and great at getting people to participate in 
those plans. I know the defined contribution plans for teachers 
in Texas in particular have been very successful and popular. 
How do you help your customers make those crucial decisions?
    Mr. SCOTT. I think there are several things that work in 
our favor here to make these plans successful, one is the fact 
that they are retirement focused, so people go into them with 
the understanding that this is about their retirement, so they 
tend to have a higher degree of interest based upon that. We do 
a significant amount of education through the employer and 
through our non-commission staff in addition to that. It is the 
employer and employee and the TIAA-CREF relationship that 
really makes that work, so they work. The employer works 
cooperatively with us to allow us access to the employees to 
help them educate them about their selection and the importance 
of selection.
    The other thing is the employer contribution. There is a 
significant level of contribution in the 403(b) space, we think 
that is consistent with having a real retirement plan and that 
is what makes those programs work well, and objective advice, 
we believe we should be giving objective advice about fund 
selection so people can make the right choices about their 
retirement.
    Mr. JOHNSON. Without government telling you to do it, 
right, you do it?
    Mr. SCOTT. Well, so far that is the case.
    Mr. JOHNSON. I know. I think that is good. Ms. Harris, when 
I was Chairman of the Subcommittee with jurisdiction over 
ERISA, I maintained that 403(b) plans and 457 plans are well 
regulated by State constitutions. If this Congress decides to 
legislate on top of all the State level regulation, could you 
review for us what special factors Congress ought to be careful 
to consider?
    Ms. HARRIS. Well, I think that while we have not previously 
been subject to ERISA, we are subject to many layers of other 
laws, such as trust laws, open meetings laws, and public 
procurement laws. I said in my testimony, our contracts are 
most often reviewed in the open forum setting, so we have 
already an extremely high level of accountability to our 
participants. I can say that from where I come from, and I 
think my plan is very typical, we treat our participants as we 
as a governmental organization treat our taxpaying public. So, 
we do see that we have a very, very high level of 
accountability. We also look to ERISA for guidance and use that 
to develop our best practices and govern our plans by fairness 
and due process for the benefit of our participants. So, your 
question was what parts of ERISA should we----
    Mr. JOHNSON. Do you think you ought to have any government 
interference in what you are doing right now or is the State 
oversight good enough?
    Ms. HARRIS. Well, I think we already look to ERISA for 
guidance and then we have several more layers of oversight 
today. So, just like Mr. Scott, I think that we are already 
meeting most of the ERISA requirements that are imposed on a 
plan that is governed by ERISA.
    Mr. JOHNSON. Okay, in the teacher venue, do most states 
require teachers to be participants of your plan?
    Mr. SCOTT. That varies, a number of States have optional 
retirement programs that they allow teachers to participate in. 
Most of our participants are in universities and faculties and 
may or may not be in State-run programs.
    Mr. JOHNSON. Okay, thank you. Mr. Wray, one question, do 
investors in a 401(k) plan generally pay more or less in 
investment fees than investors in the retail market when 
investing for their own discretionary saving?
    Mr. WRAY. They actually pay less. In the current 
composition of 401(k) participation, about two thirds of the 
people work at companies with 1,000 or more employees. Those 
companies are able to negotiate the most favorable fee 
arrangements, so if you are looking at the system overall, they 
have very favorable fee outcomes as a general group.
    Mr. JOHNSON. So, you would say that you do not think 
additional legislation or disclosure is necessary at this time?
    Mr. WRAY. No, I think that we need to change the disclosure 
requirements, and we are very much in favor of that, and we are 
very supportive of the DOL efforts in this area. I was chair of 
the ERISA Advisory Council when the recommendations were made 
for the DOL to make changes in this area. We feel that the 
credibility of the system requires that all the players see 
what the fees are even though I think overall the system is 
providing a very favorable fee outcome in the system, that does 
not mean that we do not want disclosure because the credibility 
of the system really requires this I think.
    Mr. JOHNSON. Okay.
    Mr. WRAY. But not legislation at this point.
    Mr. JOHNSON. Okay, thank you, sir. Thank you, Mr. Neal.
    Mr. NEAL [presiding]. You were doing well until the last 
sentence.
    [Laughter.]
    Mr. JOHNSON. I kind of liked it.
    Mr. NEAL. Let me thank the witnesses today for their 
testimony. There may be some written follow-up questions for 
panelists, and we appreciate your prompt response. This was 
most helpful to me, and I do appreciate the talent that you 
have demonstrated here today. If there are no further comments, 
the hearing stands adjourned.
    [Whereupon, at 2:45 p.m., the hearing was adjourned.]
    [Submissions for the Record follow:]
           Statement of the American Council of Life Insurers
    The American Council of Life Insurers (ACLI) appreciates the 
opportunity to provide our views to the Committee on Ways & Means in 
connection with the Committee's hearing on ``The Appropriateness of 
Retirement Plan Fees.'' We welcome the interest of Chairman Rangel, 
Ranking Member McCrery and the Committee on this important topic. In 
addition, we also want to thank Congressman Neal and Larson for their 
interest in this issue by having introduced legislation which addresses 
disclosure in the defined contribution market. ACLI supports efforts to 
ensure meaningful disclosure on retirement plan fees. Employers who 
sponsor defined contribution plans need to be fully informed of the 
fees for the services and investment products selected for their plans. 
Employee-participants need information on the investment products and 
related fees that are made available in their plans in order to decide 
how to invest their retirement savings.
    ACLI is a national trade association of 373 member companies that 
account for 93 percent of the life insurance industry's total assets in 
the United States, 91 percent of life insurance premiums, and 95 
percent of annuity considerations. In addition to life insurance and 
annuities, ACLI member companies offer pensions, including 401(k)s, 
long-term care insurance, disability income insurance and other 
retirement and financial protection products, as well as reinsurance.
    Life insurers are among the nation's leaders in providing 
retirement security to American workers. Life insurers provide a wide 
variety of investment products to retirement plans that are designed to 
achieve competitive returns while retirement savings are accumulating 
and to provide guaranteed income once employees enter retirement. More 
than one-quarter of the assets in employer-based retirement plans are 
managed by life insurers. Life insurance companies, like mutual funds 
and other financial institutions, provide investment options and 
administrative services to retirement plans, including 401(k) plans and 
similar participant-directed plans. In addition to managing the plan's 
investments, the insurer may offer other services to assist with plan 
administration, such as recordkeeping, participant communication, legal 
compliance and plan testing.
    ACLI is committed to working with policy-makers to improve 
disclosure of plan information. In 2006, ACLI worked in conjunction 
with a group of trade associations to provide the Department of Labor 
(the ``Department'') with data on the types of fees charged in 
connection with retirement plan investment products and services. ACLI 
again recently joined with a broad group of trade associations in 
developing joint principles on fee disclosure in response to the 
Department's request for information. We look forward to continuing to 
work with the Department on its regulatory initiatives for participant 
disclosure. While ACLI may not agree with the Department on every 
point, we believe that the Department is addressing important issues 
with respect to plan fees. We hope the Congress will coordinate any 
legislative reforms with those regulatory initiatives that the 
Department has underway. It would be extremely disruptive to plan 
sponsors, service providers and participants if changes were made in 
response to new regulatory requirements only to be replaced by 
legislation imposing a different approach.
    ACLI supports the following principles with respect to disclosure 
of plan information to plan sponsors and participants:

      Fee disclosure to plan sponsors and to participants serve 
different needs. The purposes behind fee disclosure to plan sponsors 
and to participants differ, and any reforms to the current-law rules 
should be consistent with those underlying differences. The selection 
and monitoring of service providers to the plan is a fiduciary act 
subject to ERISA-imposed obligations, including the obligation to 
ensure that fees paid from plan assets constitute reasonable 
compensation for services. By definition, a fiduciary needs full 
information about the services and products under the plan and the fees 
charged and compensation earned by plan service providers. 
Participants, on the other hand, are not selecting among service 
providers and setting provider compensation. Rather, participants are 
making a basic choice among a fixed menu of plan investment options, in 
which fees charged are only one of a number of important criteria for 
making sound investment decisions. Providing voluminous and granular 
information about plan fees to participants would add undue complexity 
and is not necessary to ensure that participants have the level of 
information they need to make decisions about their investment options. 
The distinct and different purposes between plan sponsor and plan 
participant fee disclosure must be kept squarely in mind in considering 
any new disclosure rules.
      Disclosure to plan sponsors should focus on the 
information that plan sponsors need to fulfill their fiduciary 
responsibilities. Fiduciaries need information as to the full menu of 
services and investment products that are being provided to the plan 
and the aggregate fee for those services in order to fulfill their 
responsibilities under ERISA. Some plan sponsors may choose to purchase 
investment products and services in a ``bundled'' package under which a 
single fee may be charged for both investment products and other plan 
services. A 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. ACLI does not favor a so-called ``unbundled'' 
approach, which would require disclosure to plan sponsors that 
artificially divides a single ``bundled'' fee into specified components 
that the service provider may not make available commercially on a 
separate component basis. Requiring component disclosure is not 
necessary for the fiduciary to fulfill its obligations under ERISA and 
ensure that fees are reasonable. Moreover, requiring a ``bundled'' fee 
to be artificially divided among component services likely will lead to 
arbitrary results that will not provide useful information to plan 
sponsors.
      Disclosure to plan participants should be designed to 
help focus participant decisions on how to invest their retirement 
assets. Information that is irrelevant to participants' investment 
decisions may be confusing and increase costs, and therefore, should 
not be mandated. Fee and expense information is only part of the key 
information participants need in order to make investment decisions. 
Fee disclosure should not overshadow other critical information--such 
as investment objectives and product characteristics, historical 
performance and risks, and the identity of the investment advisor or 
product provider. Prior to enrollment, participants should be informed 
of their investment choices in simple, straightforward language. In 
addition to a description of the investment, participants should have 
access to a summary of expenses that could affect their account 
balances--including asset-based fees associated with the plan and its 
investment options, additional per-participant charges associated with 
the investment, and other administration fees and transaction charges. 
After enrollment, participants should be informed where to find or how 
to request updated information on fees and other characteristics of 
plan investment options.
      Any new disclosure should be cost-effective. Additional 
disclosure requirements come with added costs. Any new disclosure 
requirements will impose new expenses and burdens that are likely to be 
reflected in higher prices for plan administrative services, which 
would ultimately be borne by the plan participants. For some employers, 
new disclosure costs and related potential liabilities could even 
contribute to a reluctance to sponsor a qualified retirement plan for 
employees. It is therefore imperative that new disclosure requirements 
be cost-effective and focused squarely on providing information that is 
necessary for the decisions that need to be made under the plan. In 
that regard, plan sponsors should have the flexibility to determine the 
format in which the plan's investment options and fee structures are 
explained to participants, which should help minimize increased costs 
associated with any new disclosure requirements. Delivery of 
information to plan participants should be coordinated with current-law 
participant notice requirements and should to the greatest extent 
possible allow the use of electronic media.

