[Senate Hearing 110-999]
[From the U.S. Government Printing Office]


                                                        S. Hrg. 110-999
 
       401(K) FEE DISCLOSURE: HELPING WORKERS SAVE FOR RETIREMENT 

=======================================================================

                                HEARING

                                 OF THE

                    COMMITTEE ON HEALTH, EDUCATION,
                          LABOR, AND PENSIONS

                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                                   ON

EXAMINING 401(K) PLAN FEE DISCLOSURE, FOCUSING ON HELPING WORKERS SAVE 
                             FOR RETIREMENT

                               __________

                           SEPTEMBER 17, 2008

                               __________

 Printed for the use of the Committee on Health, Education, Labor, and 
                                Pensions


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          COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

               EDWARD M. KENNEDY, Massachusetts, Chairman

CHRISTOPHER J. DODD, Connecticut     MICHAEL B. ENZI, Wyoming
TOM HARKIN, Iowa                     JUDD GREGG, New Hampshire
BARBARA A. MIKULSKI, Maryland        LAMAR ALEXANDER, Tennessee
JEFF BINGAMAN, New Mexico            RICHARD BURR, North Carolina
PATTY MURRAY, Washington             JOHNNY ISAKSON, Georgia
JACK REED, Rhode Island              LISA MURKOWSKI, Alaska
HILLARY RODHAM CLINTON, New York     ORRIN G. HATCH, Utah
BARACK OBAMA, Illinois               PAT ROBERTS, Kansas
BERNARD SANDERS (I), Vermont         WAYNE ALLARD, Colorado
SHERROD BROWN, Ohio                  TOM COBURN, M.D., Oklahoma

           J. Michael Myers, Staff Director and Chief Counsel

        Ilyse Schuman, Minority Staff Director and Chief Counsel

                                  (ii)

  












                            C O N T E N T S

                               __________

                               STATEMENTS

                     WEDNESDAY, SEPTEMBER 17, 2008

                                                                   Page
Harkin, Hon. Tom, a U.S. Senator from the State of Iowa, opening 
  statement......................................................     1
Enzi, Hon. Michael B., a U.S. Senator from the State of Wyoming, 
  opening statement..............................................     3
Campbell, Bradford P., Assistant Secretary, Department of Labor, 
  Employee Benefits Security Administration, Washington, DC......     7
    Prepared statement...........................................    10
Lacy, Olena Berg, Director and Senior Advisor for Financial 
  Engines, Testifying on Behalf of the Pension Rights Center, 
  Washington, DC.................................................    21
    Prepared statement...........................................    22
Benna, R. Theodore, Founder, the 401(k) Association, Jersey 
  Shore, PA......................................................    28
    Prepared statement...........................................    29
Hunt, Paul, President, Millennium Advisory Services, Testifying 
  on Behalf of the U.S. Chamber of Commerce, Glen Allen, VA......    30
    Prepared statement...........................................    32

                          ADDITIONAL MATERIAL

Statements, articles, publications, letters, etc.:
    Wall Street Journal, article.................................     4
    American Benefits Council (ABC)..............................    43
    American Council of Life Insurers (ACLI).....................    44
    American Society of Pension Professionals & Actuaries (ASPPA) 
      and the Council of Independent 401(k) Recordkeepers (CIKR).    45
    Investment Company Institute (ICI)...........................    67
    AARP.........................................................    85

                                 (iii)

  


       401(K) FEE DISCLOSURE: HELPING WORKERS SAVE FOR RETIREMENT

                              ----------                              


                     WEDNESDAY, SEPTEMBER 17, 2008

                                       U.S. Senate,
       Committee on Health, Education, Labor, and Pensions,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:04 a.m. in 
Room SD-430, Dirksen Senate Office Building, Hon. Tom Harkin 
presiding.
    Present: Senators Harkin and Enzi.

                  Opening Statement of Senator Harkin

    Senator Harkin. Good morning, everyone. The U.S. Senate 
Committee on Health, Education, Labor, and Pensions will come 
to order.
    Though he is not here today, I would like to thank Chairman 
Kennedy, as well as our subcommittee chair Senator Mikulski and 
our Ranking Member Senator Enzi, for giving me this opportunity 
to hold a hearing on my legislation, S. 2473, the Defined 
Contribution Fee Disclosure Act.
    To paraphrase Mark Twain, the reports of this bill's death 
have been greatly exaggerated. It is a fairly simple piece of 
legislation, even though there is 25 pages to it. That is 
simple around this place. All this legislation says is that 
people need enough information to make an informed decision on 
one of the most critical financial decisions they will ever 
make in their entire lifetimes.
    Given this week's tumult in the stock market, this 
legislation is designed to address what might seem to be at 
first glance a small issue, but, in fact, it has a dramatic 
impact on the retirement security of millions of Americans who 
have 401(k) plans. Not many people realize this, but ERISA does 
not require plan sponsors to provide participants with 
information on the level of fees that participants are charged 
by the various plans that they have to choose between.
    While everyone is seeing a big dip in their nest egg for 
the short term during each tumble that the stock market takes, 
those losses are temporary, I hope, and recoverable. Erosion 
from high fees, however, is quiet. It is long-term, insidious, 
and you don't recoup it. It cuts benefits by a huge amount over 
a long period of time.
    The number of people participating in defined contribution 
plans grows every year, and unfortunately, these plans are a 
bigger part of their nest egg as more and more employers freeze 
or terminate defined benefit plans. One of the key things in 
moving from defined benefits to defined contributions is making 
sure that people have all of the information they need to help 
them decide which plan serves them the best.
    Recently, AARP conducted a survey in which it asked 
individuals with 401(k) plans if they even knew what they paid 
each year in fees. Only 17 percent of the people asked said 
that they knew what their fee levels were. Well, again, it is 
not just an academic problem. It could be disastrous for a lot 
of people when they reach retirement.
    One person shared with me a story that highlights what is 
at stake. She noticed one day that her 401(k) wasn't actually 
earning anything at all. After some examination, she found that 
the agent who set up the plan for the company received a fee of 
2 percent annually for the first 5 years, reduced to 2.25 
percent after that, which was paid by the employees and not the 
company. The investment firm charged a fee of 1.25 percent, 
which they said was standard for companies under $1 million.
    Last year, she was paying 3.25 percent in fees and earning 
less than 4 percent from her money market fund. She didn't have 
a clue about the fees until she inquired after she realized she 
wasn't making any money on her fund.
    So, again, if you look back at the AARP survey, of the 17 
percent who said they knew what their fees were--of the 17 
percent who said they knew what their fees were, 33 percent 
said they weren't being charged anything at all. Of course, 
they were charged something, but one out of three thought they 
weren't even being charged anything.
    Some companies tell people they aren't being charged fees. 
Well, some companies may pay the fees, but that is not really 
much of the norm when they pick it up. A few may do that.
    The Government Accountability Office recently estimated 
that a 45-year-old with $20,000 in 401(k) would have $70,550 at 
age 65 for his retirement, assuming he was getting a 6.5 
percent return and only paying 0.5 percent in fees. But that 
figure decreases dramatically if the fees are increased by just 
a single percentage point to 1.5 percent. At that figure, the 
same individual investing the same amount of money would have 
only $58,400 for his retirement, or $12,000 less.
    Consider this case. If a 35-year-old invested $20,000 in a 
plan over 30 years, paying 0.5 percent in fees, that individual 
would have $132,287 for retirement. But if you increased the 
fees just by 1 percent up to 1.5 percent, the amount available 
for retirement is only $99,679. That is a 25 percent reduction 
in the account balance at retirement.
    A lot of times people say, ``Well, I pay a fee of 0.5 
percent or 1 percent or 1.25 percent, it doesn't seem like 
much. It just doesn't seem to amount to a lot.'' But when you 
add it up over a 25-, 30-year period of time, you can see that 
it can be, as I pointed out here, a reduction of 25 percent in 
their total amount.
    Again, what has happened is over this period of time, I 
have gotten more and more information from people who have 
awakened to the fact that they have been paying into their 
401(k)s for a long time, and they have been paying high fees. 
Then they found someone else who has not been paying very high 
fees at all. These things are getting matched up, and they are 
saying why am I not having the same kind of retirement nest egg 
as someone else simply because I am paying higher fees?
    So the information gap, that to let both the participants 
and the sponsors, both, have as much knowledge as is needed so 
they can make informed decisions is what my bill is all about. 
To provide with easily understandable information about the 
fees they are paying. Provide it before they pick which plans 
they want to invest in and, again, regularly on their quarterly 
statements.
    It would also require companies to disclose more 
information to the plan sponsors. Right now, if you provide a 
401(k), you have a fiduciary responsibility. Well, in carrying 
out that fiduciary responsibility, you better have a good 
knowledge of what is involved and what those fees are. 
Sometimes there are hidden fees that aren't even disclosed to 
the plan sponsors.
    Sometimes those sponsors also aren't told about business 
arrangements between service providers to steer participants 
into investment options in which they have a stake. Again, I 
think that is a classic case of a conflict of interest. So, 
again, the bill would require all the plan providers to 
disclose all fees and relationships between service providers 
to the people selecting the plan that the company will 
ultimately offer.
    Again, the bottom line is that people need to be investing 
more and more confidently in the 401(k)s that they are being 
offered, especially in a world where defined benefit plans are 
being slashed. And for many people their only source of real 
retirement income, aside from Social Security, is 401(k)s.
    So, again, I see the bill as a win for companies who want 
to provide their workers with secure retirements. It is a win, 
I think, for the 401(k) providers. Again, many of them have 
been providing really reasonable fees all along, none of this 
hidden stuff. But then there is always someone out there trying 
to game the system, trying to get a little leg up, trying to 
get a little bit ahead, and doing it.
    So, again, I think it is a win for those responsible 
providers that have been providing good 401(k) plans with 
reasonable fees, and I think it is a win for all of the 
Americans who now are investing in their 401(k) plans.
    And before I introduce our witnesses, I would recognize our 
distinguished Ranking Member, Senator Enzi.

                   Opening Statement of Senator Enzi

    Senator Enzi. Well, thank you, Mr. Chairman. I want to 
congratulate you on the work that you have done on this issue 
and for holding this hearing. It is a very important hearing 
and a very timely hearing.
    Our crowd isn't as big as it is sometimes for hearings. I 
think that is because we are going to be talking about numbers.
    [Laughter.]
    As the only accountant in the Senate, though, this is one 
of my favorite kind of hearings.
    Senator Harkin. You know about this stuff.
    Senator Enzi. Yes, I actually filled out several of the 
Form 5500s that we will talk about, and I have looked at the 
chart there and find it fascinating that the fund that is 
giving the biggest return also has the lowest operating 
expense.
    Senator Harkin. Say that again, Mike.
    Senator Enzi. The fund that is giving the biggest return on 
that chart has the lowest operating expense.
    Senator Harkin. Interesting.
    Senator Enzi. That is kind of an anomaly, but I am trying 
to figure out how you get people to actually take a look at the 
numbers, even if we provide the numbers. How do you get them to 
look at the numbers? How do you get them to understand the 
numbers?
    I think part of that is due to our education system. I 
don't think we run them by enough charts like this that they 
can understand what they are or even the importance of 
investing in 401(k)s. So we are holding this hearing at a very 
opportune time. What is occurring in our capital markets holds 
key lessons for individuals who are investing their retirement 
savings for their golden years. We should diversify our 
investments, and we should not take on too much risk. Those are 
the two principal foundations of investing.
    Unfortunately, our financial institutions seem to have 
forgotten those rules. We can't afford to do the same with 
retirement savings. The Department of Labor tells us that there 
are nearly $2.3 trillion in 401(k)s and related accounts 
invested in capital markets, and we have to invest these moneys 
prudently.
    Now, with respect to the fees paid on these accounts, over 
the years we have been told by experts that fees matter, and 
the smallest increase in fees can cost thousands of dollars 
over a 20- to 30-year period. However, we have also been told 
that we cannot just pay attention to fees. We also need to make 
the right financial investments based on our families' needs 
for the future.
    Last week, a major news publication printed an article in 
which the reporter sought to find out how much she was paying 
in 401(k) fees and whether those fees were in line with the 
fees paid by others for similar investments. I request 
unanimous consent to have the article included in the record.
    Senator Harkin. Without objection.
    [The information referred to follows:]

               [Wall Street Journal--September 10, 2008]