                                * * * *

    Life insurers are committed to meaningful disclosure, which is 
critical to ensuring secure retirements for the millions of Americans 
that participate in defined contribution plans. We thank the Committee 
for the opportunity to submit this statement and look forward to 
continued dialogue with the Committee and its staff on these important 
issues.

                                 

               Statement of Daniel Wintz, Omaha, Nebraska
    To the Committee:
    Thank you for this opportunity to make a statement for the record 
regarding the appropriateness and disclosure of fees charged in 
connection with investments offered to participants in 401(k) plans.
    My name is Daniel J. Wintz. I am an attorney with the Fraser 
Stryker PC LLO Law Firm, 409 South 17th Street, Omaha, Nebraska. I have 
been actively involved in the design and administration of qualified 
retirement plans since early 1975, shortly after the enactment of the 
Employee Retirement Income Security Act of 1974 (ERISA). My practice 
area has been and is primarily focused on advising employers 
maintaining, and fiduciaries serving, qualified retirement plans 
including 401(k), 403(b) and other defined contribution retirement 
plans providing for individual account investment direction.
    I believe that, under ERISA, fiduciaries to and participants in 
401(k) and other plans providing for investment direction need to be 
apprised of not only the total fees (as a percent of assets or 
otherwise) that will be incurred within a particular investment option, 
they also need to be apprised of four key elements that comprise that 
total fee; namely, investment adviser/management fees, plan 
administration fees (e.g., sub-Transfer Agent fees), sales/marketing 
fees (e.g., front-end, back-end, 12b-1, etc.), and investment overhead 
(i.e., other costs). Employers maintaining plans and fiduciaries 
serving plans need to know these respective fees in deciding whether 
particular investments are appropriate to be offered and whether the 
plan is paying no more than reasonable fees for services provided. 
Participants need to know these respective fees in order to determine 
the fees that they are paying versus possible returns, and to determine 
whether and how much they are willing to subsidize the cost of the 
administration of the plan and plan service providers.
    For representatives of the investment industry to say that this 
information is difficult (or impossible) to provide or that it is 
information overload is simply ridiculous. If the information is 
difficult to obtain; whose fault is that? It is the investment 
industry's. If employers and fiduciaries are to evaluate this 
information in order to fulfill their duties under ERISA, isn't it 
appropriate that the investment industry be required to provide it? If 
a participant wants to make an informed decision about a particular 
investment versus another, shouldn't the participant know what (s)he is 
paying for in terms of investment management, plan administration, 
sales and overhead fess for respective investment alternatives? The 
obvious answer is, Of course.
    I urge the Committee to report out a Bill that will mandate these 
minimum disclosures so that employers, fiduciaries and participants can 
make informed decisions with respect to investment alternatives offered 
through participant investment directed account plans.
    If members or staff have any questions for me or would like 
additional information, please feel free to contact me. Thank you for 
this opportunity to make this statement.

                                 

          Gerald C. Schneider and Judith M. Schneider, Letter
                                Bainbridge Island, Washington 98110
                                                   October 30, 2007
Ways and Means Committee
U.S. House of Representatives
Washington, DC

Members of the Committee:

    Thank you for the opportunity to speak to the issue of hidden fees 
in retirement savings. For us, this has been as issue for many years 
since we hold a 401(k) with an insurance company and 403(b) products.
    It took 20 years of working in schools and saving for retirement to 
become aware that hidden expenses torpedoed any chance at real growth 
in money saved through a 403(b). Once that became known, our staff had 
a chance to request better options through no-load funds. In our school 
district, it was a prolonged battle, because insurance and brokerage 
companies discouraged administrators and business office staff, who did 
not understand the issues around expenses.
    When the 401(k) came into our life, we asked again and again about 
expenses and fees. The arrogance of the insurance company staff was 
evident when the representative said, ``What do you care what the 
expenses are? Isn't the value of the account going up?'' Of course the 
value was increasing--due to a generally bullish market and continued 
contributions. They never, ever answered the questions about expenses 
and perhaps because few people asked, they felt they didn't need to.
    We regular working families must pass up travel, nicer housing, 
private schools, tutors for children, decent cars and other privileges 
and products in order to save for retirement. Having our returns 
stultified by excessive (and often hidden and unknown) expenses is an 
insult and a gross injustice. In our case, our retirement must come 
later and we believe it will be less secure as a result.
    We hope you pass HR 3185 and EXPAND it to 403(b)s and 457s. We 
working folks need to know and deserve to know what the expenses and 
fees are--all of them. And we should have the opportunity to make the 
decisions about which services we need or how much is a fair price. We 
make those decisions in regard to our homes, our automobiles, our 
after-tax savings, and all the other services and products we use; we 
need and deserve the chance to make those decisions in regard to our 
retirement savings.
            Thank you.
                        Gerald C. Schneider and Judith M. Schneider

                                 

             Statement of Kevin Powell, Irvine, California
    Members of the Committee,
    It is a great honor to be afforded this opportunity. My name is 
Kevin Powell. I am a CFP (Certified Financial Planner) and a RIA 
(Registered Investment Advisor). I have worked in the financial 
services field since 1986. I feel that my testimony will be 
representative the ``little guy'' in America, since I talk to my 
clients (hard-working Americans) about retirement on a daily basis.
    I strongly urge this committee not to limit its scope to just 
401(k) plans. There are many other types of retirement plans in the 
American workplace today and there should be similar ground rules for 
all those plans. Addressing a problem for 401(k) plans and the larger 
corporations that normally offer them, while ignoring all the other 
retirement plans would be a terrible disservice to smaller employers & 
employees who many times will use another retirement plan such as a 
SIMPLE IRA, a SEP IRA, a 457, a 401(a) plan, a 403(b) plan, etc.
    The majority of retirement plan savings is invested in mutual 
funds. Mutual funds have layers upon layers of fees, some disclosed and 
some that are hidden inside the fund. This makes it very difficult for 
investors when trying to approximate the actual amount of expenses that 
are being assessed inside a particular mutual fund. Without this 
information retirement plan participants are not able to make an 
educated decision as to where to place their hard-earned savings.
    My primary concern about retirement plans and the fees that are 
assessed is that high fees inside the investment vehicles made 
available to plan participants, rob individual investors of hundreds of 
thousands if not millions of dollars over an average American's 
lifetime.
    It is likely that the Committee is going to see a variety of 
expense ratio charts and figures from other speakers who come forward 
to testify. However, please keep a couple of very important points in 
mind.
    Disclosed mutual fund expense ratios averaged roughly 1.5% in 2006. 
That expense ratio does not include any sales loads or mortality and 
expense ratios (inside variable annuities) that investors may have had 
to pay. Yes, there are some retirement plans where investors have to 
pay these types of fees. Most importantly, it does not include the 
trading costs of the mutual fund that all investors pay. Recent 
estimates on trading cost expenses inside mutual funds were projected 
to be somewhere in the neighborhood of 0.5% to 1% or more annually.
    The Investment Company Institute is a highly respected organization 
and their research is well recognized throughout our industry. Recent 
figures from their web site show 401(k) or retirement plan expenses 
averaged about 0.8% in 2006. If you add to this the undisclosed 0.5% 
trading cost expense (use the lowest projected cost to be 
conservative), you now have a truer expense ratio of about 1.3%.
    Consider a simple scenario.
    Assume that an investor is able to accumulate $500,000 in his or 
her retirement plan. If that investor averages an 8% return on those 
assets for 20 years, the account would grow to $2,330,478. For 
simplicity's sake, assume no new additions or withdrawals from this 
fund for the illustrated time frame.
    However, if that same investor could have earned a 9% return (by 
paying 1% less in expenses), he or she would have $2,802,205 or roughly 
20% more in assets!
    A simple 1% savings produces a difference of nearly one half of a 
million dollars. That's an extra half-million dollars for those 
retirement plan participants to use to fund their retirement, retire 
debt, and make purchases at local vendors that will support the 
regional and national economy, and so on.
    That's also an extra $500,000 that will generate tax revenues for 
the U.S. government.
    The following chart shows the differences in ending values of a 
$500,000 account invested at various growth rates for 20 years. You can 
easily see the differences in the ending values of the investments.
    The purpose of the chart is to illustrate the difference in the 
ending values if retirement plan participants could save 1% in annual 
expenses. For example, compare the ending value from a 7% return to a 
1% higher return of 8% that investors could realize through lower fees 
inside their retirement plan and so on.

                                                      Title
----------------------------------------------------------------------------------------------------------------
                                                            Growth rate       Period of time      Ending value
----------------------------------------------------------------------------------------------------------------
$500,000                                                               5%           20 years         $1,326,648
----------------------------------------------------------------------------------------------------------------
$500,000                                                               6%           20 years         $1,603,567
----------------------------------------------------------------------------------------------------------------
$500,000                                                               7%           20 years         $1,934,842
----------------------------------------------------------------------------------------------------------------
$500,000                                                               8%           20 years         $2,330.478
----------------------------------------------------------------------------------------------------------------
$500,000                                                               9%           20 years         $2,802,205
----------------------------------------------------------------------------------------------------------------
$500,000                                                              10%           20 years         $3,363,749
----------------------------------------------------------------------------------------------------------------

What some of the greatest investment minds have said about investment 
        fees?
    A couple of the most intelligent investors we've ever known have 
spoken out on this subject. William F. Sharpe, Nobel Laureate in 
Economics, when asked about keys to investing, in a recent interview 
said: ``The first thing to look at is the expense ratio'' (italics & 
bold added).
    This text was taken from Warren Buffett in the Berkshire-Hathaway 
Annual Report for 1996:

    ``Seriously, costs matter. For example, equity mutual funds incur 
corporate expenses--largely payments to the funds' managers--that 
average about 100 basis points, a levy likely to cut the returns their 
investors earn by 10% or more over time.''