                         (By Karen Blumenthal)

                  how much does your 401(k) cost you?
    Page D1--You may not realize it, but you could be paying thousands 
of dollars a year in fees on your 401(k) retirement account, hidden 
expenses that affect how your savings will grow. The government is now 
trying to expose those charges so you can make better investment 
decisions.
    Under regulations proposed by the Department of Labor, 401(k) plans 
every year will have to disclose each investment's annual expense 
ratio--the percentage that goes to management and other costs--along 
with more detailed performance data. In addition, any administrative or 
other fees deducted from your account will have to be spelled out. New 
regulations may go into effect as soon as Jan. 1.
    The fees and other costs we pay are hard to find because they're 
taken out before we see investment results. But they are significant 
because they nibble into our returns now, and, over decades, they can 
take a huge bite out of our future savings tally. Perhaps more 
important, expense ratios--even more than an investment's past 
performance--turn out to be a strong indicator of how a mutual fund 
will fare down the road.
    ``In almost every study we've run, expenses show up as a very 
significant predictor of future performance,'' says Christine Benz, 
director of personal finance at Morningstar Inc., the investment 
research firm. In other words, over time, funds with lower fees are 
likely to outperform those with higher fees in the same category. By 
contrast, says Ms. Benz, ``our data indicates that past performance is 
a weak indicator'' of future results.
    But even with more information, understanding and making sense of 
investment expenses can be a mind-bender. To get a handle on them, I 
decided to dig into my own 401(k) account to see what I was paying and 
what I could do about it. The plan is a typical one, and the exercise 
turned out to be revealing--and somewhat painful.
    Finding the details. Many plans, but not all, provide performance 
data on the various mutual funds and other investment options they 
offer, though they may not detail the 1-, 3- and 5-year data and 
equivalent benchmark performance that the Labor Department will likely 
require. Yet plans don't currently have to detail the administrative 
fees or the expenses built into investment choices, and finding those 
can be tedious and time-consuming.
    My plan is managed by Fidelity Investments, which provides lots of 
information on a fairly user-friendly Web site. It was easy to find the 
expense-ratio link for the Spartan International Index fund, for 
instance. But once there, the numbers were confounding: There were 
three separate expense ratios--0.2 percent as of April, 0.1 percent 
after reductions as of February and 0.1 percent after a cap on expenses 
in 2005. It took conversations with three people at Fidelity to confirm 
that the expenses are capped at $10 for every $10,000 invested. Finding 
the fund's prospectus--which contained details on the expenses--
required a few extra clicks.
    My funds don't come with any ``loads,'' the sales charges assessed 
when you buy or sell a fund. Neither do they assess so-called 12b-1 
sales and marketing fees. But your funds might. Some of mine do assess 
penalties for short-term trading, but I'm way too lazy to move into and 
out of funds frequently.
    To find out who pays my 401(k) plan's administrative expenses--
those outside of individual funds--I needed to locate something called 
the Summary Plan Description. That required a call to my employer's 
benefits department to get a copy. I learned on page 87 that the 
company picks up the modest legal and accounting fees, and the rest of 
the expenses appear to be paid from what Fidelity already charges. 
That's good news: Some plans actually charge participants for all or 
part of the administrative cost.
    How cheap is it? Knowing that the Fidelity Growth fund charges $94 
in expenses for every $10,000 invested still didn't tell me if those 
expenses were reasonable. Fred Reish, a Los Angeles lawyer specializing 
in employee benefits, cautions against looking at the average expense 
ratios for, say, large growth funds, since those averages include high-
cost retail funds that wouldn't normally be in a 401(k). Instead, he 
suggests a better comparison would be the funds with the lowest 
expenses in their category.
    At the Morningstar.com1 site, I put in the fund's ticker symbol 
(FDGRX) and clicked on a little ``i'' next to the expenses number. That 
showed me the fund's expenses were well below the category average of 
$137 per $10,000 invested, but still fell into the second quartile. In 
other words, this fund was more department store than Target, cost-
wise.
    Michael Callahan, of pension consultant Pentec Inc., says he would 
consider expensive any U.S. stock fund with an expense ratio over 1.5 
percent, or an international fund with a ratio of 2 percent or more.
    Using another free Morningstar tool called Xray, I entered all my 
stock funds and found that my average expense ratio was 0.36 percent, 
or $36 per $10,000 invested, mostly because I lean toward index funds 
and Fidelity's are among the cheapest.
    I was feeling pretty smug--but there was a catch. I couldn't find 
the expense ratio for one of my favorite investments, a company-
sponsored ``guaranteed investment contract'' fund, which functions as 
sort of a low-volatility intermediate bond fund. The new Labor 
Department rules will require disclosure of expense ratios for these 
types of funds, as well as for collective trusts, which operate like 
mutual funds but aren't subject to regulation.
    Gina Mitchell, president of the Stable Value Investment 
Association, a trade group, says the typical guaranteed-investment-
contract fund has an expense ratio that ranges from about 0.4 percent 
to about 0.8 percent, depending on whether administrative fees are 
included. The higher end of the range is more than the bond-fund 
offerings in my plan charge. If it applies to my account, it would 
raise my average overall cost to about half a percentage point, or 
around $2,500 a year in expenses on a $500,000 portfolio.
    Figuring out your overall cost is especially important if you are 
deciding whether to keep your 401(k) with a former employer. Hewitt 
Associates compared the expenses of a typical 401(k) and the retail 
costs of an individual retirement account, and found that a 35-year-old 
saver who chose the IRA could end up with 9 percent to 18 percent less 
in her retirement account at age 70 than if she stayed in the original 
plan. If your plan charges high expenses, you may also want to consider 
how much of your income you want to invest in it, beyond capturing the 
full employer match.
    What to do now. Even with differences in costs among funds, don't 
invest based on expenses alone. They should only be a factor, along 
with your asset mix, the fund's ranking among its peers and its long-
term performance.
    Consider my international stock funds: Spartan International Index 
and Fidelity Diversified International, a managed fund with 10 times 
the expenses--$102 per $10,000. Even with much-higher costs, the 
managed fund has outperformed the index fund over 3, 5 and 10 years.
    Over the long run, the cheaper index fund may ultimately do better. 
But in the meantime, I appreciate the managed fund's outstanding 
performance. My solution: Divide my international piece between the 
two. I will also now watch the managed fund more diligently. The higher 
costs underscore why we need to expect more from actively managed funds 
and avoid them if they don't routinely offer superior results or 
diversification.
    You can find out more about the proposed disclosure changes at the 
Labor Department's Employee Benefits Security Administration site 
(www.dol.gov/ebsa\2\). Comments are due this week; you can e-mail yours 
to [email protected]\3\, with the subject line ``Participant fee disclosure 
project.''

    Email: [email protected]\4\

    Senator Enzi. The good news is that she was able to find 
the information. The bad news is that it was an exhausting 
journey because she had to seek out computer programs and 
expert advice that were not given to her employer.
    She found that her index fund fees were smaller than the 
industry norm. However, her international fund fees were a bit 
higher. After careful analysis, she decided to keep her 
international fund investment because it would deliver higher 
returns over the long-term.
    We can make 401(k) fees as transparent as we like, but if 
we don't provide the tools for employees and individuals on how 
to interpret and compare the information, then the information 
is useless. Last week, Apple Computer's Steve Jobs had a major 
press conference on his new innovations. One of his new ideas 
was something called Genius software.
    This Genius software would enable a person to pick one song 
from his or her library of music, and then the software would 
put together a song list. If we are able to have Genius 
software for music, why can't we have Genius software for 
retirement savings? If we gave the iPod generation Genius 
software for their retirement savings, then we can be sure that 
our youngest generation is set for their golden years as they 
are set for their music today.
    People, of course, are a little worried about how much 
people might learn about them. But a lot of them have the 
little grocery store discount things. That helps them to make 
sure that the right things are on the shelf at the right time 
and they know what people are going to buy.
    We watch the ads for eHarmony. That is picking a future 
mate by a computer software program. I am not sure why we don't 
have the same thing for stocks. You know, put in goals, wind up 
with a list. It might have something to do with the liability 
question, though.
    But recently, Chairman Chris Cox of the Securities and 
Exchange Commission embarked on an initiative to require 
companies to use Extensive Business Reporting Language, XBRL, 
for companies and mutual funds to tag the data in their 
financial disclosures. The concept is based on a very similar 
concept used by Steve Jobs. But instead of tagging song titles, 
the SEC wants to tag financial earnings, fees, and asset 
holdings.
    With this type of innovation for retirement savings, I 
envision that computer models could easily produce useful, 
meaningful, transparent disclosures based upon each employee's 
and their family's needs.
    Mr. Chairman, I do want to thank you for working with us to 
invite two small business persons to testify. Under the Pension 
Protection Act, we made great strides in reducing the hurdles 
for companies to establish auto-enrollment 401(k) plans. 
However, we still lag behind in the number of small businesses 
offering retirement benefit plans.
    According to recent data by the Congressional Research 
Service, only 26 percent of employers with fewer than 25 
employees have retirement plans. This compares to 65 percent of 
all large companies that have pension plans.
    Anything that we do with respect to 401(k) fee disclosure 
and investor education should not place disproportionate 
burdens on small entities, nor should it saddle them with 
additional liability. And we already do provide some exclusions 
for small businesses, but we don't have the education programs 
to get them involved in providing it for their employees.
    I believe that everyone in the room today shares the same 
goal of providing better 401 fee disclosure. However, we should 
now be looking down the road and harness technology to make 
that information more useful and meaningful to working 
families. They are the only ones who can make the necessary 
choices to address their own needs.
    I thank you for holding this important hearing today.
    Senator Harkin. Thank you very much, Senator Enzi. Thanks 
for all your help in developing this and moving this hearing 
along. Hopefully, we will get something done here.
    We have two panels, and we have a short morning here. We 
have to be out of there by shortly after 11 o'clock. Our first 
panel would be Assistant Secretary Bradford Campbell, 
Department of Labor, in charge of the Employee Benefits 
Security Administration, Washington, DC.
    Mr. Secretary, we have your statement in its entirety. 
Again, I would ask you if you could just summarize it in 5 to 7 
minutes, then we could have an interchange before we bring up 
our second panel.
    So welcome to the committee, Mr. Campbell, and please 
proceed.

    STATEMENT OF BRADFORD P. CAMPBELL, ASSISTANT SECRETARY, 
DEPARTMENT OF LABOR, EMPLOYEE BENEFITS SECURITY ADMINISTRATION, 
                         WASHINGTON, DC

    Mr. Campbell. Well, thank you, Mr. Chairman, Senator Enzi 
and other members of the committee.
    I want to thank you for the opportunity to come here today 
to testify about the Department of Labor's significant progress 
in promulgating regulations that we have developed to address 
these very issues of fee and expense and conflict of interest 
information in 401(k) and other employee benefit plans. These 
regulations are a top priority for the Department of Labor.
    As you noted, over the past 20 years, the retirement 
universe has changed, and there are significant changes 
affecting both workers and plan fiduciaries who are making 
decisions about their plans. More workers now control the 
investment of the retirement assets in participant-directed 
individual account plans, such as 401(k) plans, and they need 
better tools to make informed decisions.
    Plan fiduciaries, who are charged by law with paying only 
reasonable fees for necessary services, have found their jobs 
more difficult as both the number and types of fees proliferate 
and the relationships between financial service providers have 
become more complex.
    These trends caused the Department to conclude that despite 
the success we have been having in our enforcement efforts and 
our education and outreach efforts to participants and 
fiduciaries, a new regulatory framework was necessary to better 
protect the interests of America's workers, retirees, and their 
families. That is why we began several years ago initiating a 
series of three major regulations, each addressing a different 
aspect of this problem.
    The first regulation addresses the needs of participants 
for concise, useful, comparative information about their plan's 
investment options. The second regulation addresses the needs 
of plan fiduciaries, who require more comprehensive disclosures 
by service providers to enable them to carry out their duties 
under the law. And the third regulation addresses disclosures 
made by the plan to the public and the Government in the annual 
Form 5500, which is filed with the Labor Department by these 
plans.
    It is essential to understand, I believe, that the 
disclosure needs of each of these groups is different, and that 
is exactly why we structured this in three separate 
regulations, which are each targeted to those different needs.
    Participants are choosing their investments from among a 
defined universe of options that are in their plan. And to do 
this, they need concise summary information that allows them to 
compare those options in meaningful ways that take into account 
the fees that they are paying, the historical rates of return, 
the nature of the investment, and the other relevant factors 
that one considers in making a long-term retirement investment 
decision.
    Our proposed regulation will, for the very first time, 
ensure that all 65 million Americans in these plans have the 
basic information that they need to make these decisions and 
that they can actually use to compare across investment 
products. So instead of throwing up their hands and throwing 
out 12 of 14 or however many prospectuses might be passed 
through the participant that are unread, by and large, workers 
will be able to use the model disclosure form, which we have a 
sample of here for you to review, that would help them find 
this basic information they need in a very useful format.
    Now there is widespread agreement in the comments that we 
have received throughout this process--from workers, from 
consumer groups, from plan sponsors, employers--that a 50-page 
written document in legalese isn't helpful to workers. It just 
costs more money to prepare. And that is exactly what our 
proposals are intended to avoid to provide workers with useful 
information.
    Plan fiduciaries have a different duty than workers in 
making these choices, and it requires a different and more 
comprehensive disclosure. Fiduciaries are trying to decide if 
the services the plan is receiving are necessary and if the 
prices that are being charged for those services are 
reasonable, that is taking into account the needs of the plan 
as a whole.
    These fiduciaries need to know whether the services that 
are being provided are going to be influenced by compensation 
arrangements between the service providers and third parties, 
whether the direct charges that the plan is paying to the 
service provider are properly reflecting any payments that the 
service provider is receiving from a third party such as 
revenue sharing or other arrangements, what services they will 
be receiving and information of that nature that they need to 
assess all of the factors involved.
    Our final regulation in this area will ensure that 
fiduciaries get this information before they are entering into 
these arrangements so that they can carry out their obligations 
to the workers.
    I do want to note that we are nearing the end of what has 
been a multiyear process. It is a comprehensive public 
regulatory process. The final regulation that provided the 
disclosures to the Government and the public in the Form 5500 
was promulgated last year.
    Last year, we also proposed the regulation requiring 
disclosures from service providers to plans, and we held 2 days 
of administrative hearings to further augment the record on 
these issues that were raised this spring. We will be issuing a 
final regulation in the next several months.
    This summer, we proposed the participant disclosure 
regulation, and the comment period on that recently closed. We 
are in the process of evaluating those comments, and we will 
promulgate a final regulation this year.
    I do want to commend the committee for its interest in 
enhanced fee and expense disclosure. I think it is a very 
important area that we should all be looking at.
    But, I do want to note that the Department has the 
authority under current law to undertake these regulatory 
initiatives, and we have been exercising it to ensure that 
workers are protected from exactly the concerns that have been 
raised in the congressional hearings that have been held on 
this topic. And I think that our very deliberative and open 
process of rulemaking has been very conducive to addressing 
some of the fairly complex technical issues that have been 
presented.
    In conclusion, Mr. Chairman and Senator Enzi and the 
committee, I want to thank you for the opportunity to come here 
and for your interest in this important issue because it is 
crucial to ensuring that Americans have adequate retirement 
savings and adequate retirement income.
    I am committed to ensuring that our regulatory projects are 
completed in a timely manner, and I appreciate the opportunity 
to address those and would be happy to answer any questions you 
have.
    [The prepared statement of Mr. Campbell follows:]
               Prepared Statement of Bradford P. Campbell
                          introductory remarks
    Good morning Chairman Harkin, Ranking Member Enzi, and members of 
the committee. Thank you for inviting me to discuss plan fees, the 
Department of Labor's role in overseeing plan fees, and proposals to 
increase transparency and disclosure of plan fee and expense 
information. I am Bradford Campbell, the Assistant Secretary of Labor 
for the Employee Benefits Security Administration (EBSA). I am proud to 
be here today representing the Department of Labor and EBSA. Our 
mission is to protect the security of retirement, health and other 
employee benefits for America's workers, retirees and their families, 
and to support the growth of our private benefits system.
    Ensuring the security of retirement benefits is a core mission of 
EBSA, and one of this Administration's highest priorities. Excessive 
fees can undermine retirement security by reducing the accumulation of 
assets. It is therefore critical that plan participants, directing the 
investment of their contributions, and plan fiduciaries, charged with 
the responsibility of prudently selecting service providers and paying 
only reasonable fees and expenses, have the information they need to 
make appropriate decisions.
    That is why the Department began a series of regulatory initiatives 
to expand disclosure requirements in three distinct areas:

    1. Disclosures by plans to participants to assist in making 
investment decisions;
    2. Disclosures by service providers to plan fiduciaries to assist 
in assessing the reasonableness of provider compensation and potential 
conflicts of interest; and
    3. More efficient, expanded fee and compensation disclosures to the 
government and the public through a substantially revised, 
electronically filed Form 5500 Annual Report.

    Each of these projects addresses different disclosure needs, and 
our regulations are tailored to ensure that appropriate disclosures are 
made in a cost-effective manner. For example, participants are unlikely 
to find useful extensive disclosure documents written in ``legalese''--
instead, it appears from comments we received thus far that 
participants want concise and readily understandable comparative 
information about plan costs and their investment options. By contrast, 
plan fiduciaries want detailed disclosures in order to properly carry 
out their duties under the law, enabling them to understand the nature 
of the services being provided, all fees and expenses received for the 
services, any conflicts of interest on the part of the service 
provider, and any indirect compensation providers may receive in 
connection with the plan's business.
    We have made significant progress on these projects. On November 
16, 2007, we issued a final regulation requiring additional public 
disclosure of fee and expense information on the Form 5500. On December 
13, 2007, we published a proposed regulation requiring specific and 
comprehensive disclosures to plan fiduciaries by service providers, and 
held 2 days of administrative hearings on the proposed regulation on 
March 31 and April 1, 2008, and we plan to complete a final regulation 
this year. On July 23, 2008, we published a proposed rule requiring 
plans to disclose fee and expense, investment return and other 
essential information to plan participants. This proposal was informed 
by public comments on participant disclosures we received following a 
Request for Information published on April 25, 2007. The public comment 
period on the proposed regulation recently closed, and we are 
evaluating the comments received from consumer groups, plan sponsors, 
service providers and others as we work to finalize the proposal.
    The Employee Retirement Income Security Act of 1974 (ERISA) 
provides the Secretary of Labor with broad regulatory authority, 
enabling the Department to pursue these comprehensive disclosure 
initiatives without need for a statutory amendment. The regulatory 
process currently underway ensures that all voices and points of view 
will be heard and provides an effective means of resolving the many 
complex and technical issues presented. I hope that as Congress 
considers this issue, it recognizes the Department's existing statutory 
authority and takes no action that could disrupt our current efforts to 
provide these important disclosures to workers. My testimony today will 
discuss in more detail the Department's activities related to plan 
fees. Also, I will describe the Department's regulatory and enforcement 
initiatives focused on improving the transparency of fee and expense 
information for both plan fiduciaries and participants.
                               background
    EBSA is responsible for administering and enforcing the fiduciary, 
reporting, and disclosure provisions of Title I of ERISA. EBSA oversees 
approximately 679,000 private pension plans, including 387,000 
participant-directed individual account plans such as 401(k) plans, and 
millions of private health and welfare plans that are subject to 
ERISA.\1\ Participant-directed individual account plans under our 
jurisdiction hold over $2.2 trillion in assets and cover more than 65 
million participants. Since 401(k)-type plans began to proliferate in 
the early 1980s, the number of employees investing through these types 
of plans has grown dramatically. Assets held in these plans are, in 
real terms, more than 13 times greater than the amount held in 1984 and 
have increased by 22.5 percent since 2000. EBSA employs a 
comprehensive, integrated approach encompassing programs for 
enforcement, compliance assistance, interpretive guidance, legislation, 
and research to protect and advance the retirement security of our 
Nation's workers and retirees.
---------------------------------------------------------------------------
    \1\ Based on 2005 filings of the Form 5500.
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    Title I of ERISA establishes standards of fiduciary conduct for 
persons who are responsible for the administration and management of 
benefit plans. It also establishes standards for the reporting of plan-
related financial and benefit information to the Department, the IRS 
and the Pension Benefit Guaranty Corporation (PBGC), and the disclosure 
of essential plan-related information to participants and 
beneficiaries.
                          the fiduciary's role
    ERISA requires plan fiduciaries to discharge their duties solely in 
the interest of plan participants and beneficiaries, and for the 
exclusive purpose of providing benefits and defraying reasonable 
expenses of plan administration. In discharging their duties, 
fiduciaries must act prudently and in accordance with the documents 
governing the plan. If a fiduciary's conduct fails to meet ERISA's 
standards, the fiduciary is personally liable for plan losses 
attributable to such failure.
    ERISA protects participants and beneficiaries, as well as plan 
sponsors, by holding plan fiduciaries accountable for prudently 
selecting plan investments and service providers. In carrying out this 
responsibility, plan fiduciaries must take into account relevant 
information relating to the plan, the investments available under the 
plan, and the service provider, and are specifically obligated to 
consider fees and expenses.
    ERISA prohibits the payment of fees to service providers unless the 
services are necessary and provided pursuant to a reasonable contract, 
and the plan pays no more than reasonable compensation. Thus, plan 
fiduciaries must ensure that fees paid to service providers and other 
expenses of the plan are reasonable in light of the level and quality 
of services provided. Plan fiduciaries must also be able to assess 
whether revenue sharing or other indirect compensation arrangements 
create conflicts of interest on the part of the service provider that 
might affect the quality of the services to be performed. These 
responsibilities are ongoing. After initially selecting service 
providers and investments for their plans, fiduciaries are required to 
monitor plan fees and expenses to determine whether they continue to be 
reasonable and whether there are conflicts of interest.
                ebsa's compliance assistance activities
    EBSA assists plan fiduciaries and others in understanding their 
obligations under ERISA, including the importance of understanding 
service provider fees and relationships, by providing interpretive 
guidance \2\ and making related materials available on its Web site. 
One such publication developed by EBSA is Understanding Retirement Plan 
Fees and Expenses, which provides general information about plan fees 
and expenses. In conjunction with the Securities and Exchange 
Commission, we also developed a fact sheet, ``Selecting and Monitoring 
Pension Consultants--Tips for Plan Fiduciaries.'' This fact sheet 
contains a set of questions to assist plan fiduciaries in evaluating 
the objectivity of pension consultant recommendations.
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    \2\ See, e.g., Field Assistance Bulletin 2002-3 (November 5, 2002) 
and Advisory Opinions 2003-9A (June 25, 2003), 97-16A (May 22, 1997), 
and 97-15A (May 22, 1997).
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    EBSA also has made available on its Web site a model ``401(k) Plan 
Fee Disclosure Form'' to assist fiduciaries of individual account 
pension plans when analyzing and comparing the costs associated with 
selecting service providers and investment products. This form is the 
product of a coordinated effort of the American Bankers Association, 
Investment Company Institute, and the American Council of Life 
Insurers.
    To help educate plan sponsors and fiduciaries about their 
obligations under ERISA, EBSA conducts numerous educational and 
outreach activities. Our campaign, ``Getting It Right--Know Your 
Fiduciary Responsibilities,'' includes nationwide educational seminars 
to help plan sponsors understand the law. The program focuses on 
fiduciary obligations, especially related to the importance of 
selecting plan service providers and the role of fee and compensation 
considerations in that selection process. EBSA has conducted 26 
fiduciary education programs since May 2004 in different cities 
throughout the United States. EBSA also has conducted 58 health 
benefits education seminars, covering nearly every State, since 2001. 
Beginning in February 2005, these seminars added a focus on fiduciary 
responsibilities. EBSA will continue to provide seminars in additional 
locations under each program.
             disclosures to participants under current law
    ERISA currently provides for a number of disclosures aimed at 
providing participants and beneficiaries information about their plans' 
investments. For example, information is provided to participants 
through summary plan descriptions and summary annual reports. Under the 
Pension Protection Act of 2006, plan administrators are required to 
automatically furnish pension benefit statements to plan participants 
and beneficiaries. The Department issued Field Assistance Bulletins in 
December 2006 and in October 2007 to provide initial guidance on 
complying with the new statutory requirements. Statements must be 
furnished at least once each quarter, in the case of individual account 
plans that permit participants to direct their investments, and at 
least once each year, in the case of individual account plans that do 
not permit participants to direct their investments. Other disclosures, 
such as copies of the plan documents, are available to participants on 
request.
    Additional disclosures may be required by the Department's rules 
concerning whether a participant has ``exercised control'' over his or 
her account. ERISA section 404(c) provides that plan fiduciaries are 
not liable for investment losses which result from the participant's 
exercise of control. A number of conditions must be satisfied, 
including that specified information concerning plan investments must 
be provided to plan participants. Information fundamental to 
participants' investment decisions must be furnished automatically. 
Additional information must be provided on request.
           ebsa participant education and outreach activities
    EBSA is committed to assisting plan participants and beneficiaries 
in understanding the importance of plan fees and expenses and the 
effect of those fees and expenses on retirement savings. EBSA has 
developed educational brochures and materials available for 
distribution and through our Web site. EBSA's brochure entitled A Look 
at 401(k) Plan Fees for Employees is targeted to participants and 
beneficiaries of 401(k) plans who are responsible for directing their 
own investments. The brochure answers frequently asked questions about 
fees and highlights the most common fees, and is designed to encourage 
participants to make informed investment decisions and to consider fees 
as a factor in decisionmaking. Last fiscal year, EBSA distributed over 
5,400 copies of this brochure, and over 46,000 visitors viewed the 
brochure on our Web site.
    More general information is provided in the publications, What You 
Should Know about Your Retirement Plan and Taking the Mystery out of 
Retirement Planning. In the same period, EBSA distributed over 86,000 
copies of these two brochures, and almost 102,000 visitors viewed these 
materials on our Web site. EBSA's Study of 401(k) Plan Fees and 
Expenses, which describes differences in fee structures faced by plan 
sponsors when they purchase services from outside providers, is also 
available.
                         regulatory initiatives
    EBSA has completed one initiative and currently is finalizing two 
others to improve the transparency of fee and expense information to 
participants, plan sponsors and fiduciaries. We began these 
initiatives, in part, to address concerns that participants are not 
receiving information in a format useful to them in making investment 
decisions, and that plan fiduciaries are having difficulty getting 
needed fee and compensation arrangement information from service 
providers to fully satisfy their fiduciary duties. The needs of 
participants and plan fiduciaries are changing as the financial 
services industry evolves, offering an increasingly complex array of 
products and services.
Disclosures to Participants
    On April 25, 2007, the Department published a Request for 
Information, inviting suggestions from plan participants, sponsors, 
service providers, consumer advocates and others for improving the 
current disclosures applicable to participant-directed individual 
account plans. In response to this request, the Department received 
more than 100 comment letters from a variety of interested parties. 
Drawing on these comments, the Department developed a proposed rule 
that will, upon adoption, require fiduciaries of all participant-
directed individual account plans--not just plans electing to comply 
with section 404(c)--to furnish to the plan's participants and 
beneficiaries important plan and investment-related information. This 
proposed regulation, published in the July 23, 2008 Federal Register, 
will ensure that all participants who are responsible for making 
investment decisions under their plan receive understandable 
information about their plan and the investments offered thereunder, 
including information about the fees and expenses that directly affect 
their retirement savings.
    A major challenge in developing the proposal was determining 
precisely what information plans should be required to disclose to 
participants. Many commenting on the Request for Information encouraged 
the Department to keep in mind that, while appropriate disclosures are 
helpful, simply mandating the disclosure of page after page of legal 
jargon is actually contrary to the interests of participants, as the 
quantity of information may be overwhelming to participants and the 
benefits may not justify the cost, which are likely to be charged 
against the accounts of participants. Our proposal adopts a disclosure 
framework that favors quality over quantity, providing plan 
participants with concise, useful information in a format that 
facilitates comparative judgments between plans' investment options.
    Specifically, the proposal would require that participants be 
furnished, upon enrollment and at specified intervals thereafter, two 
general categories of information--``plan-related information'' and 
``investment-related information.''
    Plan-related information primarily encompasses administrative 
expenses of the plan, such as legal and accounting fees, and expenses 
related to the actions of a specific participant, such as a loan 
processing fee. In addition to requiring descriptions of what and how 
these fees and expenses are assessed, to be furnished upon enrollment 
and at least annually thereafter, the proposal requires that the 
amounts actually charged against a participant's account for such 
expenses be disclosed quarterly, noting that this quarterly disclosure 
requirement could be satisfied by including the required information on 
the participant's quarterly benefit statement.
    With respect to investment-related information, the proposal 
provides for the disclosure of specific information regarding each 
designated investment option and that such information be disclosed in 
a form that facilitates comparisons of investments. The proposal also 
includes a model comparative disclosure form. The specific investment-
related information required to be disclosed under the proposal 
includes:

     The name of each investment option, type or category of 
the investment (e.g., money market fund, balanced fund, etc.), and 
whether the investment is actively or passively managed.
     Information about the performance of each investment over 
1-, 5-, and 10-year periods.
     Benchmarks against which each investment may be compared 
in terms of performance.
     Fee and expense information with respect to each 
investment--specifically, the total operating expenses, and any 
shareholder-type fees that might be charged directly against the 
participant's investment.

    In addition, a Web site address is required to be provided with 
respect to each designated investment option for those participants who 
want additional information about their investment choices. The Web 
site would, at a minimum, make available information concerning the 
principal investment strategies, attendant risks, investments 
comprising the portfolio, portfolio turnover, etc.--similar to the 
information that would be contained in more detailed prospectuses.
    The comment period on the proposal closed on September 8. Although 
we have not yet finished reviewing all of the comment letters, let me 
just say that we are pleased to see that so many stakeholders under 
ERISA support simple and short communications between plans and 
participants as the most helpful and meaningful.
Disclosures to Plan Fiduciaries
    On December 13, 2007, EBSA issued a proposed regulation amending 
its current regulation under ERISA section 408(b)(2) to clarify the 
information fiduciaries must receive and service providers must 
disclose for purposes of determining whether a contract or arrangement 
is ``reasonable,'' as required by ERISA's statutory exemption for 
service arrangements. Our intent is to ensure that service providers 
entering into or renewing contracts with plans disclose to plan 
fiduciaries comprehensive and accurate information concerning the 
providers' receipt of direct and indirect compensation or fees and the 
potential for conflicts of interest that may affect the provider's 
performance of services. The information provided must be sufficient 
for fiduciaries to make informed decisions about the services that will 
be provided, the costs of those services, and potential conflicts of 
interest based on fees or compensation. The Department believes that 
such disclosures are critical to ensuring that contracts and 
arrangements are ``reasonable'' within the meaning of the statute. 
Public comments on the proposed regulation are currently under review 
and we are working on developing a final regulation.
Disclosures to the Public
    On November 16, 2007, EBSA promulgated a final regulation revising 
the Form 5500 Annual Report filed with the Department to complement the 
information obtained by plan fiduciaries as part of the service 
provider selection or renewal process. The Form 5500 is a joint report 
for the Department of Labor, Internal Revenue Service and PBGC that 
includes information about the plan's operation, funding, assets, and 
investments. The Department collects information on service provider 
fees through the Form 5500 Schedule C.
    Consistent with recommendations of the ERISA Advisory Council 
Working Group, the Department published a final regulation amending the 
Form 5500, including changes that expand the service provider 
information required to be reported on the Schedule C. The changes more 
specifically define the information that must be reported concerning 
the ``indirect'' compensation service providers received from parties 
other than the plan or plan sponsor, including revenue sharing 
arrangements among service providers to plans. The changes to the 
Schedule C were designed to assist plan fiduciaries in monitoring the 
reasonableness of compensation service providers receive for services 
and potential conflicts of interest that might affect the quality of 
those services.
    We intend that the changes to the Schedule C will work in tandem 
with our 408(b)(2) initiative. The amendment to our 408(b)(2) 
regulation will provide up front disclosures to plan fiduciaries, and 
the Schedule C revisions will reinforce the plan fiduciary's obligation 
to understand and monitor these fee disclosures. The Schedule C remains 
a requirement for plans with 100 or more participants, which is 
consistent with long-standing congressional direction to simplify 
reporting requirements for small plans.
                       ebsa's enforcement efforts
    EBSA has devoted enforcement resources to this area, seeking to 
detect, correct and deter violations such as excessive fees and 
expenses, and failure by fiduciaries to monitor on-going fee structure 
arrangements. From fiscal year 1999 through August 2008, we closed 674 
401(k) investigations involving these issues, with monetary results of 
over $131 million.
    In carrying out its enforcement responsibilities, EBSA conducts 
civil and criminal investigations to determine whether the provisions 
of ERISA or other Federal laws related to employee benefit plans have 
been violated. EBSA regularly works in coordination with other Federal 
and State enforcement agencies, including the Department's Office of 
the Inspector General, the Internal Revenue Service, the Department of 
Justice (including the Federal Bureau of Investigation), the Securities 
and Exchange Commission, the PBGC, the Federal banking agencies, State 
insurance commissioners, and State attorneys general.
    EBSA is continuing to focus enforcement efforts on compensation 
arrangements between pension plan sponsors and service providers hired 
to assist in the investment of plan assets. EBSA's Consultant/Adviser 
Project (CAP), created in October 2006, addresses conflicts of interest 
and the receipt of indirect, undisclosed compensation by pension 
consultants and other investment advisers. Our investigations seek to 
determine whether the receipt of such compensation violates ERISA 
because the adviser or consultant used its status with respect to a 
benefit plan to generate additional fees for itself or its affiliates. 
The primary focus of CAP is on the potential civil and criminal 
violations arising from the receipt of indirect, undisclosed 
compensation. A related objective is to determine whether plan sponsors 
and fiduciaries understand the compensation and fee arrangements they 
enter into in order to prudently select, retain, and monitor pension 
consultants and investment advisers. CAP will also seek to identify 
potential criminal violations, such as kickbacks or fraud.
                concerns regarding legislative proposals
    While I am pleased that the Department's regulatory initiatives and 
the legislative proposals introduced in Congress share the common goal 
of providing increased transparency of fee and expense information, I 
am concerned that legislative action could disrupt the Department's 
ongoing efforts to provide these important disclosures. Proposed 
legislation may not achieve the primary goal of participant 
disclosures--providing workers with useful and concise information--by 
mandating very detailed and costly disclosure documents. Excessively 
detailed disclosures are likely to be ignored by participants even as 
those participants bear the potentially significant cost of their 
preparation and distribution. Participants are most likely to benefit 
from concise disclosures that allow them to meaningfully compare the 
investment options in their plans. The Department has received many 
comments highlighting the importance of brevity and relevance in 
disclosures to participants. The regulatory process is well-suited to 
resolving the many technical issues arising as we seek to strike the 
proper balance in providing participants with cost-effective, concise, 
meaningful information.
    I am also concerned by proposals suggesting that specific 
investment options should be mandated. Requiring specific investment 
options would limit the ability of employers and workers together to 
design plans that best serve their mutual needs in a changing 
marketplace.
                               conclusion
    Mr. Chairman and members of the committee, thank you for the 
opportunity to testify before you today. The Department is committed to 
ensuring that plans and participants pay fair, competitive and 
transparent prices for services that benefit them--and to combating 
instances where fees are excessive or hidden. We are moving as quickly 
as possible consistent with the requirements of the regulatory process 
to complete our disclosure initiatives, and we believe they will 
improve the retirement security of America's workers, retirees and 
their families. I will be pleased to answer any questions you may have.