    Sadly, Mr. Buffett was too conservative in his calculations. The 
average equity fund now charges not 100, but 150 basis points, and also 
incurs portfolio transaction costs of at least another 50 basis points. 
Together, they comprise expenses of 200 basis points or more in some 
cases.
    If I could amend Mr. Buffett's comments to reflect that fact, then 
fund costs are a ``levy likely to cut the returns their investors earn 
by 20% or more over time.''
    And if you have to pay a sales load or management fee to buy or 
sell or manage your mutual fund, then your total returns will suffer 
even more.
    Sadly--and unbelievably--bond fund expenses also average more than 
1%, a grossly unjustified levy on any gross interest yield, especially 
with recent nominal yields in the 4.6% neighborhood on the long U.S. 
Treasury bond. When adding in all fees, returns would be cut by almost 
30%. I believe investors should regard such costs as unacceptable and 
the government should step in to regulate this abuse.
    If you want more evidence, consider this quote from the Securities 
and Exchange Commission's website:

    ``Higher expense funds do not, on average, perform better than 
lower expense funds.''

    Albert Einstein was once asked, ``What is the most powerful force 
in the universe?'' He replied, ``Compound interest.'' Investors benefit 
from the power of that force when they invest for the long-term. But 
remember that when it comes to investment costs, the force can be 
equally powerful in the opposite direction.
Second area of focus beside investment fees
    Retirement plan fees are a great starting point but should not be 
the only area of focus for the Committee. Further information from the 
Investment Company Institute's web site showed that retirement nest 
eggs reached a record $16.4 trillion in 2006, an 11% increase over the 
prior year and a 55% increase since 2002 when the equity bear market 
bottomed.
    That is great news but also a bit disheartening. Since account 
values only grew by 11%, it means that most participants in retirement 
plans woefully underperformed the stock market in 2006 when compared to 
the overall stock market (S&P 500) return of 15.8%.
    Considering new money added by employees and employers plus 
Americans who opened up a retirement plan for the first time and the 
earnings of all that new money, the real rate of return on retirement 
plans most likely was in the low to mid single digits. That could be 
roughly one-half of the nearly 16% return of the S&P 500. This is not a 
one-time anomaly either. This trend can be observed for a significant 
period of time.
    So instead of earning an extra 1% as was illustrated above, some 
retirement plan participants could realize returns that were 4%-6% 
higher than what they have typically been earning! Using the investment 
growth chart from page 2, if you compare a 5% return to a 9% return (a 
difference of 4%), the result is $1.5 million more dollars for that 
retiree!
Possible solutions
1. Consistent rules and pricing guidelines
    Part of this difference can come from establishing consistent 
pricing guidelines for mutual funds or other investment vehicles. Any 
investment company that offers services to any type of a retirement 
plan would have to offer a special set of funds that had pricing 
specifically for retirement plans.
    I am not affiliated with any brokerage company but American Funds 
is a financial institution that I have a great deal of respect for. 
They have classified their funds into different levels. The fee 
differences on their ``R'' funds are striking. R5 funds are generally 
available to only retirement plans. For example, the American Fund 
Investment Company of America R1 mutual fund had a disclosed expense 
ratio of 1.42% compared to the R5 fund that had a 0.36% gross expense 
ratio. (Morningstar data July 2007)
    That is the 1% difference that was illustrated in the original 
example and results in 20% more money for the plan participant.
    However, the Committee has room to even improve on that this 
operational structure.
    The R5 funds are only open to 401(k) plans. That means a large 
number of plan participants have to pay quite a bit more for the R4 
funds or the R3 funds. For example, the internal expense ratio for the 
American Funds Investment Company of America R4 fund was roughly 80% 
higher than the R5 fund (0.65%). The R3 fund's gross expense ratio was 
disclosed as 0.95% or nearly 1.6 times higher than that of the R5 fund. 
And none of these expense ratios include any trading costs.
    I believe you would see broad-based support for a mandate from the 
government for any company working with retirement plans that they have 
a class of retirement fund options for investors to consider that would 
be characterized by significantly lower fees inside the funds made 
available to all retirement plans. An expense ceiling formula should be 
included with this mandate. In other words, if the average expense 
ratio for the previous year was 1.5%, than all investment vehicles made 
available to retirement plans must have expense ratios that were 1% 
less than that ratio. Or whatever amount or percentage the Committee 
deems appropriate.
    A flexible fee ceiling would allow for normal inflationary price 
increases or adjustments so financial companies would not suffer if 
costs increase in future years.
    If investment companies wanted to offer their investment vehicles 
to the American public inside a retirement plan, they would have to 
have this class of lower cost funds available. The argument that 
financial institutions will go bankrupt or lose money is not valid 
since many companies besides American Funds are doing this very thing 
today and thriving in the market place.
    If that type of argument is made, the Committee needs to remember 
that some of the largest costs mutual funds incur come from 
advertising, distribution and commission expenses. Advertising expenses 
are much less expensive with retirement plan participants when compared 
to investors in general because retirement plan participants normally 
have a set ``menu'' of funds to choose from. If a particular fund is 
not available inside a retirement plan, participants cannot go outside 
the plan and add funds of their own choosing.
    Distribution and commission expenses are much less with retirement 
plans since all investment companies compensate their sales people 
significantly less on retirement plans than they do when compared to a 
regular sale of their funds. Distribution expenses are held in check 
because of the defined set of plan participants are limited to one 
enterprise or institution.
    There are other investment alternatives that are significantly less 
expensive than traditional mutual funds. So there is the potential for 
an even greater savings to retirement plan participants.
    Investment companies should be required to disclose all fees and a 
total, all-inclusive fee ratio for each fund they offer. That is the 
only way that investors will ever be able to do an ``apples to apples'' 
comparison of fund performance, expense ratios, etc. Since trading 
costs are not included in the current management expense ratio, 
investors who see an expense ratio of 0.8% are being terribly misled 
when in fact their total fee expense could easily be double that 
amount.
    I am certain you are going to hear large institutions scream at 
this idea but it's the fair and right thing to do. I know those two 
words do not always make it to the final version of some laws but in 
this case, the Committee and our elected officials owe it to the 
American public to do all they can to see that they are included in any 
changes this Committee brings to the floor.
2. Education
    The SEC and NASD do an exceptional job of investor education. While 
these are primarily governmental watchdog agencies responsible for 
policing agents and companies working with the public, they have done a 
very good job of promoting investor education.
    The SEC has an awesome tool on their web site today that addresses 
expense ratios in funds and allows investors to compare two different 
investments based purely on a difference in fees. I strongly recommend 
members of the committee have staff go to this site and generate a 
couple of scenarios for themselves. (http://www.sec.gov/investor/tools/
mfcc/mfcc-intsec.htm) The differences are shocking. So there are 
already some great educational tools in place. Plan participants just 
need to be made aware of this information.
    The Committee should request that the SEC to expand their mutual 
fund cost tool to include other types of investments such as ETF's 
(exchange traded funds) and a wider array of mutual funds in the market 
place today.
    I strongly encourage your committee to assign the SEC and/or NASD 
to devise a 401-k guide that must be distributed to all 401-k plan 
participants annually. Have a paper and electronic version available. 
Inside this guide, basic investment advice could be provided to plan 
participants to help them make them make an educated decision on the 
management of their plan dollars. It would have to be written in 
simple, everyday language. ``Legal-ease '' must not be included in the 
booklet. Fees, investment allocation, dollar cost averaging, investment 
risk, etc. can all easily be discussed in a non-threatening manner.
    Every financial decision has consequences. There are good decisions 
and bad decisions, there are good and bad consequences to good 
decisions. There are also good and bad consequences with bad decisions. 
But usually the ratio of bad decisions producing a good consequence is 
very poor and if it does happen, it is called ``luck.'' If the 
Committee, through its actions, can in some way inform the American 
public about these consequences and that solutions cannot be unto 
themselves, your work would have a profound impact on our society.
    We are all concerned about the future of our country. What if 
through some very simple steps, your Committee could help increase 
retirement fund balances by two or three times what is currently in 
those plans? If you can reduce costs by 1% and increase returns by 3% 
or so annually through investor education and create a greater fiscal 
responsibility by all members of the financial services industry, these 
are some logical, possible results:

      The economy would surge with the new surplus of money in 
retirement plans. More assets to purchase more goods and services.
      GDP would soar to unbelievable levels from additional 
consumer spending.
      Consumer confidence would increase as a result of having 
so much more money in savings. Tax coffers would swell to record levels 
as Americans pulled additional funds from their retirement plans 
generating additional taxable income.
      Annual deficits would shrink or disappear entirely from 
the higher stream of tax revenues.
      The looming national debt crisis could have a realistic 
solution. Americans would have more funds with which to retire their 
ever-growing indebtedness.
      Trillions upon trillions of additional wealth would be 
created without anyone doing anything differently but operating on a 
more efficient level.
      Looming crisis' in Social Security and Medicare could be 
better addressed with this new pool of capital.
      Instead of debating tax increases to fund the many 
critical needs of our country, governmental leaders could have serious 
discussions about tax reductions or needed social reforms.

    Most importantly, retirement plan participants would come closer to 
realizing the American dream of financial independence for themselves 
and their children. I challenge the Committee to make that your goal 
and legacy.
    Thank you for this opportunity.
            Respectfully submitted,
                                               J. Kevin Powell, CFP
                                        Certified Financial Planner
                                          My Strategic Mentor, Inc.
                                      Registered Investment Advisor

    PS I would welcome the opportunity of testifying in person before 
the Committee as it considers these very important matters.