    Senator Harkin. Thank you very much, Mr. Secretary, and I 
appreciate that.
    Getting to this model comparative chart that you came up 
with, the AARP conducted a survey last month comparing 
participant reaction to your model disclosure form to one that 
they came up with and said in a letter to you, which they 
obviously sent to me, that, ``Roughly a third or fewer 
respondents agree that DOL's model disclosure form is easy to 
read--30 percent; is easy to understand--25 percent; has a 
clear purpose--33 percent; has terms that are clearly defined--
24 percent; and explains how to get additional information--35 
percent.''
    ``In contrast, at least 7 in 10 respondents who viewed 
AARP's form agree that AARP's model disclosure form is easy to 
read--77 percent; easy to understand--72 percent; has a clear 
purpose--78 percent; has terms that are clearly defined--70 
percent; and explains how to get additional information--75 
percent.''
    I am asking how would you respond to this? Is it possible 
that DOL would amend the model disclosure to incorporate some 
of AARP's suggestions?
    Mr. Campbell. Actually, my staff and I met with the AARP 
earlier this week to discuss exactly the issues that they 
raised in their comment, and I would say that that is the 
benefit of the notice and comment rulemaking process in that we 
get the expertise across the spectrum of workers and advocates 
and others to help us inform what the final regulation will 
look like.
    I do think there are a couple of important differences in 
what we proposed with the AARP's form that go to the fact that 
their form had a slightly different purpose. It was a 
retrospective analysis of what an individual paid in the 
options they were already in, whereas our model disclosure is 
intended to provide a prospective view of the entirety of the 
options in the plan so that participants can select among them.
    I think the other big difference between the two dealt with 
the disclosure of historical rates of return and, just as 
importantly, benchmarks to compare those rates to. I think that 
was something the survey also revealed was very valuable to 
participants. So, again, we certainly appreciate those 
comments, and we will be happy to consider them as we go 
through the process.
    Senator Harkin. I hope so. Again, I look at this model 
comparative chart, and say, I will tell you what I should 
invest in. I should get into that fund there, the Russell 1,000 
there, maybe. Or the D, the Fund Midcap ETF 15 percent, 13 
percent, 12 percent compared with those bonds down there that 
are 3.8 percent and 4 percent. That is where I want to go.
    The average person looks at that, and they say, ``Wait, 
well, of course, why be dumb? I want to put that in there. I 
get the biggest rate of return right there, 15, 13, and 12 
percent average rate. Wow, boy, that is where I would want to 
go.'' I mean, that is just the average person, I would think, 
would look at that. I mean, what else would they need to know 
other than that?
    Mr. Campbell. Well, I think that that goes to exactly the 
point that Senator Enzi made about the importance of education 
and ensuring that participants can understand the relative 
merits of these, and that is an issue that we were trying to 
address in this model disclosure so that workers would have in 
one place the information they need to make those judgments.
    I think the point that the Senator is making goes to issues 
of diversification, and should you put all your eggs into one 
basket? I think those are the sorts of issues that, for 
example, the PPA addressed in the quarterly benefits statement 
requiring basic education information and diversification 
materials.
    Senator Harkin. I think Senator Enzi is on to something 
here on software. My older daughter said to me one time, not 
too long ago, ``You still using that credit card of yours?'' I 
said, ``Yes, I have been using it for years.'' She said, ``Oh, 
that is not good. You should get a better card, get better 
deals.'' And I said, ``Well, I never thought about it.''
    There is a site you can go to. I don't recall the name of 
it. So I went online, and got on that site. They have a form 
that you fill out. You tell about who you are and what you do, 
and how much money you earn, and family information, and they 
come up with a program of what might be the best credit card 
for you.
    It seems to me, as was said, if they can do this with iPods 
and music, why can't we come up with a software program when an 
individual would sit down and plug in a lot of information as 
to family size, their age, their health, other savings they may 
have, other resources they might have, job history, perhaps 
even looking ahead--how many different kinds of jobs--what is 
their income level and what is their prospectus. You plug in 
information like that.
    Now some of that is sort of by guess and by golly, but 
people can have a pretty good idea of what they are going to be 
doing and how much money they are going to be making and what 
their situations are at that point in time. You plug that in, 
and back comes a program that says, you know, with all that 
information you have given us, here is probably what you ought 
to be thinking about investing in.
    Why can't we come up with a software program like that?
    Mr. Campbell. Well, fortunately, the Pension Protection Act 
has finally removed some barriers that prevented exactly those 
kinds of software programs from being more widely available in 
plans. Actually, the department just in the last month issued a 
proposed regulation to implement those provisions. So we are 
working quite diligently to do exactly that because I think 
those are very wise decisions that Congress made and an 
excellent suggestion.
    Senator Harkin. Will that be part of your final rule, to 
come up with that kind of software program? Could the 
Department of Labor, EBSA, come up with a model software 
program?
    Mr. Campbell. The regulation I had mentioned in my opening 
statement is what is addressing this in investment advice. The 
Pension Protection Act does not specify that the Labor 
Department create the model. It does require the Labor 
Department to determine the qualifications of a person eligible 
to certify the independence of such a model created by another.
    I think the intent in Congress was to ensure that we 
weren't fixing in law and in regulation a static model that 
doesn't reflect changes that occur, which I think was a wise 
decision. Our proposed regulation will implement those 
provisions, and once finalized, that regulation will enable 
this computer model advice to be available to participants.
    So I am very excited about that regulation as well, and I 
would be happy to discuss it.
    Senator Harkin. I am just trying to think who is going to 
come up with this model software program.
    Mr. Campbell. Typically.
    Senator Harkin. You would want someone divorced from the 
business. You would want some independent group or some 
independent agent to do that, I would think.
    Mr. Campbell. That certainly occurs currently. Also in the 
PPA, the requirements would allow various proprietary models to 
be developed. But they have to be certified that they are 
unbiased and independent, that the advice they produce is 
independent.
    Senator Harkin. Yes.
    Mr. Campbell. The provisions in the PPA were very wise, and 
I think our regulation accurately is implementing them. Our 
proposed regulation would accurately implement them.
    Senator Harkin. I still wonder who is going to come up with 
the software. It costs money to do something like that, and you 
wouldn't get any return on it. I mean, this is just information 
unless someone came up with it and it was just widely adopted 
by all of the plans. I suppose they could pay a fee to use the 
software or something. I don't know----
    Mr. Campbell. The intent of the provision in the PPA that 
makes it more widely available is that by removing some of the 
barriers in law, it allows service providers to offer the 
investment advice along with other offerings, which previously 
was quite difficult to do and, thus, makes it a more common 
feature in plans.
    Senator Harkin. One last question. Do you know how much you 
pay into TSP, what your fees are in TSP?
    Mr. Campbell. Generally, the fees in the TSP are quite low. 
They range between 1, 2, 3 basis points. Unfortunately, that is 
not quite an apples-to-apples comparison with the private 
sector. For one thing, the Federal agencies absorb a great deal 
of the payroll and other costs that are associated with private 
sector plans, which factor into the fees that are paid by those 
plans. So it is not quite apples-to-apples.
    Of course, also the TSP is very large. So it does have 
economies of scale that aren't available to smaller businesses.
    Senator Harkin. There is a lot of difference between 3 or 4 
or 5 basis points and 100 basis points or 200 basis points that 
are out there. It raises also the question of pooling. You 
might have small entities out there, but why can't they be 
pooled?
    Mr. Campbell. One of the strengths of our private benefit 
system has always been its flexibility. It allows the workers 
and the employees in a given employment situation to come up 
with benefits that best suit them and their unique 
circumstances.
    One of the questions, I think, in a pooling arrangement 
would be to what extent is that strength diminished by 
Government-imposed regulations or one-size-fits-all products. I 
think that has been a concern that I would have in looking at 
that.
    But I think one of the biggest significant impacts of the 
regulations we have proposed is that by making this a more 
transparent marketplace, by ensuring that fiduciaries see 
revenue-sharing arrangements and know exactly what the service 
provider is getting, that it puts the fiduciaries in the 
position of being able to accurately and more--to have the 
information they need to actually negotiate with service 
providers and understand what is being paid, which protects 
participants.
    In turn, with participants having fee information, it 
provides feedback the other way to the plan fiduciaries, 
because the workers now have the tools they need to ask 
questions of their own plans. And I think there is important 
feedback that will be provided by these regulations that will 
have a downward effect on prices.
    Senator Harkin. When do you expect the final rules to be 
out?
    Mr. Campbell. We expect to issue the final fiduciary 
disclosure regulation in the next several months and the 
participant fee disclosure regulation by the end of the year.
    Senator Harkin. I hope you are seriously taking into 
account the information from AARP and looking at what they have 
come up with, too.
    Mr. Campbell. We will very seriously consider all the 
comments we have received. We are big believers in the notice 
and comment process at EBSA because it has been very valuable 
to us in all of our regulations to get that expert input.
    Senator Harkin. Thank you very much, Mr. Secretary.
    Senator Enzi.
    Senator Enzi. Thank you.
    I am going to go to a little bit more basic question to 
start off because there are many families and individuals that 
are watching the capital markets right now, and they are 
worried about the safety of their retirement investments 
altogether. Are our workers' 401(k) accounts safe? And what 
should workers be doing to invest for the long-term retirement 
security, any advice for people at this point in time?
    Mr. Campbell. Certainly. I would say our 401(k)s and other 
long-term savings vehicles are very safe. They are designed to 
be that way.
    The assets in your 401(k), the assets in your traditional 
pension plan, these are separate and held separately in trust 
from the assets of the company. So even if your employer goes 
bankrupt, your retirement is separate from the employer and, 
therefore, safe from the problems they may have.
    Traditional pension plans have an insurance factor from the 
Federal Government. The SEC, through a variety of mechanisms, 
has guarantees up to $500,000 for securities that are held by 
brokers and so forth. So there are a variety of protections in 
place that make retirement savings vehicles very secure.
    I would urge people not to react precipitously. You are 
investing for the long-term. You should continue to make your 
regular contributions every payroll period and not be spooked 
into making radical adjustments but think about what is the 
best way to get to your ultimate retirement goal.
    Personally, for my own account in the Thrift Savings Plan, 
I am continuing to invest in the C Fund on the grounds that I 
am dollar cost averaging. And hopefully, when things come back 
up, I will own more shares that I purchased at a lower price. 
But hopefully, time will prove me right about that.
    Senator Enzi. We have been working on the financial 
literacy thing for a long time with all of the agencies, and it 
is something that people have to concentrate on. There aren't a 
lot of sources out there.
    You mentioned the Pension Protection Act several times, and 
I greatly appreciate all of the time and effort that you and 
your employees have extended to bring that law to life. One 
important part of the law was to reduce the hoops that 
companies had to jump through in order to provide automatic 
enrollment in 401(k) plans, and the initial numbers from the 
Employees Benefit Research Institute shows this is really 
making a difference and is helping get more employees enrolled 
to save for their retirement.
    However, as you heard in my opening remarks, only a quarter 
of the small businesses are offering 401(k) type plans for 
their employees. As a former small business owner, I know it is 
difficult to offer benefits. What are the messages that you 
have received from small businesses in the comments and letters 
and your outreach efforts?
    In addition, how did that influence the disclosure 
requirements that you put in the regulatory proposal?
    Mr. Campbell. Well, the regulation, particularly in 
disclosures by service providers to plan fiduciaries, really is 
primarily a boon for small- and mid-sized companies because 
these are the fiduciaries that have traditionally had the most 
difficult time getting the information they really needed 
because they didn't have the negotiating clout that, for 
example, a 200,000-person firm would have in negotiating with 
those same vendors.
    By requiring this information to be provided to all 
fiduciaries, we are ensuring that fiduciaries know what 
revenue-sharing arrangements are occurring, really know whether 
there is a conflict that they should be concerned about when 
one fund is recommended over another, and I think will very 
much help small businesses and mid-sized businesses in offering 
plans and offering them on good terms in fulfilling their 
fiduciary duties to offer very reasonable prices to their 
workers.
    Investment advice I think is also important. Under the PPA 
provisions, that can now be a service that is more widely 
available as part of a package of services that a provider 
would provide, for example, a small business, which typically 
goes to a single provider for most of the services connected 
with their plans. That can be valuable to their workers, but 
also to the small business owners in terms of their own plan. 
So there is an incentive there.
    We also, of course, offer a great deal of education and 
outreach, working with small business owners to make sure they 
are aware of their fiduciary responsibilities under the law. I 
have received many positive comments about the sessions that we 
have held and the materials that we produce, which are intended 
to be understandable and useful, and that is something we work 
on regularly.
    Senator Enzi. Several times you have used the words 
``fiduciary responsibility.'' To the small businessman, that 
translates into ``liability and lawsuit.'' What are you doing 
to counter that, to give them some confidence that if they go 
with a 401(k) plan, they are not just asking for more lawsuits?
    Mr. Campbell. Right. Well, I think the Pension Protection 
Act was important in helping clarify some of those roles, 
particularly, as you said, in automatic enrollment. The 
Department of Labor issued a regulation regarding what sorts of 
investments are appropriate to be used and that would not carry 
with them undue liability for workers to be automatically 
enrolled in, but that would also provide workers with the type 
of long-term retirement savings returns that are appropriate. 
That's in the best interests of workers and also the plan 
sponsors.
    In our educational efforts, we make sure that fiduciaries 
are aware of where the common pitfalls are. The best way to not 
have a problem is to avoid making a mistake in the first place. 
And if we can use our experience in the violations that we have 
seen on our enforcement side to inform our educational side, we 
can steer plans clear of the common pitfalls, and that is to 
the benefit of everyone in the system.
    Senator Enzi. Well, that is why I am hoping that we will 
have some more technology involved in this. And when the 
technology is approved, those using it won't be held 
responsible so that they can encourage their employees to use 
that relatively lawsuit free.
    Mr. Campbell. I think that is important. The independent 
certification in the computer model is ensuring that those who 
then use it can rely on it to be unbiased.
    Senator Enzi. Thank you. I have used my time.
    Senator Harkin. Thank you, Senator.
    Secretary Campbell, thank you very much.
    Mr. Campbell. Thank you, sir.
    Senator Harkin. Good job. Our second panel, Olena Berg 
Lacy, Director and Senior Advisor for Financial Engines, 
testifying on behalf of the Pension Rights Center; R. Theodore 
Benna, Founder of the 401(k) Association, Jersey Shore, PA; 
Paul Hunt, President, Millennium Advisory Services, testifying 
on behalf of the U.S. Chamber of Commerce.
    We have everyone here, and again, all your statements will 
be made a part of the record in their entirety. I am going to 
ask if you could each sum it up maybe in 5 minutes, I would 
sure appreciate that. We will start, again, with Olena Berg 
Lacy from the Pension Rights Center.
    Ms. Lacy, welcome to the committee.

 STATEMENT OF OLENA BERG LACY, DIRECTOR AND SENIOR ADVISOR FOR 
 FINANCIAL ENGINES, TESTIFYING ON BEHALF OF THE PENSION RIGHTS 
                     CENTER, WASHINGTON, DC