                                 

          Statement of MassMutual, Springfield, Massachusetts
    Massachusetts Mutual Life Insurance Company (``MassMutual'') is 
pleased to submit this statement for the record in connection with the 
October 30, 2007 hearing of the House Committee on Ways & Means on the 
appropriateness of retirement plan fees. We believe this an important 
topic and we appreciate the commitment of Chairman Rangel and Ranking 
Member McCrery to address it in a thorough and considered way. We also 
very much appreciate the specific interest in this issue shown by 
Select Revenue Measures Subcommittee Chairman Neal as demonstrated by 
his recent introduction of the Defined Contribution Plan Fee 
Transparency Act of 2007 (H.R. 3765).
    MassMutual is a mutually owned financial protection, accumulation 
and income management company with total assets under management in 
excess of $450 billion. We are a premier provider of life insurance, 
annuities, disability income insurance, long term care insurance, 
retirement planning products, income management and other products and 
services for individuals, business owners, and corporate and 
institutional markets. Specifically within the retirement services 
market, MassMutual Retirement Plan Services administers over 4,300 
defined contribution plans covering more than 890,000 participants and 
representing $32.6 billion in assets. Our OppenheimerFunds subsidiary 
likewise has a very significant presence in the retirement plan 
marketplace, managing $52 billion in 401(k), 403(b), small business 
retirement plan and individual retirement product assets.
    MassMutual believes that improvements in existing retirement plan 
fee disclosure standards can and should be made. Such reforms must be 
pursued, however, in a balanced and practical manner to ensure that we 
do not deter employees from plan participation or employers from plan 
sponsorship and to ensure that we do not, ironically, raise costs for 
the very employees we are seeking to safeguard.
MassMutual's History of Engagement and Business Improvement Regarding 
        Fee Disclosure
    MassMutual has a long history of advocacy in favor of comprehensive 
disclosure of fees to plan sponsors and participants. For more than a 
decade we have publicly recommended expanded fee disclosure. 
Specifically, we testified on behalf of expanded fee disclosure 
standards in 1996 before the Department of Labor's ERISA Advisory 
Council and again more recently in September 2004 before the same body. 
 We likewise, in our own business practices, have sought to exceed 
legal requirements and to continually improve the fee disclosures we 
provide to our plan sponsor customers and to their plan participants. 
For example, we have continued to expand our disclosures to 401(k) 
sponsors regarding plan expenses, including of the payments made to 
compensate intermediaries (such as brokers and consultants) and the 
revenue sharing payments we receive from third parties. These detailed 
disclosures enable plan fiduciaries to more effectively fulfill their 
fiduciary duties and avoid the potential for conflicts of interest. We 
also just completed implementation of improvements to the benefit 
statements we provide to plan participants to make the fee and other 
information about plan investment options even clearer and more 
comprehensible.
Recommended Approach for Fee Disclosures to Plan Sponsors and 
        Participants
    Building on this history of policy engagement and continuous 
business practice improvement, MassMutual continues to support improved 
fee disclosure to both plan sponsors and plan participants and we 
welcome the attention to these issues by both legislators and 
regulators. We believe that reforms to current law should provide 
disclosures that are relevant, meaningful and cost-effective. As 
fiduciaries making the decisions on which plan providers to hire and 
what plan investment options and services to offer, plan sponsors need 
clear information on the fees charged for plan services, the specific 
services encompassed within a given provider contract and any revenues 
received by providers from outside parties.
    We are concerned, however, that some may be seeking a particular 
provider disclosure regime as a way to tilt the marketplace toward a 
specific 401(k) service model. Many employers today prefer to work with 
a single ``bundled'' 401(k) plan service provider that offers all 
needed plan services for an easily reviewed aggregate fee. Under this 
arrangement, employers have only one entity to monitor and the 
responsibility of that service provider for the plan is clear. As 
bundled providers, MassMutual and OppenheimerFunds can assure the 
Committee that price competition among bundled service providers is 
fierce. Employers typically get multiple bids from such providers for 
the package of services they seek, a technique that assists employers 
in determining the reasonableness of the bundled fee, and regularly 
revisit the pricing of the bundled package of services. Yet certain 
providers seek to legally mandate the ``unbundling'' of both the 
services provided to plans and the prices associated with such services 
(even, ironically, when providers do not sell such services 
separately). We believe forcing bundled providers to unbundle their 
services and prices will be costly, will result in unhelpful 
artificiality of price information and will push all employers toward a 
single unbundled service model that many have not preferred.
    Turning to the question of participant disclosure, it is clear that 
the disclosure needs of plan participants are substantially different 
from those of plan fiduciaries. Participants use fee information (along 
with other relevant factors) to make several discrete judgments--
whether to participate in a plan and what options to select from among 
a plan's investment menu. Unlike fiduciaries, participants are not 
selecting among service providers or overseeing these providers' 
compensation levels. Participant fee information that is too voluminous 
or too detailed could lead to inertia, deterring employees from 
participating in the plan, or to investment decisions driven solely by 
fee considerations (which could result in undue investment in such low-
cost but undiversified options as money market or company stock funds). 
At its most basic, we strongly believe the benefits of specific new 
provider and participant disclosure requirements must be weighed 
against their costs. It would be unfortunate and ironic if in the 
effort to improve and streamline fee disclosures we added significant 
new costs that would reduce the dollars available for retirement 
benefits.
Commentary on Current Fee Disclosure Reform Initiatives
    MassMutual is supportive of the Department of Labor's (DOL) current 
efforts to address retirement plan fee transparency through three 
distinct regulatory projects. These projects involve (1) expanded 
disclosure by plan sponsors to the federal government of the fees paid 
by the plan and its participants to service providers, (2) expanded 
disclosure by service providers to plan sponsor fiduciaries of the 
direct and indirect fees such providers receive, and (3) expanded 
disclosure to participants regarding the investment and administrative 
fees charged to them under the plan.
    We also recognize that Members of Congress have shown interest in 
addressing some of these same topics through legislation. In this 
regard, it will be important that any legislative efforts be closely 
coordinated with the existing regulatory activity. It would be 
extremely counterproductive if one set of disclosure reforms were 
implemented only to be supplanted shortly thereafter by another set of 
reforms. The result would be significant cost and confusion for both 
plan sponsors and participants, undercutting the benefits of the 
reforms themselves and heightening the risk that plan participation and 
sponsorship could be deterred.
    With regard to the specific legislation that has been introduced to 
date, we believe the legislation introduced by Representative Neal and 
cosponsored by Representative Larson (H.R. 3765), makes significant 
improvements to current law while avoiding many of the pitfalls of 
other recent legislative proposals. We are pleased, for example, that 
the Neal bill steers clear of mandating that certain investments be 
included in every 401(k) plan. Such a congressional directive would 
usurp the role of the plan fiduciary to select investments best suited 
to its particular workforce and would mark a radical shift in our 
pension law, which has historically focused on holding fiduciaries to 
high standards and a prudent process rather than forcing them to reach 
particular substantive outcomes.
    Participants under the Neal bill would be provided with information 
about the fees associated with plan participation and plan investments 
prior to enrollment and would also receive an annual statement that 
provides information on their specific investments, their asset 
allocation and the fees applicable to their accounts. The bill avoids 
inundating participants with voluminous, complex and disaggregated fee 
information that does not assist with participation and investment 
decisions but runs the real risk of bewildering participants, prompting 
unwise investment decisions and deterring plan participation. The Neal 
bill would require plan service providers to disclose to plan 
fiduciaries the total fees charged under a contract, an itemized list 
of the services provided for such fees, payments made by the provider 
from plan revenues to third-party intermediaries and compensation 
received from unaffiliated service providers (known as revenue 
sharing). While the Neal bill would also require service providers to 
make pricing estimates as to several broad categories of included 
services, it would not force the extensive unbundling of services and 
fees that marks other recent legislative proposals. We have detailed 
above why we think such extensive unbundling interferes with the 
marketplace and would be counterproductive.
Conclusion
    MassMutual very much looks forward to continuing to work closely 
with Chairman Rangel, Ranking Member McCrery, Representative Neal and 
all interested members of the Committee--as well as the regulators at 
the Department of Labor--in the effort to enhance retirement plan fee 
disclosure standards. If handled appropriately, this effort can serve 
as an opportunity to further strengthen a defined contribution system 
that is already performing admirably in assisting tens of millions of 
American families in building retirement security. But we must be 
deliberate and practical in this effort. Disclosure regimes could 
easily become inordinately complex and costly in which case they would 
only serve to undermine these families' retirement security. We surely 
must not take any steps that would deter American workers from what we 
all know is the prudent course: participating in employer defined 
contribution plans from as early an age as possible in order to benefit 
from the truly powerful combination of compound interest, tax 
incentives, fiduciary oversight and frequent employer contributions.
    We appreciate the Committee's consideration of our views.

                                 

    Statement of Matthew D. Hutcheson, Independent Pension Fiduciary
BACKGROUND
    Retirement plans subject to the provisions of the Employee 
Retirement Income Security Act of 1974 (``ERISA''), carry with them 
special obligations, which are commonly referred to in the retirement 
industry as ``Fiduciary Standards of Care.'' Both regulators \1\ and 
private organizations \2\ have produced helpful tools and resources to 
assist fiduciaries fulfill their important obligations.
---------------------------------------------------------------------------
    \1\ An excellent tool for Fiduciaries; produced by the EBSA, called 
``eLaws--ERISA Fiduciary Advisor'' http://www.dol.gov/elaws/ebsa/
fiduciary/introduction.htm
    \2\ Fiduciary Standards of Care promulgated by the Foundation for 
Fiduciary Studies. http://www.fi360.com/main/pdf/handbook_steward.pdf
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    Those fiduciary standards are in place to protect participants and 
beneficiaries from economic slippage caused by the casual, careless, or 
even imprudent actions of others. The concept of a fiduciary acting on 
behalf of those who do not possess the knowledge or ability to act for 
themselves is not new, and the importance of knowledgeable and fully 
informed fiduciaries has never been clearer than it is today.
    Participants do not generally understand the fees and costs 
associated with the operation of their 401(k) (or similar plan),\3\ but 
fiduciaries cannot use ignorance as an excuse.\4\ However, no matter 
who is ultimately making the investment decisions, whether participants 
or fiduciaries, fees and costs must be both known and understood for 
the reasons that follow.
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    \3\ AARP study on awareness of 401(k) fees. http://www.aarp.org/
research/financial/investing/401k_fees.html
    \4\ Under ERISA, ``a pure heart and an empty head are not enough'' 
to avoid responsibility for fiduciary breaches. Donovan v. Cunningham, 
716 F.2d 1455, 1467 (5th Cir. 1983)
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FUNDAMENTAL KNOWLEDGE FIDUCIARIES NEED
    ERISA requires that fiduciaries possess an understanding of many 
fundamental elements of plan operation. For those fiduciaries charged 
with managing the costs and investments of a plan, four of those basic 
elements bear particular importance because they directly impact how 
much retirement income a participant may ultimately receive.
    1. The first is an appropriate investment time horizon for the 
portfolio, which will assist the fiduciary in determining how much risk 
can be taken over an identified period of time.\5\
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    \5\ PRUDENTLY DEFINED TIME HORIZONS AS DETERMINED BY FIDUCIARIES: 
ERISA Sec. 404(a)(1)(B); 29 CFR Sec. 2550.404a-1(b)(1)(A); 29 CFR 
Sec. 2550.404a-1(b)(2)(A); Metzler v Graham, 112 F.3d 207, 20 EBC 2857 
(5th Cir. 1997); Interpretive Bulletin 96-1, 29 CFR Sec. 2509.96-1; HR 
Report No 1280, 93d Congress, 2d Session (1974)
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    2. The second is the identification of a modeled rate of return 
(i.e. the investment return goal) the fiduciary deems necessary to 
fulfill the objectives of the Plan, and the incorporation of that 
identified modeled rate of return into an actual portfolio.\6\
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    \6\ DEFINED MODELED/EXPECTED RETURN AS DETERMINED BY FIDUCIARIES: 
ERISA Sec. 404(a)(1)(A) and (B). Regulations--29 CFR Sec. 2550.404a-
1(b)(1)(A); 29 CFR Sec. 2550.404a-1(b)(2)(A); Federal Power Commission 
v. Hope Natural Gas Company, 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed. 333 
(1944); Communications Satellite Corporation v. Federal Communications 
Commission, 611 F.2d 883 (D.C. Cir. 1977)
---------------------------------------------------------------------------
    3. The third is combining the appropriate time horizon with the 
investment return goal (modeled return) to identify an appropriate 
level of risk into the investment portfolio necessary to generate that 
rate of return.\7\
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    \7\ APPROPRIATE LEVEL OF RISK AS DETERMINED BY FIDUCIARIES: ERISA 
Sec. 404(a)(1)(B). Regulations--29 CFR Sec. 2550.404a-1(b)(1)(A); 29 
CFR Sec. 2550.404a-1(b)(2)(B)(iiii); Laborers National Pension Fund v. 
Northern Trust Quantitative Advisors, Inc., 173 F.3d 313, 23 EBC. 1001 
(5th Cir. 1999)
---------------------------------------------------------------------------
    4. The fourth requires fiduciaries to know and understand the 
related fees and costs associated with the individual elements of a 
portfolio and the portfolio as a whole because there is an inverse 
relationship between fees/costs and net investment returns.\8\
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    \8\ FEES AND COSTS ARE KNOWN, ACCOUNTED FOR, AND MONITORED BY 
FIDUCIARIES: ERISA Sec. 404(a)(1)(A)(i and ii); Sec. 406(a)(1)(C); 
Sec. 408(b)(2); Liss v. Smith, 991 F. Supp. 278 (SDNY 1998); 
Interpretive Bulletin 94-2, 29 CFR Sec. 2509.94-2. Sec. 2(a); Sec. 7; 
OCC Interpretive Letter No 722 (March 12, 1996), citing the Restatement 
of Trusts 3d: Prudent Investor Rule Sec. 227, comment m at 58 (1992). 
ERISA Sec. 3(14)(B); Sec. 404(a)(1)(A), (B) and (D); Sec. 406(a); 29 
CFR Sec. 2550.408(b)(2); Booklet, A look at 401(k) Plan Fees, U.S. 
Dept. of Labor, Pension and Welfare Benefits Administration; DOL 
Advisory Opinion Letter 89 28A (9/25/89); Interpretive Bulletin 75-8, 
29 CFR Sec. 2509.75-8. ERISA Sec. 404(a)(1)(A) and (B); Sec. 406(a)(1); 
Sec. 406(b)(1); Sec. 406(b)(3); Brock v. Robbins, 830 F.2d 640, 8 EBC 
2489 (7th Cir. 1987); DOL Advisory Opinion Letter 97-15A; DOL Advisory 
Opinion Letter 97-16A (5/22/97)
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    Those four variables are equally important and interrelated 
elements of portfolio construction. An expectation of favorable long-
term results is otherwise not possible. Any other approach is random 
guesswork.
    Further, in the context of this discussion, those four 
prerequisites must exist in harmony with each other before a fiduciary 
can confidently assert they have met the high standard of care to which 
they are obligated to adhere. And those prerequisites are inextricably 
connected. Deficiencies in that prerequisite knowledge will likely 
alter the outcomes of the others, and their collective impact upon the 
portfolio as a whole.
    Time horizons, risk tolerance levels, and required returns may 
change from time to time due to forces fiduciaries or participants 
cannot control. Participants can only control the time horizons by 
working longer or retiring earlier unless illness or other unforeseen 
events occur. The economy can experience unforeseen turbulence. Other 
influences can make it challenging to maintain a steady course with 
prerequisites one through three. That leaves one variable that can be 
known ahead of time and can be controlled; variable number four--fees 
and costs.
FEES--THE PRIMARY PREDICTOR OF LONG-TERM RESULTS
    Fees and costs, being the only possible currently controllable of 
the four prerequisite variables, therefore become the primary indicator 
of long-term results, all other variables taken into proper 
consideration.
    In other words, when fees and costs are not known and understood, 
the long-term rate of return will be less than expected.\9\ To increase 
the return to the expected level, additional risks must then be taken--
risks about which fiduciaries and participants may be unaware, but 
which they must be aware to properly manage their portfolios. Those 
additional risks may require a longer time horizon to accomplish the 
objective. Riskier portfolios generally cost more due to the frequency 
of transactions and rebalancing. Thus, one variable influences the 
other, and around and around things go, creating the potential for a 
imbalance within this delicate system that is already subject to many 
other uncontrollable variables. How can a fiduciary fulfill their basic 
duties described in prerequisites one through four when there are so 
many moving targets and unknowns?
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    \9\ Chairman Christopher Cox, Securities and Exchange Commission. 
``Our financial services industries are able to skim off much more of 
the assets they handle than would be the case in a well-functioning 
market. The difference materially burdens an investor's annual expected 
return. And compounded over the retirement time horizon of even someone 
in his or her 50's, this can result in truly astronomical shortfalls.'' 
SEC Speech. Address to Mutual Fund Directors http://www.sec.gov/news/
speech/2007/spch041207cc.htm
---------------------------------------------------------------------------
    For example, if a fiduciary constructs what they believe to be a 
portfolio that will deliver a long-term rate of return of 10%, but they 
are unaware that there are hidden costs of an additional 1%, the actual 
net fee adjusted return will be 9%. Thus, to actually earn the 10% 
return, higher risks must be taken--possibly higher than what the 
fiduciary deems prudent.
    Therefore, fees that are obscure, hidden, or to which fiduciaries 
and participants are simply ignorant, create new and unexpected risks 
that may not be appropriate for the plan. Those risks create an 
imbalance between other fiduciary obligations, and make those 
obligations virtually impossible to satisfy, as the identified returns, 
risks, time horizons, etc. are based upon partial relevant information, 
thereby distorting expected future outcomes.
    An additional challenge created by fee opacity (unknown fees) 
creates is an environment where participants pay for services they do 
not receive. For example, in a conventional bundled plan, the 
incremental cost of providing a particular service may be 0.10% of each 
participant account balance per year. In conventionally priced bundled 
plans, all participants pay for the service whether they utilize that 
particular provision of the plan or not. This speaks directly to the 
issue of considering the appropriateness of retirement plan fees.
    Expenses from the plan must pay for services that benefit the 
participants and beneficiaries. Expenses that are for services that do 
not benefit participants and beneficiaries are excessive, and may in 
fact be prohibited transactions.\10\
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    \10\ Unnecessary and excessive services are those being rendered 
that are not ``helpful to the plan.'' 29 CFR Sec. 2550.408(b)(2)
---------------------------------------------------------------------------
    In other words, a fiduciary's failure to satisfy obligation four, 
at a minimum, undermines a fiduciary's obligation pursuant to 
obligations one through three and potentially other fundamental plan 
requirements.
BENEFITS HONORABLE DISCLOSURE
    The benefits of full disclosure are therefore as follows:

    1. The widespread lack of understanding \11\ by retirement plan 
participants and fiduciaries alike will be brought under control.
---------------------------------------------------------------------------
    \11\ AARP study on awareness of 401(k) fees. http://www.aarp.org/
research/financial/investing/401k_fees.html
---------------------------------------------------------------------------
    2. Fiduciaries will be able to properly discharge their duties, 
unimpeded, as they will know what all fees and costs are in advance, 
where costs can be fully evaluated and decisions can be made 
responsibly to properly manage costs and increase returns when 
possible;
    3. Participants, to the extent they construct their own portfolios, 
will have relevant knowledge of all four variables in their possession. 
They too will be empowered to participate meaningfully in the system as 
it is currently designed. In other words, they will be in possession of 
all of the knowledge necessary to build a secure retirement, not just 
part of it as they have previously had;
    4. Fiduciaries and participants will have the information necessary 
to discern the difference between ``reasonable'' expenses, and 
``excessive'' expenses. Many think in terms that fees must be either 
reasonable or excessive. In practice however, fees can be both 
reasonable and excessive at the same time. In other words, the concept 
that fees and expenses must be ``reasonable'' is too subjective and 
relative to be meaningful. Therefore, fees and expenses must be 
reasonable, and must also not be excessive, simultaneously. Fiduciaries 
and participants can determine the reasonableness of fees only if they 
know what the fees are during the decision process. Participants will 
therefore be enabled to choose to pay a reasonable fee for only those 
services they both need and want;
    5. Confidence in the system will greatly improve, increasing 
employee participation; and,
    6. The private retirement system will be embraced by those who do 
not have a plan due to concerns about opacity and fair business 
practices by the financial services industry.
FORM DISCLOSURE
    There has been much debate over the form full disclosure should 
take. The most obvious element of disclosure is that it must be 
comprehensive for all of the reasons stated above. Second, the fees 
should be, at a minimum, combined into two basic categories for 
reporting to participants. Investment related fees,\12\ and 
administrative fees.\13\ Third, a measuring stick against a standard 
that has met the test of time should be provided so participants can 
understand the difference between their actual returns and the returns 
they could have received had they met the standard. The third element 
is particularly valuable to the participants who do not have advanced 
financial training. All of this should be easily understood by 
fiduciaries and participants at a glance. Participants must also be 
protected from paying for services they do not receive or benefit from, 
such as services that require underwriting from the whole plan, 
irrespective of the number of participants who actually utilize those 
services. This is an example of why bundled service providers must not, 
under any circumstance, be treated differently than their un-bundled 
service provider colleagues. There must be standardization in 
disclosure.
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    \12\ Sum of fund expense ratio, cost of clearing trades--i.e. 
brokerage commissions, other contract charges, commissions, shareholder 
servicing per head fees, early redemption fees, transfer/exchange/
settlement costs, wrap fees, annuity fees and charges, investment 
advisor fees, and anything else related to the cost of delivering 
investment services, etc. Administration fees embedded in expense ratio 
or wrap investment fee must be extracted out and reported under the 
administrative fee category.
    \13\ Administrative fees charged to plan assets in addition to what 
the funds or investment products may charge. Per head charges, third 
party record keeper charges, custodial fees, professional fees passed 
through to plan assets. For example, a CPA or an attorney may submit an 
invoice to a plan sponsor for services rendered to a plan. If the plan 
sponsor passes such a bill on to plan participants, then it must be 
captured and reported. Other pass-throughs, such educational/advice 
fees, enrollment meeting fees/costs, travel, certain office and support 
staff fees, etc., and any miscellaneous fees or charges.
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    There are other aspects of disclosure that are critically 
important, such as whether conflicts of interest exist within plans, 
and the relationships service providers have with each other. If those 
relationships improve performance, increase efficiency, and facilitate 
operations, then the participants may greatly benefit. Then service 
providers can be proud of their mechanisms and relationships, and such 
disclosure will reveal the value added they purport to deliver.
    Those service providers who have no conflicts of interests or 
special revenue sharing relationships with other service providers, 
including subsidiary or sister organizations, will simply have nothing 
to disclose. Such firms will not be affected by that element of the 
legislation.
SUPPORT HR 3185
    I support HR 3185 and believe that it is sound legislation that 
addresses all of the relevant aspects of disclosure. It is 
comprehensive, it requires disclosure of other necessary aspects of 
plan operation such as the existence of conflicts of interest, and it 
places the interests of participants and beneficiaries first.
    HR 3185 is sound legislation, and in its fundamentally unaltered 
form will right the ship in the 401(k) industry. While I am not opposed 
to a prohibited transaction tax as contemplated in HR 3765 per se, I 
believe ERISA as now written has adequate powers to assess monetary 
fines and penalties for failure to comply with the disclosure 
requirements of HR 3185.
    I encourage the Committee to embrace HR 3185 in its fundamentally 
unaltered form. I believe that we will look back on this legislation in 
10 or 20 years as a significant turning point toward protecting the 
retirement of America's middle class.

                                 

               South Carolina Retirement Systems, Letter
                                  South Carolina Retirement Systems
                                     Columbia, South Carolina 29223
                                                   October 24, 2007
The Honorable Charles Rangel
Chairman, Committee on Ways and Means
U.S. House of Representatives
Washington, DC 20515

Dear Mr. Chairman:

    I am writing to you as director of the South Carolina Retirement 
Systems (Retirement Systems), which administers five defined benefit 
pension plans for public employees, to offer comments on H.R. 3361, a 
bill to make technical corrections to the ``Pension Protection Act of 
2006'' (PPA). The Retirement Systems services more than 200,000 active 
members and in excess of 100,000 annuitants. Our members are from state 
government, public schools, institutions of higher education, and local 
governments.
    I am submitting this letter on behalf of the Retirement Systems; 
however, South Carolina is not alone in facing these issues. As a 
member of the National Association of State Retirement Administrators 
(NASRA) and the National Council on Teacher Retirement (NCTR), where I 
also serve on the NCTR executive committee, I can assure you that many 
other pension plans throughout the nation are affected by the 
provisions of the PPA discussed below, and are confronted with the same 
issues.
    My comments relate to Section 845 of the PPA, which allows eligible 
retired public safety officers to elect to exclude from gross income up 
to $3,000 of certain distributions made from an eligible retirement 
plan to pay qualified health insurance premiums.
    First, I want to commend you for correcting the guidance issued by 
the Internal Revenue Service (IRS) in its Notice 2007-7, Q&A 23, which 
stated that this exclusion did not apply to self-insured plans. This 
interpretation could have precluded otherwise eligible South Carolina 
public safety retirees from being able to participate in this new 
benefit, and I therefore support Section 9(i) of H.R. 3361 as 
introduced, which provides that the exclusion applies to coverage under 
an accident or health plan (rather than accident or health insurance), 
thereby permitting the exclusion to apply to self-insured plans as well 
as to insurance issued by an insurance company.
    However, I would like to devote the bulk of my comments to a 
provision that I believe should be included in H.R. 3361, but does not 
appear there. Specifically, as explained further herein, I strongly 
urge you to add a provision to H.R. 3361 that would delete from Section 
845 of the PPA the requirement that the exclusion shall only be 
available if payment of health plan premiums is made directly to the 
provider of the accident or health plan by deduction from a 
distribution from the public safety officer's retirement plan.
    This requirement that premiums be paid directly to the insurance 
company has placed an undue administrative burden on the South Carolina 
Retirement Systems as well as many other retirement plans across the 
country. As background, the Retirement Systems provides benefits to a 
diverse employee base, covers many employee groups other than public 
safety officers, and does not currently identify employees as ``public 
safety officers.''
    Therefore, in order to implement this benefit, the Retirement 
Systems has had to first develop a certification process to identify 
eligible members. Given that there are nearly 800 employers in the 
Retirement Systems' plans, identifying public safety officers 
accurately is difficult, particularly since many of these plan members 
have been retired for years, and employers have therefore often had 
difficulty in determining whether or not the member's last position was 
a public safety officer position. This has been further complicated by 
other portions of the PPA which provide a different definition of a 
public safety officer (PPA Section 828). The overall process, which has 
required direct individual communication with retirees and employers, 
is cumbersome and time consuming. It requires the expenditure of assets 
of the trust fund for the benefit of only a small sub-set of members, 
which also raises some fiduciary concerns for retirement systems 
administrators.
    Next, the Retirement Systems must identify insurance companies with 
whom retirees have policies and must develop reporting and 
reconciliation requirements with them. However, as is the case with 
most public pension systems across the country, we do not administer 
retiree healthcare for South Carolina public employees. Retirement 
plans therefore may often have no control over the relationship between 
the retiree and the insurance provider. However, in order to offer this 
new benefit, retirement plans must become a conduit between them, 
caught in the middle of complex, often sensitive dealings between the 
insurance company and the retiree, such as cancelled policies, modified 
policies, refunded premiums, and increased premiums. It is no wonder 
that explaining the necessity of this arrangement to insurance carriers 
has been a challenge, and getting them to agree often difficult. I 
understand that in other states, some insurance companies have actually 
refused to agree to such an arrangement.
    In short, tremendous time, effort, and resources are required to 
reconcile all of these events and properly track the health care 
benefit taken by our eligible members. As a consequence, the Retirement 
Systems has had to expend significant time and resources to gather 
membership data and modify existing information systems. In addition, 
we have hired additional personnel for the ongoing administration of 
these requirements. (Even though the IRS has recently indicated that 
reporting such amounts on retirees' Form 1099-Rs will not be required 
of us, the fact that payments must still be made from retirement 
systems directly to providers will require pension systems to continue 
to be middlemen in a complicated administrative process that is far 
removed from our primary responsibility, which is the provision of 
retirement benefits.)
    Finally, adoption of the new benefit by a plan is optional and is 
also subject to being limited in scope. For example, I understand that 
in some cases, retirement plans can only deduct premiums for insurance 
provided by an employer or administered by the plan. However, there may 
be instances in which an employer provides a healthcare plan that is 
not administered by its retirement system, or where public safety 
members may be enrolled in a union-sponsored plan (if not for health 
benefits coverage, then perhaps for long-term care). Therefore, the 
continued mandatory involvement of retirement systems in this process 
can potentially delay and/or limit the use of the benefit by retirees 
who would otherwise be eligible to claim the exclusion but for the fact 
that the payment of health plan premiums is not made directly to the 
provider of the accident or health plan by deduction from a 
distribution from the public safety officer's retirement plan.
    As I noted earlier, the IRS has now determined that retirement 
plans are not the entity that should properly make the decision that 
medical premium payments should be excluded from an individual's 
taxable income. Instead, the instructions regarding 1099-Rs and this 
new benefit make it clear that this is an election that should be made 
by the individual taxpayer. Therefore, given the undue administrative 
burden on pension plans, the added costs for taxpayers that could 
result, and the potential for limited and non-uniform application of 
the benefit for public safety retirees, there appears to be no good 
reason for the ongoing involvement of retirement systems in the 
administration of this benefit.
    Thank you for this opportunity to express the views of the South 
Carolina Retirement Systems concerning H.R. 3361. While I appreciate 
the fact that the modification to Section 845 of the PPA that I am 
recommending may not be a purely technical matter, I believe that it is 
nonetheless a critically important correction that will preserve and 
enhance this important benefit for all involved.
            Sincerely,
                                               Peggy G. Boykin, CPA
                                                           Director

                                 