    Ms. Lacy. Thank you, Mr. Chairman, Senator Enzi, and other 
members of the committee.
    I appreciate you inviting me here this morning to talk 
about this very important issue of 401(k) fee disclosure. My 
name is Olena Berg Lacy, and I was the head of the Employee 
Benefits Security Administration during the Clinton 
administration. So I have some familiarity with these issues.
    I am also a member of the board of directors of the Pension 
Rights Center, and as you mentioned, I am representing them 
here today.
    I am going to address the issue of fee disclosure from the 
perspective of participants. Now while I was at the EBSA 10 
years ago, we held hearings on fees and produced a report as a 
result of those hearings. So I recently went back to look at 
that report to see what had happened in the interim, and not 
much actually had until the department undertook its regulatory 
efforts.
    The only thing that has really changed is that there is 
substantially more assets in plans that are subject to these 
fees. Fees are important because, as you have already pointed 
out, millions of people depend on the 401(k) as the primary 
supplement that they will have to Social Security in their 
retirement, and fees greatly affect the level of assets people 
are able to accumulate.
    They are also important because of the magnitude of dollars 
involved. If you look at all defined contribution plans, there 
are somewhere around $3 trillion held in these types of plans. 
And if you made a rough assumption that they were collectively 
managed for 100 basis points, or 1 percent, that means there is 
somewhere around $30 billion a year going into fees and out of 
retirement savings accounts.
    Disclosure of these fees is a critically important consumer 
issue. And that disclosure, as you have pointed out, has to 
occur at two levels. It has to occur at the plan sponsor level, 
so the plan sponsor is able to make the decisions that they 
need to, to ensure that they have complied with their fiduciary 
duty to make appropriate choices for their plan participants. 
There needs to be disclosure to participants that is clear and 
concise and easy to understand.
    Let us start with disclosure to plan sponsors. Large 
employers probably have the resources to shop around among 
service providers, get the information they need, and do the 
analysis to get the best deals for their plans. But many 
smaller plan sponsors don't have the ability to do this. They 
may not know the options that are available to them or even how 
to evaluate those options.
    And fees do vary substantially for very similar investment 
products. So it is important that they have this information. 
Currently, there is no explicit legal obligation for service 
providers to give them that information.
    As Secretary Campbell has just discussed, the EBSA 
undertook a regulatory project to provide that kind of 
information to plan sponsors, the information that they will 
need to make prudent decisions. I could spend a lot of time 
commending all the good things that they have done, but since 
my time is limited, I would like to focus on the areas where 
they might not have gone far enough.
    One failure, I believe, in the proposed regulation is that 
the DOL is not requiring that service providers unbundle their 
fees or separately report different kinds of fees. I think 
without this unbundling it is going to be difficult for smaller 
plan sponsors to make comparisons among different offerings.
    The DOL report 10 years ago pointed out that there are 80 
different ways these fees can be displayed, and also 
aggregating fees can disguise potential conflicts of interest, 
and I go into that in my written testimony in greater detail. I 
believe we need congressional action that goes beyond the DOL 
proposal.
    As I mentioned earlier, the second level of fee disclosure 
is from sponsors to participants. If participants can determine 
that the fees they are paying are excessive, they often have 
the ability to influence the plan design by making their 
desires and wishes known to their employer. They need clear 
disclosure as well, and they need to know what they are paying 
for and how to select wisely among the options that are offered 
to them.
    The DOL, again, has proposed regulations to address this 
disclosure. And again, I applaud their efforts but believe, as 
in the case of plan sponsors, they could have gone a bit 
further. I think the same disaggregation needs to occur at the 
participant level, perhaps not in the same detail as plan 
sponsors will need, but some separation of fees into the basic 
categories of services.
    Now there are other issues with the proposed regulations as 
well. Senator Harkin, in your question, I think you got to the 
heart of it. The chart has both fees and performance, and I 
believe performance data was put in probably because the 
department heard from a lot of people, that if you just give 
participants fee data, they will go for the lowest. They need 
to know performance as well.
    That performance chart has no mention of risk. And I think 
it is a far greater harm if people go to the riskiest funds 
because they appear to provide the most return than it is if 
people go to the lowest fee.
    I will be happy to answer any questions that you have and 
quickly point out that with another hat, I sit on the board of 
directors of a company that provides exactly the software you 
have been talking about, and I would be happy to brief you on 
that at any time.
    [The prepared statement of Ms. Lacy follows:]
                 Prepared Statement of Olena Berg Lacy
    Thank you, Mr. Chairman and members of the committee, for inviting 
me here to speak to you about the important issue of fee disclosure to 
401(k) plans and their participants. My name is Olena Berg Lacy and I 
was head of the Department of Labor's Employee Benefits Security 
Administration (EBSA) during the Clinton administration. I am also a 
member of the board of directors of the Pension Rights Center, which I 
am representing today. The Center is a nonprofit consumer organization 
that has been working since 1976 to promote and protect the retirement 
security of American workers and their families. I would like to 
address the fee issue from the perspective of what level of disclosure 
is in the best interests of plan participants.
    While I was with EBSA, we held hearings on 401(k) fees in November 
1997 and issued a report in April 1998. I recently went back to review 
that report and see what had changed since. I am sorry to say that not 
a lot has changed in the intervening decade--except that substantially 
more assets are in plans that are subject to these fees.
    Of course, the major development that has occurred in the last 
decade is the increase in the shift from defined benefit plans to 
defined contribution plans so that increasingly a DC plan--a 401(k), a 
457, or a 403(b)--will be the only or the primary supplement to Social 
Security for millions of workers.
    Fees are important. We cannot predict future returns on 
investments, but fees are a certainty. They can make a substantial 
difference in a retirement account balance. The Government 
Accountability Office has pointed out that a 1 percent increase in fees 
on an account achieving a 7 percent rate of return annually will reduce 
retirement savings by 17 percent over 20 years. The impact of fees is 
greater still on smaller account balances or over a longer period of 
years.
    Fees are also important because of the magnitude of dollars 
involved. More than $3 trillion is invested in these plans. If you 
assume that collectively, they are operated for just 100 basis points 
(1 percent), that amounts to more than $30 billion per year taken from 
retirement saving accounts in fees. The significance of this loss of 
retirement income is greatly magnified when markets are in turmoil and 
participants are incurring losses in their accounts.
    For fee disclosure to truly benefit plan participants, it must 
occur at two levels: disclosures from service providers to plan 
sponsors on fees assessed to the plan, and from plan sponsors to plan 
participants on the fees participants are paying. Disclosure to 
sponsors at the plan level is critically important to participants 
because it is the sponsor who makes the determination of what services 
to provide and what investment alternatives to include in the plan. The 
sponsor has a fiduciary duty to ensure that these decisions are made 
prudently and for the sole and exclusive benefit of the participants.
    You might expect that in order to fulfill this duty, plan sponsors 
would simply ``shop'' among service providers to find the best deal for 
their plans. In the large plan market, this is largely the case. But as 
the DOL report pointed out in 1998, the market is not efficient in 
allowing small- and medium-sized plan sponsors to be aware of what is 
available to them. They have difficulty in getting the information they 
need to make informed decisions. Because fees vary substantially for 
very similar investment products and services, it is critical that such 
information be provided but there is no explicit legal obligation for 
service providers to do so. In the absence of such a requirement, 
sponsors are on their own to sort out fee information. As the DOL study 
pointed out, there are more than 80 ways fees could be displayed. This 
is because there are different types of fees: asset-based, per 
participant fees, and itemized fixed charges. There are also different 
categories of fees, such as administrative costs, communications, 
investment management and sales charges. Many of these categories have 
subcategories.
    Given the lack of information available and the confusing array of 
ways in which it is presented, it is reasonable to ask if some plan 
sponsors are selecting investment and service options with excessive 
fees. While there is not a lot of data, a 2007 study might be 
indicative. IMC, a consulting firm, examined the offerings of thousands 
of plans of all sizes and different categories of investment offerings. 
Based on their findings and extrapolating what they found to the entire 
market, they estimated that as many as 5.5 million of more than 55 
million participants may be paying some unreasonable fees, and the 
assets subject to these fees total almost $300 billion. If you add in 
plans paying some high fees, 26 percent of total assets may be subject 
to high or excessive fees. In small plans with under $5 million in 
assets, almost 50 percent may be paying some high or excessive fees.
    In general, large-plan sponsors have the ability to issue RFPs to 
numerous service providers and to demand that information be provided 
in a consistent format so that comparisons may be easily made. They 
have the sophistication to evaluate the information they receive. 
Small-plan sponsors probably do not. In fact, the DOL report noted that 
surveys showed that cost was not a primary consideration for them and 
that, in fact, many select as their 401(k) provider financial 
institutions that provide them with other financial services. Yet these 
sponsors have the same fiduciary duty to make these decisions for the 
sole and exclusive benefit of plan participants.
    To level the playing field, it is important that explicit 
disclosure requirements exist for the information that service 
providers must provide plan sponsors and that there be uniformity in 
the format so that comparisons are easy to make. The EBSA undertook a 
regulatory project earlier this year to effect such requirements and 
should be commended for undertaking this important effort. Its proposal 
provides much-needed information to plan sponsors to allow them to make 
reasonable decisions. Unfortunately, the proposed regulations do not go 
far enough.
    Most importantly, the DOL failed to require that expenses be 
unbundled.\1\ Without separation of fees for the different categories 
of investment management, plan administration, and participant 
services, it will be difficult, if not impossible for small- and 
medium-sized plan sponsors to make comparisons among different 
offerings. And as they monitor the reasonableness of the fees they pay, 
without unbundling, they will be unable to determine if investment 
managers and other service providers are reaping windfalls when the 
growth in assets subject to an all-in management fee exceeds the 
incremental costs of providing administrative and other services.
---------------------------------------------------------------------------
    \1\ 401(k) plan fees and expenses generally fall into three 
categories: plan administration fees, individual service fees, and 
investment fees. Some employers may provide for or negotiate these 
services separately and the expenses charged by each provider 
(recordkeeper, investment manager, etc.) are charged separately. This 
is referred to as an ``unbundled'' arrangement. In the case of 
unbundled arrangements, the proposed regulations require that the 
dollar amount of plan administration fees be disclosed to participants 
in quarterly benefit statements. Other plans may have some or all of 
the services offered by one provider for a single fee and that provider 
will then pay out of its fee any other service providers it may have 
contracted with to provide services. This is a ``bundled'' arrangement. 
The proposed regulations do not require disclosure of plan 
administration fees in bundled arrangements.
---------------------------------------------------------------------------
    Aggregating fees can also disguise potential conflicts of interest. 
For example, assume there is a plan with 15 different investment 
offerings, but the record-keeper is getting 65 percent of its revenue 
from just one or two of those offerings--and those are proprietary 
offerings. If the funds under-perform, the record-keeper may well 
resist removing them from the investment line-up because of the 
difficulty in replacing that lost fee revenue.
    Also, if regulations or legislation were to allow aggregate-level 
disclosure, we would be concerned that plan sponsors might assume that 
their duty to examine fees extended no further than what was required 
to be revealed to them. In reality, ERISA requires that they ferret out 
such conflicts of interest. And they need sufficient information to do 
so.
    It is vital that we get this right and there is a need for 
congressional action to go beyond the DOL proposal.
    As I mentioned earlier, the second level of disclosure is from plan 
sponsors to plan participants on the fees they are paying. In 
discussions about this issue, I have noticed that even those who 
support better disclosure to plan sponsors are less willing to concede 
that greater disclosure to participants is also needed. I respectfully 
disagree. Plan participants also have important decisions to make that 
such disclosures would support. The first critical decision is whether 
to participate in the plan in the first place. Most participants to not 
contribute anywhere near the maximum annual limit and many do not 
contribute enough to maximize the company match. Many lower-wage 
workers do not even contribute beyond the IRA limit and may well be 
better off with an IRA if the costs of operating the 401(k) plan exceed 
the value of the company match.
    Furthermore, participants often have the ability to influence plan 
design and investment offerings by making their desires known to their 
employer. So they need to understand what they are paying for. The DOL 
study posed it this way: ``If participants knew how much optional 
features of their plans cost, would they demand so many?'' An Internet 
study showed that 85 percent of 1,000 respondents voted for greater 
investment returns versus more services from their plans.
    Again, in addition to plan features, participants may influence 
which investment options are offered. And certainly they need fee 
comparisons to select among those options.
    The DOL has also undertaken a regulatory effort to address 
disclosure to plan participants and recently issued proposed 
regulations. By requiring a single, tabular description of fees to 
participants, the department's proposal will significantly improve the 
transparency of fees. However, as with the DOL's approach to service 
provider disclosure to plan sponsors, these regulations fall short. 
Indeed, one can assume that if the plan sponsor disclosures are 
inadequate, they will not be conveyed to participants in a way that is 
meaningful and can be easily understood. The information should be 
unbundled at the participant, as well as the sponsor level. While 
participants may not need the same level of disaggregation of fees that 
plan sponsors should have, at the very least, fees for the different 
categories of services should be separately disclosed.
    For disclosure to participants to be helpful, it needs to be clear, 
concise, and readily accessible. Financial terminology needs to be 
explained in simple terms. The regulation as proposed does not require 
sufficient explanation of either fees or investment choices. While too 
much information may overwhelm participants, too little will not 
support reasonable decisionmaking. And the information must be 
presented using terms that most participants will understand. Effective 
disclosure also requires easy access to the information. Electronic 
means of disclosure will not be appropriate for participants without 
access to computers or knowledge of how to use them.
    There are other issues with the proposed regulations, as well. They 
require the provision of summary investment performance information. 
This requirement is undoubtedly in response to the concern expressed by 
many industry observers that the provision of fee information only 
might lead some financially unsophisticated participants to opt for the 
lowest fee funds without regard to performance. Unfortunately, the 
summary performance information could result in a similar problem with 
this group of participants: that they opt for the highest performing 
funds without regard to risk. We submit that this is a far greater 
danger and, if it cannot be averted, the fee information should stand 
alone.
    Finally, in some respects, the proposed regulations weaken 
currently required disclosures. (Please see the attached letter from 
the Pension Rights Center to the DOL commenting on the regulations for 
more detail). So as with disclosure to plan sponsors, there is a need 
for Congress to step in.
    I mentioned at the beginning of my remarks that not much has 
changed in the last decade. But there is some new evidence that just 
your interest in this issue is making a difference. A recent article in 
Investment News reported on a survey that showed that 30 percent of 
plan sponsors cited costs and fees as their reason for switching plan 
providers. This marks a significant change from the last survey in 
2005, when only 18 percent changed for this reason. The article 
mentioned that discussions in Congress, as well as the recent DOL 
activity, has brought the issue of fees to the forefront. We believe 
that without further congressional action, this momentum could fade. So 
we thank you for holding this hearing and for your interest in this 
issue of paramount importance to the retirement well-being of millions 
of American workers.
                             Pension Rights Center,
                                      Washington, DC 20036,
                                                 September 8, 2008.
Office of Regulations and Interpretations,
Employee Benefits Security Administration,
Attn: Participant Fee Disclosure Project, Room N-5655,
U.S. Department of Labor,
200 Constitution Avenue, NW,
Washington, DC 20210.