  Statement of Wayne H. Miller, Denali Fiduciary Management, Vashon, 
                               Washington
Summary
    ERISA is the federal law that governs the management of retirement 
plans. When a company that sponsors a retirement plan appoints a group 
of executives to manage the plan, those individuals are known as 
fiduciaries. The role of fiduciaries, first and foremost is to see that 
no one doing business with the retirement plan does harm to the plan's 
participants. The fiduciaries are supposed to serve as guardians on 
behalf of those people who have money in the retirement Trust.
    In the overwhelming majority of cases fiduciaries work only a few 
hours every calendar quarter, receive little if any on-going training 
in the disciplines involved in their work, have no metrics with which 
to measure the success or failure of their plan management activities 
and are granted no compensation for their work regardless of its 
effectiveness. In the world of retirement plan fiduciaries there is 
virtually no personal accountability, no substantive oversight and no 
incentive to do a good job.
    If this sounds like a recipe for a dysfunctional retirement plan 
system--it is. The last time we saw an economic system run like this we 
called it communism.
The Problem Isn't Technical
    There are a myriad of technical issues ERISA retirement plan 
fiduciaries must know and understand to carry out their plan management 
responsibilities. Given the changes in the regulatory and capital 
markets over the past few years, the depth and breath to which 
technical issues must be examined has increased dramatically. For 
example, the concept of risk and its application to operations, 
investment management and plan governance is not the same in 2007 as it 
was in the year 2000.
    These types of intellectual challenges notwithstanding, after 24 
years of industry experience (having offered fiduciary advice and 
consulting on $100+ billion of retirement assets) it is very clear that 
the greatest obstacles fiduciaries face are not matters of technical 
competence. Though daunting in scope, such things can readily be 
learned. The greatest obstacles reflect the individual fiduciary's 
state of emotional intelligence (EI) and the dysfunctional behavior 
generated by the ``group think'' dynamics with which many fiduciary 
Committees operate.
Background: Incentives Count
    Like it or not, in America's business culture, ``honor'' is not a 
highly prized incentive for influencing behavior. Any market based 
economist will tell you that other than by sheer luck the goals of any 
commercial activity are unlikely to be reached without properly 
structured incentives. In fact, without properly aligned incentives, 
all manner of extraneous actions will be adopted that are counter-
productive to the intended purpose of the activity. For America's 
retirement system this is a big problem because other than for the 
``honor'' of it, the American retirement system contains no incentives 
to encourage fiduciary excellence on the part of those people 
responsible for plan management. Worse yet, while the legal framework 
in which fiduciaries work imposes significant responsibility upon them, 
as a practical matter, they are not held to account for the quality of 
their work.
    In any commercial endeavor where responsibility exists without 
individual accountability the result is a governance nightmare.
    With no incentives or accountability embedded in the system to 
assure purposeful plan management practices, counter-productive 
behavior has become epidemic. This behavior impacts everything from 
plan operations and investment management to governance. There are many 
factors that have created this condition. For example, the bull market 
in the 1980's and 1990's created an environment in which everyone made 
money. From this success a culture developed in which little outside 
scrutiny was applied to those organizations that delivered services to 
retirement Plan Sponsors and their participants. During this period 
poor fiduciary habits became ingrained in common business practices.
    Another influence that has fostered and promoted dysfunction in the 
retirement industry has come from the very vendor community whose 
conflicts of interest Congress intended to protect working Americans 
from. Despite such Congressional intent, plan management practices that 
explicitly or implicitly promote a vendor's economic interests have 
been commonplace. They have heavily influenced fiduciaries to the point 
that the spirit of fiduciary duty is commonly violated and no 
consequences are incurred by the violators or by those allowing such 
violations to occur.
    If a retirement plan's fiduciaries are unfamiliar with or 
inattentive to the retirement plan's purpose had have no strategic plan 
in place by which all plan management practices are measured for their 
effectiveness at promoting that purpose, then ANY activity they engage 
in creates the ILLUSION of making progress in managing the plan.
    This illusion is the natural consequence of a Plan Sponsor's 
fiduciary culture that lacks the intellectual rigor of establishing 
well-reasoned metrics to assess the efficiency or effectiveness of plan 
management practices. This illusion is the clinical manifestation of a 
dysfunctional fiduciary governance system. Such dysfunctional business 
practices would never be tolerated in the Plan Sponsor's core business. 
Any manager holding on to such delusional thinking rather than focused 
on project metrics that quantify progress toward goals would pay a 
price with their reputation and eventually their job.
    The same principle that applies in core finance applications--if 
you aren't measuring it, it doesn't count--is applicable to fiduciary 
management as well.
Fiduciary Illusions and Emotional Intelligence
    Emotional Intelligence was well recognized long before the term was 
coined.
    Emotional Intelligence (EI) has been well documented and researched 
in the most elite of business publications such as the Harvard Business 
Review. A simple explanation of EI is ``the self-awareness and 
acceptance which individuals have about the underlying motivation that 
drives their behavior''. The state of each individual's EI is 
substantially derived from the emotional framework that shaped the 
formation of their personality.
    An individual's EI, sometimes called EQ (like IQ), is not a purely 
static phenomenon, like height or eye color. It is dynamic within each 
of us and responsive to many types of stimuli. Each of us has the 
experience of witnessing a high level of EI in someone else even if we 
aren't used to calling it by that name. For example, we witness it when 
someone is willing to tell one on themselves--especially when those 
self deprecating comments are offered in a public forum. Such comments 
seem to have two components to them. First, the speaker recognizes that 
how they have dealt with that particular issue reflected a shortcoming 
in their character. Secondly, having self-acceptance that they have the 
shortcoming, the speaker can address the issue comfortably with others. 
They do not try to hide, mask or spin a story about it. There is no 
reason to do so as their shortcomings are not a source of emotional 
turmoil. This is what self acceptance brings--a release from shame, 
regret, sadness or angst.
    To speak comfortably about one's shortcoming a speaker must 
emotionally reconcile the impact the shortcoming has had in their life. 
An audience listening to such a speaker will admire the sincerity of 
that individual. Those listening feel and respect the candor and 
authenticity of the person speaking. Listening to such commentary is 
inspiring and makes us want to be better.
    By contrast, the absence of highly developed EI is also very 
familiar to all of us although it too is known by other names.
    For example, take my friend Jim (not his real name). Jim is in his 
late 40's and lives in California with his 5th wife and two children. 
One day Jim called in a highly excited state. He had finally figured 
out ``what it was with women''. From the animation in his voice I could 
tell that Jim's revelation was profound for him. Having elaborated upon 
his discovery, I asked him if he recognized that HE was the only common 
ingredient in all of his five marriages. He was startled by the 
question and irritated by my interruption of his enthusiasm. Without 
hesitation, he dismissed the question, renewed his excitement and told 
me again of his A-HA moment.
    Jim claimed to have discovered some principle regarding a pattern 
of behavior common to all of his wives. What he didn't realize was that 
the conclusion he reached deeply discounted his responsibility in 
understanding the dynamics of HIS relationships with women. In short, 
he ignored the contribution his personality made in the construction of 
his own life. He thought his discovery was all about THEM. He couldn't 
see that it really said more about HIM. He was blind to the vagaries of 
his emotional make up and the thought process derived from it--even 
though I'd bet big money that his four ex-wives weren't.
    Had Jim been willing to reflect on the question, rather than 
deflect it, a powerful self-discovery might have been available to him. 
It might have changed his life. Alas, it would have to wait for another 
day. Jim had no idea of the gem he passed over. Emotional blind spots 
are like that.
    Though very successful in business, Jim has a poorly developed EI 
when it comes to women. That's what having an emotional blind spot is; 
some aspect of your life for which you do not gather and process 
information that is otherwise visible to an independent and unattached 
observer. By definition, an emotional blind spot causes you to gather 
and interpret information in a manner that distorts the reality that an 
emotionally neutral person would have. Furthermore, the blind spot 
itself sustains the distortion until some other influence comes along 
with significant power to break up the illusion.
Emotional Blind Spots and Retirement and Plan Management
    With no metrics to guide a self assessment regarding the quality of 
their own fiduciary conduct, ``plan management'' is more often a 
euphemism for benign neglect (or sometimes ignorance) than a conscious 
process engineered to produce a specific long-term result. This 
euphemism is sustained by a commonplace fiduciary culture that has as 
its fundamental premise ``WE ARE GOOD PEOPLE HERE''.
    WE ARE GOOD PEOPLE HERE is a statement of identity. All too often, 
it is how fiduciaries think of themselves. The sentiment is used as a 
kind of emotional shield by fiduciaries to protect themselves 
individually and collectively from feeling badly about their conduct--
regardless of the quality of their fiduciary conduct. Its unspoken 
acceptance as the cultural premise by a fiduciary committee limits the 
capacity of the fiduciaries to absorb any information that runs counter 
to the premise.
    The author, never having met a malicious fiduciary, does not 
disagree with the statement that most fiduciaries are in fact well-
meaning. However, being well-meaning is not a cause for celebration as 
to the quality of one's work. No experienced business person tells 
their boss that they are a well-meaning person and therefore, by virtue 
of that, they have done well at their job. However, this is exactly the 
emotional foundation with which most retirement plan fiduciaries 
operate.
    Unless metrics are used to assess the effectiveness of plan 
management practices, WE ARE GOOD PEOPLE HERE is nothing short of a 
linguistic substitute for arrogance and neglect. It is an obstacle that 
reflects a paucity of sincerity relative to the solemn duty of watching 
after someone else's financial interests.
    Though fiduciaries are morally and legally bound to serve in a 
guardianship capacity this group identity is the real (albeit 
unconscious) driver of their behavior. Its presence discourages an 
authentic self-examination or rigorous independent examination of the 
group's efficiency or effectiveness in the exercise of its duties. 
Though the goal of serving in a fiduciary capacity is to be of service 
to others and to apply the highest level of responsibility to acting in 
a guardianship capacity, a WE ARE GOOD PEOPLE HERE culture is all about 
the fiduciaries. It is NOT about the quality of the job done on behalf 
of the plan participants they serve.
    Organizational psychologists have a term for the behavior of smalls 
groups fueled by such a culture. It is ``group think''. In an ERISA 
fiduciary context WE ARE GOOD PEOPLE HERE is the clinical manifestation 
of group think. Such a culture thrives by deflecting any emotional 
challenge to the identity of the group. It operates as a kind of 
irresponsible creed: WE ARE GOOD PEOPLE HERE, that's how we know we do 
such a good job. If things don't work out--at least we meant well and 
that's what counts.
    There are other emotional influences that also distort the 
purposefulness of a fiduciary's conduct in their individual capacities. 
Some of these influences are;

      the avoidance of blame,
      promoting the illusion of competency,
      the need for approval,
      the lack of self acceptance of making mistakes,
      the desire to look good,
      the willingness to acquiesce to the status quo rather 
than live out one's own values and last but not least . . .
      the lack of personal courage to speak out.