Re: Comments on Proposed Regulations on Fiduciary Requirements for 
        Disclosure in Participant-Directed Individual Account Plans

    We are submitting comments on the Department of Labor's proposed 
regulations for fiduciary requirements for disclosure in Participant-
Directed Individual Account Plans. The Pension Rights Center is a 
nonprofit consumer organization that has been working since 1976 to 
promote and protect the retirement security of American workers and 
their families.
    As the Department of Labor noted in its preamble to the proposed 
regulations, and as the Department of Labor's Advisory Council on 
Employee Welfare and Employee Retirement Plans noted in a 1998 report 
on fees in defined contribution plans, high fees can have a substantial 
negative effect on an employee's retirement savings in a defined 
contribution plan. And the evidence is strong that in many defined 
contribution plans, particularly 401(k) plans sponsored by small and 
medium sized firms, fees exceed reasonable levels.
    The proposed regulations create a new regulatory regime for 
disclosing fees and investment performance information to participants. 
While we think that the proposal springs from good intentions and 
incorporates some sound ideas, it is, in many respects, problematic. 
The regulations will not ensure that adequate information is provided 
to participants to help them make intelligent decisions on how to 
invest plan assets, or, indeed, whether to participate in the plan at 
all. Moreover, the regulations provide some information that may 
mislead the typical investor, resulting in some investors making 
poorer, rather than wiser, decisions. In addition, the regulations fall 
short on providing participants with sufficient information to evaluate 
the performance of the fiduciaries responsible for selecting investment 
alternatives and negotiating fees with third parties.

Our specific concerns include the following:
    1. The regulations should require that fees be unbundled. The 
regulations' most significant short-coming is that they do not require 
that fees for broad categories of services be separately stated, but 
rather allow fees to be bundled.\1\
---------------------------------------------------------------------------
    \1\ 401(k) plan fees and expenses generally fall into three 
categories: plan administration fees, individual service fees, and 
investment fees. Some employers may provide for or negotiate these 
services separately and the expenses charged by each provider (record 
keeper, investment manager, etc.) are charged separately. This is 
referred to as an ``unbundled'' arrangement. In the case of unbundled 
arrangements, the proposed regulations require that the dollar amount 
of plan administration fees be disclosed to participants in quarterly 
benefit statements. Other plans may have some or all of the services 
offered by one provider for a single fee and that provider will then 
pay out of its fee any other service providers it may have contracted 
with to provide services. This is a ``bundled'' arrangement. The 
proposed regulations do not require disclosure of plan administration 
fees in bundled arrangements.
---------------------------------------------------------------------------
    Particularized information about the nature and size of fees is 
critical to responsible investing. When fees are bundled, however, 
participants are denied this information. Fee unbundling is critical to 
providing participants with the information they need to choose among 
investment alternatives (and decide whether to participate in the 
plan). Moreover, with bundled fees, a plan record keeper may be able to 
overburden non-proprietary funds with excess fees, making its 
proprietary funds more attractive. Bundled fees may thus result in 
participants who invest in certain investment alternatives subsidizing 
the recordkeeping and other fees of participants who invest in other 
alternatives.\2\
---------------------------------------------------------------------------
    \2\ It should also be noted that unbundled fees would permit fee 
disclosures to include benchmarks for different types of fees.
---------------------------------------------------------------------------
    Bundled fees also mask the cost of particular services, some of 
which might not be used by most participants. If the costs of such 
services were more transparent, participants might ask the plan sponsor 
to drop the services or charge the costs of the services directly to 
the participants who use them. Finally, when administrative services 
are bundled with investment fees, it becomes more likely that vendors 
of investment vehicles will reap windfalls when asset growth exceeds 
the incremental additional costs of providing administrative services.
    We are aware that to provide this information it will be necessary 
for investment vendors who currently bundle fees (or who receive 
revenue sharing or similar payments from other parties) to modify their 
current business practices. But such transitional costs for vendors do 
not seem too large a price for the vendors' ability to participate in 
one of the largest investment markets in the world, and it is 
reasonable to require that market participants play by rules that 
maximize transparency. We also know that there are technical issues 
involved in requiring that fees be separately stated, but we believe 
that the Department of Labor should be able to draw on the considerable 
investment expertise of other Federal agencies and the private markets 
to create a workable regulatory regime in which fees for broad 
categories of services are separately stated.
    It is also worth observing that some observers have suggested that 
the proposed regulations, by requiring greater transparency when fees 
are not bundled, will result in more plans contracting with vendors who 
bundle fees. This would further undercut efforts to improve 
transparency.
    2. Plans in Which Participants Do Not Have Investment Choice. The 
proposed regulations require disclosure to participants in plans where 
employees allocate their accounts among several investment 
alternatives, but do not apply to plans where the investments are 
professionally managed for the participants as a unitary group. But 
participants in the latter plans also have a need to know the 
investment and administrative fees for which they are paying, to assist 
them in their planning for retirement and to evaluate fiduciary 
performance. The regulations should extend fee disclosures to 
participants in such plans.
    3. Description of Investment Information. The proposed regulation 
requires the provision of summary investment performance information. 
This requirement is undoubtedly in response to the concern expressed by 
many observers that the provision of fee information only might lead 
some unsophisticated participants to opt for the lowest fee funds 
without regard to performance. Unfortunately, the summary performance 
information could result in another problem with this group of 
participants: they may opt for the highest performing funds without 
regard to risk. We submit that this is a far greater danger and if it 
cannot be averted, the fee information should stand alone. In fact, the 
required disclosure fails to provide even summary descriptions of each 
alternative or notation of the level of risk associated with each 
investment.
    While we agree that furnishing participants with excessive 
information can be counterproductive, this does not mean that the 
optimal level of disclosure is the least disclosure. We do not see how 
participants who are unwilling or technologically ill-equipped to 
search Web sites for information on each of their investment 
alternatives are served with the scant summary information required by 
the regulations. Indeed, the regulations, seem to adopt a name, rank, 
serial number approach to disclosure: they require written disclosure 
for each investment alternative of only the following: (1) category of 
investment, (2) form of management (passive or active); and (3) 
historical performance data (with a market benchmark). This is 
insufficient and may result in some investors selecting the investment 
with the highest historical return--without regard to risk or the value 
of portfolio diversification--since this is what the disclosure 
statement appears to isolate as the key determinant of the value of an 
investment. We note that the Federal Thrift Savings Plan provides 
understandable summary paragraphs for each investment alternative and 
might be a starting model for better disclosure than the proposed 
regulations would require.
    We also recommend that if performance data is included in the final 
regulations, the regulations specify that investment return be reported 
net of fees.\3\ In addition, there should be a requirement that key 
terms such as expense ratio, basis points, large-cap fund, operating 
expenses, active management and passive management, etc., be clearly 
defined.
---------------------------------------------------------------------------
    \3\ The definition of ``average annual total return'' refers to 
Securities and Exchange Commission Form N-IA, which requires that 
investment performance be disclosed net of fees, but since some plan 
fiduciaries may not be familiar with the SEC requirements, the fact 
that investment return must be shown net of fees should be made 
explicit in the final regulations.
---------------------------------------------------------------------------
    4. The Regulations Should Not Reduce Investment Disclosure. The 
regulations currently in effect under ERISA Sec. 404(c) require that a 
prospectus be provided to participants for each investment alternative 
offered by the plan. The proposed regulations, which would replace 
these rules, do not require provision of prospectuses. Instead, they 
merely require plans to provide information on how to access 
prospectuses on the Internet. Many participants are more likely to read 
a prospectus if they are provided with a hard copy than if they must 
access the Internet. We urge that the new regulations focus on 
improving disclosure rather than weakening it.
    5. Expenses Charged to Individuals. The regulations require that 
expenses charged directly to individual participants be disclosed. We 
think it probable that some participants will not understand the 
significance of some of these charges. We thus believe the regulations 
should provide information to help individuals understand the nature of 
the charges and the impact they can have on return. As an example, we 
note in the sample disclosure chart in the regulations, that one 
investment imposes a $20 annual service fee on accounts with less than 
$10,000. The average return for this fund over the previous 5-year 
period was .22 percent and 8.9 percent for the previous year. If a 
participant had invested $1,000 in this account and the fund returned 
on average 2 percent annually over the next 5 years, the account 
balance would not have grown at all during this period. And if the 
returns during this period were initially lower than 2 percent, the 
return would have been negative over those 5 years, notwithstanding the 
2 percent average rate of return. We do not think this will be apparent 
to many participants. In addition, we are skeptical that all 
participants are aware of how, for example, a ``4.25 percent deferred 
sales charge against amounts invested or redeemed,'' might affect their 
investments.
    6. Correlation of fee disclosure and investment disclosure. The 
typical participant reading the Model Comparative Chart would not know 
whether the ``average annual total return'' for a fund on Part I 
reflected the fees separately stated on Part II (both annual operating 
fees and shareholder and shareholder-type fees).
    7. Timing and Method of Disclosure. The proposed regulations permit 
general fee and investment disclosure to be made in a plan's summary 
plan description and require that modifications to the general 
disclosures be made by the 30th day following the adoption of a 
material change. While providing information in the summary plan 
description is useful, we believe that providing a stand-alone 
disclosure to participants when they first commence plan participation, 
and annually thereafter, would better serve participants and put only a 
mild additional burden on plan sponsors. We also believe that material 
changes in fee and investment information should be reported to 
participants before, rather than after, they are adopted.
    Finally, we want to note that promulgation of a regulation on fee 
disclosure requires two conceptually distinct inquiries: first, what 
information does a participant require about fees to make informed 
investment decisions; and second, how the information can be made 
intelligible to participants. The latter inquiry can be most 
effectively answered through testing various alternatives with actual 
participants. We urge the Department to undertake such a study.
            Respectfully submitted,
                                           Norman P. Stein,
                                                    Policy Advisor.

                                             Jane T. Smith,
                                                  Policy Associate.

    Senator Harkin. All right. We will come back to that.
    Next, we will turn to R. Theodore Benna, founder of the 
401(k) Association, who I am told is the parent of 401(k)s.
    Mr. Benna, welcome. I often wondered who dreamed this whole 
thing up.

      STATEMENT OF R. THEODORE BENNA, FOUNDER, THE 401(K) 
                 ASSOCIATION, JERSEY SHORE, PA

    Mr. Benna. Thank you. Well, it's a pleasure to be here, Mr. 
Chairman and Congressman Enzi.
    I appreciate the opportunity and want to comment just 
briefly on the fees, but more importantly, I think, about other 
issues that tie into it, which you were both addressing, and 
that is participants making wiser investment decisions and 
burden of liability placed on employers.
    Definitely greater disclosure is required to plan sponsors 
and participants. This is a very high-level frustration for 
both of those audiences. So action clearly is needed.
    On the other side, being involved in the administration of 
small plans for small businesses, I have to warn you that it is 
not easy to obtain the information that you are asking to be 
disclosed. It is extremely difficult to find the information 
due to the many layers of fees that exist.
    On the investment side, the fact that funds that are 
offered in these plans can be--there are many different share 
classes that are involved. There is no easy way to go out 
there, gain the fee information and the investment return 
information, and provide it.
    My best estimate in terms of having to do that in our 
little business is it probably would result in having to 
increase fees to our clients by 5 to 10 percent to be able to 
pull that information together. Certainly one of the things 
that would be very helpful to the industry would be some 
centralized place because everybody who has a plan and is 
servicing them would have to disclose fees. Right now, there 
isn't one easy place where you can go to and find performance 
information and fee information for all share classes that are 
readily available that I know of.
    That is my comment on fees. I want to comment on your 
concern about participant investments. It is probably about 7 
years ago now, when we were coming up to the 25th anniversary 
of the first 401(k) savings plan, that I was focusing on the 
fact that we have a lot to learn from the experience we have 
gained. One of the things that frustrated me was the fact that 
despite millions of dollars thrown at education, it hadn't 
really changed the bar.
    I helped, as Olena did, launch the investment advice 
business with computer-driven models and had the hope that that 
was going to help overcome this hurdle of participants making 
better investment performance. After a couple of years' 
experience watching that model, I concluded that it wasn't 
doing any more than what education did to change the way 
participants were investing.
    At that time, Money magazine ran an article. The title of 
the story was ``Fixing 401(k).'' I had a quote in that, which 
was a one-liner, which was, ``The father of 401(k) said if he 
were starting over from scratch today, he would blow up 
existing investment structures.'' That got a little concern in 
the investment community, I might add.
    What I was talking about were two things that you are both 
obviously focusing on. That is getting participants to 
understand and to make easier decisions, and the question I was 
asking is why should employers be liable, have a gun held to 
their head being fearful of being sued when they are helping 
their employees save for retirement? It doesn't make sense.
    At that time, I started talking here and visited some 
different people and promoted the idea of a fiduciary safe 
harbor that would protect businesses who chose to structure 
their plans in a certain way from liability exposure. The 
investment structure I was talking about at that time, frankly, 
was replacing these big menus that we throw out at participants 
and expect them to be able to understand and make informed 
investment decisions about and to use vehicles that are already 
in place that provide proper allocations, automatically re-
balance, and automatically reduce risk as participants grow 
older.
    Those investment vehicles are commonly known as target 
maturity funds. Seven years ago, there was only one mutual fund 
company that offered those funds. Today, every player in the 
field must offer them due to the demand and the awareness that 
these funds are achieving a lot of the things that you are 
looking to accomplish.
    PPA included a provision in it that reduces fiduciary 
liability potentially for employers who utilize funds of this 
type, and that was put in primarily for default investment 
purposes. However, that application potentially has much 
broader potential for employers who use that kind of structure 
and the benefits of QDIA to help their participants get better 
investment results without having to make all these complex 
decisions and also substantially reduce employer liability for 
the employers.
    Thank you.
    [The prepared statement of Mr. Benna follows:]
                Prepared Statement of R. Theodore Benna
    I am commonly referred to as the father of 401(k) because I 
designed and installed the first plan that used a matching employer 
contribution and employee pre-tax contributions. I am semi-retired, but 
I am still active and have been in the retirement plan business for 49 
years,
    I am here as an advocate for participants and employers and as a 
co-owner and officer of a small company that administers plans for 
small employers.
    Substantial progress has been made to disclose fees during the past 
10 years due to governmental attention and market pressure. Most 
employers receive fee information today but many participants either 
don't or it is available but hard to find.
    There is lots of room for improvement.
    As a 401(k) advocate, I support the adoption of the Department of 
Labor proposed regulations but with a delayed effective date. As an 
officer of a company that administers plans, I am concerned about the 
time and cost related to complying with these regulations.
    A major problem is the fact that there isn't any place where the 
data is readily available for all mutual funds that may be offered in a 
401(k) plan. A community effort to gather this information will be 
useful.
    The effective date is unworkable.
    A determination needs to be made regarding who will be responsible 
for providing the necessary information. Greater disclosure is badly 
needed but it is questionable how much of an impact greater disclosure 
will have.