    There are a multitude of plan management details impacted by these 
emotional biases that distort plan management priorities away from 
fiduciary excellence. Here are a few examples:

      Fiduciaries often work with brokers or advisors but do 
not intimately understand the nature of the broker or advisor's 
relationship to the Trust's assets. Process improvement is a credible 
goal of any long-term business endeavor. However, sustaining a 
reputation free of tarnished image or blame has a higher emotional 
priority in fiduciary management than conducting a rigorous examination 
of service vendors.

    This is the primary reason why individual fiduciaries are not held 
to account for the fulfillment of various statutory duties. A fiduciary 
doesn't ``own'' the duty if they aren't accountable to someone for it. 
The implications for plan participants regarding investment costs, 
inappropriate investment vehicles and tainted investment advice are 
substantial.

      The industry's major vendors are trusted without that 
trust being verified. Because most fiduciaries serve in a part-time 
capacity, the vendors are relied upon to provide perspective and 
counsel on many mission critical plan management functions. 
Historically, that reliance was often mis-placed. Indeed, relative to 
the guardianship role, the duty of loyalty and the explicit duty to 
``monitor'' parties in interest, the continuation of this reliance is 
inappropriate. In the real world, the economic best interests of 
vendors have often supplanted the economic best interests of the plan 
participants.

    This is especially true in the new world of providing investment 
advice to plan participants. Few vendors can demonstrate that the 
advice they offer creates value. Very few can demonstrate that the 
advice they offer is valuable enough to pay for itself. If the service 
offers participant's comfort--fine--charge a hand holding fee instead 
of a percentage of the participant's account.

      The vendor's interest in life-style and life-cycle funds 
that ``automate'' the asset allocation decision based on a plan 
participant's age has embedded within it the self-interest the vendor 
has in maintaining the dominance of its investment management services 
in the 401(k) plan's menu. This is counter productive relative to a 
Best-of-Breed approach and has technical flaws relative to managing 
investment risks that are mission critical for older workers.

    Regardless of the lofty principles embedded in ERISA, the de facto 
operating condition of the fiduciary landscape is not a pretty sight. 
With $10+ trillion of assets under ERISA's umbrella, such a 
dysfunctional culture is clearly inconsistent with the spirit if not 
the letter of fiduciary principles. Another description of such a 
culture is to say that it fosters and maintains a very low level of 
emotional intelligence. Candidly, it is self centered, inauthentic 
(relative to purpose), delusional (like Jim), self-assured and 
unfortunately in the American retirement plan industry--common 
practice.
    This isn't to say everyone involved in the retirement plan industry 
is some kind of crook. Rather, this EI lens simply magnifies what 
everyone already knows. We all think in a manner that supports and 
validates our sense of Self and our economic interests--even when we 
have no metrics as to what value our activity has actually created.
    Given the truth and gravity of this statement how can a retirement 
system, intended to represent the highest aspirations of trust and 
guardianship in law, recover a vision of its purpose and integrate the 
vision into the real world? Let's start with something radical; how 
about being authentic.
Systematic Fiduciary Governance: When Structure Supports Purpose
    Responsibility without accountability has been the unspoken rule in 
ERISA. It is time that this change. The only credible solution to 
dysfunctional fiduciary conduct and the supporting cast of characters 
that promote it is to amend the current fiduciary governance practices 
of a retirement plan and install accountability that is visible to 
stakeholders at every segment of the plan management process.
    There is no need to throw the entire system out. Rather, the 
efficiency of the entire system would be dramatically enhanced if a 
systematic and transparent approach to fiduciary governance were 
implemented and all industry players were held accountable for their 
piece of it. The average American worker would be the winner.
Limiting the Impact of Low Fiduciary EQ and Incentivizing High EQ
    Let's go back to my friend Jim for a moment. He operated with an 
understanding of what was ``wrong'' with women and believed in the 
correctness of his perspective. He made his assessment and held it as 
truth because in his experience it was true. However, he reached his 
conclusion without including a self assessment as to how the vagaries 
of his own personality influenced his thought process and thus his 
conclusion. He just couldn't see it at the time and he didn't ask for 
an emotionally neutral (i.e., independent) pair of eyes to validate his 
hypothesis.
    In similar fashion, most retirement fiduciaries and the support 
personnel around them do not engage in a critical self examination of 
their own conduct. Lacking a specific regulatory imperative to do so, 
initiating such an examination takes extraordinary courage. Investment 
managers, brokers, human resource fiduciaries, fiduciaries with a 
finance background, the attorneys and investment advisors who counsel 
fiduciaries, the Board members who serve as Appointing Fiduciaries and 
even the insurers who insure the above, all discount the contribution 
they make to supporting and sustaining dysfunctional fiduciary conduct 
within the industry. Everyone bears some amount of responsibility in 
the matter of this dysfunction.
    All of these industry players have their reasons for doing what 
they do. Most of those reasons are related to their cash flow and 
market share. When all internal and external industry players are 
allowed to organize themselves in a manner such that no one is at the 
table speaking with a singular voice defending the interests of plan 
participants--the design of how the retirement security game gets 
played is fundamentally flawed.
    When the maintenance of the status quo has a higher priority within 
the Plan Sponsor's fiduciary culture than does engineering more 
efficient or effective processes, something is wrong. The spirit of the 
fiduciary's duty has been subjugated. When fiduciaries give latitude to 
accommodate the self interest of service vendors a process has been 
initiated in which the incremental degradation of the duty becomes 
increasingly acceptable. Only Rube Goldberg could be proud of such a 
convoluted architecture.
So, What Is An Answer?
    In creating an answer to the dilemma posed by a low fiduciary EQ, 
there are two realities one must address. First, the regulatory burden 
upon business is already substantial. Additional regulatory burden will 
be resisted and any backlash will diminish the opportunity for real 
change. Secondly, the effectiveness of the retirement system has been 
compromised for many years. Therefore, a solution that is years in the 
making runs the risk of being an ineffective band aid or a smoke 
screen, neither of which are useful relative to engineering an 
effective and efficient solution that promotes retirement security.
    The author is suggesting that a genuine safe harbor against 
fiduciary liability be offered to the Plan Sponsor of a retirement plan 
IF and only IF the Sponsor adopts and can demonstrate the operational 
effectiveness of a governance process that assigns individual 
accountability for the fulfillment of all statutory fiduciary duties, 
establishes metrics which provide a credible assessment of the 
effectiveness of plan management practices and visibly incorporates the 
following components of governance transparency.

        1.  The Sponsor must collect separate written disclosures of 
        the economic self-interest of each and every party upon whose 
        advice, counsel or services they depend in executing plan 
        management activities. These disclosures must be made available 
        to Trust beneficiaries in their entirety and plan participants 
        must be made aware that such disclosures are available.
        2.  The Sponsor must create, implement and make visible to all 
        Trust beneficiaries written disclosures regarding the process 
        of self examination and/or independent examination of the 
        Sponsor's fiduciary conduct relative to the statutory fiduciary 
        duties already existing in law. A self examination must make 
        use of a thorough documentation system that has embedded within 
        it a very high standard of fiduciary care.

    If these components of a fiduciary governance system were visible 
to all stakeholders (the plan participant, the Sponsor's shareholders 
and the federal regulatory agencies that oversee retirement plans) the 
transparency of such information would have the natural effect of 
improving the quality of plan management. Only when such information is 
collected, disclosed and published will the dysfunctional behavior that 
has influenced the industry be mitigated.
    If such a mandate was not contaminated by the self interests of the 
investment management community it would warrant the granting of a 
genuine, complete and comprehensive safe harbor from fiduciary 
liability by the regulatory authorities. That's right. Other than 
stealing money or explicit fraud, fiduciary liability would be a thing 
of the past. The notion of having multiple conditional safe harbors for 
Plan Sponsors as were offered in the Pension Protection Act of 2006 is 
of marginal utility relative to a blanket safe harbor which provides 
real protection based on meeting the requirements of a rigorous 
governance documentation process.
    The safe harbor from fiduciary liability would be offered 
specifically to the appointing fiduciaries of the Board of Directors. 
By doing so, it would generate interest at a level of corporate 
leadership for which the fiduciary governance processes can receive the 
internal support to allow these plan management practices to flourish. 
By requiring that the self assessment be reviewed and approved by the 
Plan Sponsor's Board of Director's, an additional incentive would be 
incorporated into promoting checks and balances in fiduciary 
governance.
A missing link of the fiduciary system would be in place, operational 
        and incentivized.
    The adoption of these changes would create a system that is more 
authentic relative to its purpose than what we have now. Such a system 
would impose few if any costs on the Sponsor or plan participants 
because a template can be promoted that would serve as the foundation 
of the system. Various plan costs would be examined in a new light--one 
that exposes the economic self interest of all vendor support personnel 
and organizations. The impact of such sunshine cast upon plan 
management practices will make it easier for fiduciaries to carry the 
guardianship shield on behalf of those who trust them to do so.
    With all of the really important information on the table rather 
than under the table, the marketplace will naturally reward the 
provider of high quality services that actually make a difference.
    To remove communist-like ideology from the retirement plan 
business, to simplify the process by which a Plan Sponsor knows they 
are fulfilling their duty and to offer a genuine safe harbor that 
relieves liability are all worthy goals.
    Implement this solution and plaintiff's counsel, service vendors 
who obfuscate value and Rube Goldberg will all have to find something 
else to smile about.

                                  
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