    Senator Harkin. Thank you very much, Mr. Benna.
    And now we will turn to Paul Hunt, President of the 
Millennium Advisory Services on behalf of the U.S. Chamber of 
Commerce.
    Mr. Hunt.

    STATEMENT OF PAUL HUNT, PRESIDENT, MILLENNIUM ADVISORY 
SERVICES, TESTIFYING ON BEHALF OF THE U.S. CHAMBER OF COMMERCE, 
                         GLEN ALLEN, VA

    Mr. Hunt. Thank you, Senator Harkin. I appreciate being 
here today, and I want to thank both of you, Senator Enzi and 
Senator Harkin, for the opportunity to discuss the 
appropriateness of retirement plan fees.
    I am Paul Hunt. I am president of Millennium Advisory 
Services. We are an SEC-registered investment advisory firm. I 
am also president of Millennium Capital Management, and we do 
traditional investment business through our broker/dealer 
relationship with Triad Advisors out of Atlanta, GA.
    I am pleased to testify today on behalf of the U.S. Chamber 
of Commerce, where I am a member, and I am also a member on 
their Corporate Leadership Advisory Council.
    As you know, the Chamber is the world's largest federation, 
representing more than 3 million businesses and organizations 
of every size, sector, and region. Over 96 percent of the 
Chamber members are small businesses with fewer than 100 
employees. So I am a very good representative of the Chamber 
today because we are a small business.
    Also being a small business, we are in the investment 
world. As investment advisors--we are investment advisors on 
several retirement plans, and employees of Millennium Capital, 
through Triad Advisors and are registered reps on several 
retirement plans. We are also a small business that sponsors 
our own retirement plan.
    I believe it is critically important to discuss the impact 
of potential legislation on the small business sponsor. For 
that reason, I appreciate this opportunity to discuss fee 
disclosure and the potential impact that it may have for small 
businesses.
    While there have been several bills introduced in Congress 
on fee disclosure and several sets of regulations issued by the 
Department of Labor, my comments today will focus on general 
principles and concerns of small business plan sponsors rather 
than on specific provisions in any one piece of legislation. I 
would like to highlight the following areas.
    Plan fee disclosure can be helpful to small business plan 
sponsors in the appropriate context. Onerous administrative and 
cost burdens will negatively affect small business plan 
sponsorship. Liability concerns are an important consideration 
for small business owners. And the ability to buy bundled 
services should be preserved.
    First, it is important to state that plan fee disclosure 
can be very helpful to small businesses. Being in the 
investment business, we are true believers of transparency, and 
I applaud what you gentlemen are doing. We believe that 
transparency is a very, very important factor in the retirement 
plan world.
    Clarification of fee disclosure requirements can be very 
helpful to small business plan sponsors to ensure that they are 
aware of the services that they are receiving and the prices 
they are paying. At the same time, it is critical that the 
significance of plan fees be put in the appropriate context.
    Some plan sponsors may begin to feel that they need to 
choose the least expensive investment option in order to avoid 
litigation claims. However, the lowest fees are not a guarantee 
of the best performance. Moreover, plan sponsors may desire 
services or features that are not included in the lowest fees. 
Therefore, it is necessary for plan sponsors to also consider 
expenses in the greater context of investment performance and 
features.
    As you are aware, small business owners are very sensitive 
to administrative and cost increases. Due to their size and 
resources, small business owners often feel these burdens 
sooner and more deeply than their larger counterparts. Unlike a 
large company that may have a dedicated human resource or 
benefits professional, or even an entire department, this 
function in a small business may be one of several other duties 
of an employee, more likely the owner.
    Therefore, small business owners will be less likely to 
establish a retirement plan if there are going to be 
significant administrative burdens that they do not have the 
resources to cover. The threat of litigation is a serious 
concern for small business plan sponsors.
    While the publicity garnered by congressional hearings, 
lawsuits, and newspaper articles has highlighted the importance 
of plan fees, it has also created for some a negative 
impression of plan fees and plan sponsors. A small business 
owner who does not have the resources to hire an outside 
consultant may become wary of offering an individual account 
plan at all for the fear of a potential lawsuit. Therefore, it 
is critical to proceed cautiously and thoroughly, consider all 
implications associated with any changes or requirements.
    I am going to make a side comment on that. In my opinion, I 
think that it is very dangerous because of litigation. I think 
it is almost a catch-22 for the small business owner. The 
threat of being sued over not having the lowest expense fees, 
and then the other side of the coin is, as you know, markets 
are very cyclical. Different investments perform different in 
different times, and choosing the lowest cost fee does not 
provide for protection against cyclicality.
    Therefore, I think that the small business owner is also 
afraid of litigation for not having better performing funds in 
there and a wider choice. So I think that is something you have 
to be very careful of.
    Finally, we request that Congress let the market determine 
the services and products available to sponsors. There is a 
need for support for both bundled and unbundled services. The 
choice of which service model to use should be made by the 
consumer, in this case the plan sponsor, based on its needs and 
resources.
    For both administrative and cost concerns, there are 
employers that may prefer to use bundled services for their 
retirement plans. In terms of administration, it is one-stop 
shopping. Furthermore, the pricing of bundled services may be 
more attractive to some plan sponsors.
    Again, for a small business sponsor who is trying to 
maximize resources, this is an important consideration. 
Congress should consider the need to increase plan sponsorship 
in the small business market if it considers any changes to 
bundled fee arrangements.
    In conclusion, the concerns of small business plan sponsors 
need additional consideration. Unreasonable administrative 
requirements, additional liabilities and potential cost 
increases could drive small businesses away from the private 
retirement system. At a time when small business retirement 
plans are beginning to experience success, we should encourage 
these efforts by creating requirements that fully consider the 
concerns and possible consequences to small business plan 
sponsors.
    I appreciate the opportunity to address our concerns, and I 
am open for any questions you may have.
    [The prepared statement of Mr. Hunt follows:]
       Prepared Statement of Paul Hunt, U.S. Chamber of Commerce
                                summary
    The U.S. Chamber of Commerce is the world's largest business 
federation, representing more than 3 million businesses and 
organizations of every size, sector, and region.
    More than 96 percent of the Chamber's members are small businesses 
with 100 or fewer employees, 70 percent of which have 10 or fewer 
employees. Yet, virtually all of the Nation's largest companies are 
also active members. We are particularly cognizant of the problems of 
smaller businesses, as well as issues facing the business community at 
large.
    Besides representing a cross-section of the American business 
community in terms of number of employees, 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.
    The Chamber's international reach is substantial as well. It 
believes that global interdependence provides an opportunity, not a 
threat. In addition to the U.S. Chamber of Commerce's 105 American 
Chambers of Commerce abroad, an increasing number of members are 
engaged in the export and import of both goods and services and have 
ongoing investment activities. The Chamber favors strengthened 
international competitiveness and opposes artificial U.S. and foreign 
barriers to international business.
    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.
                                 ______
                                 
    Thank you, Chairman Kennedy, Ranking Member Enzi, Senator Harkin 
and members of the committee for the opportunity to appear before you 
today to discuss the appropriateness of retirement plan fees. My name 
is Paul Hunt, President of Millennium Advisory Services, Inc., which is 
an SEC-registered investment advisory firm. I am also President of 
Millennium Capital Management of Virginia, Inc., which does traditional 
investment business through our broker/dealer relationship with Triad 
Advisors, Inc. I am pleased to be able to testify today on behalf of 
the U.S. Chamber of Commerce where I am a member of its Small Business 
Council and the Corporate Leadership Advisory Council. The Chamber is 
the world's largest business federation, representing more than 3 
million businesses and organizations of every size, sector, and region. 
More than 96 percent of the Chamber members are small businesses with 
fewer than 100 employees.
    Millennium Advisory Services is an investment advisor for several 
retirement plan clients, and employees of Millennium Capital Management 
are registered representatives on several other retirement plans. We 
are also a small business that sponsors our own retirement plan.
    As a provider of services to small business plan sponsors, I 
believe that it is critically important to consider the impact of any 
potential legislation on the small business plan sponsor. For that 
reason, I appreciate the opportunity to discuss the issue of plan fee 
disclosure and the potential impact on small business plan sponsors.
                              introduction
    According to the U.S. Small Business Administration, small 
businesses (less than 500 employees) represent 99.9 percent of the 
total firms and more than half of the workforce in the United 
States.\1\ Clearly, ensuring adequate retirement security for all 
Americans means encouraging small businesses to participate in the 
private retirement system. Small businesses, in general, face 
significant hurdles and may view retirement plans as yet another 
potential obstacle and therefore, choose not to establish them. Thus, 
there have been tremendous efforts to provide incentives and encourage 
small business owners to establish and maintain retirement plans.\2\ 
Consequently, it is important to give special consideration to 
potential burdens that new legislation may impose on small businesses.
---------------------------------------------------------------------------
    \1\ U.S. Small Business Administration Office of Advocacy estimates 
based on data from the U.S. Dept. of Commerce, Bureau of the Census, 
and U.S. Dept. of Labor, Employment and Training Administration.
    \2\ Under the Economic Growth and Tax Relief Reconciliation Act of 
2001 (``EGTRRA'') that was made permanent by the Pension Protection Act 
of 2006 (``PPA'') small businesses may claim a tax credit for 
establishing a retirement plan equal to 50 percent of qualifying costs 
up to $500 per year for the first 3 years. In addition, the PPA 
instituted a number of additional positive reforms including the 
creation of the Roth 401(k), simplification of a number of complex 
administrative requirements, and the creation of the DB(k) for small 
businesses.
---------------------------------------------------------------------------
    Despite the obstacles, and due to various incentives, small 
businesses are having success in the retirement plan arena. Small 
businesses with less than 100 employees cover more than 19 million 
American workers.\3\ Most of these small business employees enjoy 
generous annual retirement plan contributions from their employers, 
often in the range of 3 to 10 percent of compensation. Thus, the small 
business qualified retirement plan system is successful in delivering 
meaningful retirement benefits for its employees and all efforts should 
be made to encourage its continued success.
---------------------------------------------------------------------------
    \3\ Patrick J. Purcell, Congressional Research Service (CRS) Report 
for Congress, Social Security Individual Accounts and Employer-
Sponsored Pensions, February 3, 2005, Table 2. Employee Characteristics 
by Employer Retirement Plan Sponsorship, 2003 at CRS-5.
---------------------------------------------------------------------------
    My comments today focus on the concerns of small business plan 
sponsors as they relate to additional fee disclosure requirements. 
While there have been several bills introduced in Congress on fee 
disclosure and several sets of regulations issued by the Department of 
Labor, our comments today focus on general principles and concerns 
rather than focusing on specific provisions in any one piece of 
legislation or regulation. Clarification of fee disclosure requirements 
can be very helpful to small business plan sponsors to ensure that they 
are aware of the services that they are receiving and the prices that 
they are paying. In order to ensure that plan fee legislation helps 
small businesses, we ask Congress to consider our following concerns.
                      small business plan concerns
    Costs Considerations are Important to Small Business Plan Sponsors. 
Of course, small business owners--like all business owners--are 
concerned about costs. The costs of maintaining a retirement plan may 
be a greater consideration for a small business owner, because once a 
small business decides to establish a retirement plan it is often 
subject to higher administrative fees than larger companies. A report 
by the Small Business Administration found that the administrative 
costs for large companies (over 500 employees) averaged $30 to $50 per 
participant while the administrative costs for mid-size companies (500 
to 199 employees) were slightly higher at $50 to $60 per participant. 
For the smallest companies, however, (200 and fewer employees), the 
average administrative costs jumped to over $400 per participant.\4\ 
One reason for the higher cost is that there is a minimum 
administrative cost to establishing and maintaining a retirement plan 
and small companies have fewer employees to spread the costs over; 
therefore, the costs per participant can become significantly 
higher.\5\ Thus, it is critical to keep this distinction in mind when 
discussing the appropriateness of plan fees.
---------------------------------------------------------------------------
    \4\ Joel Popkin and Company, Small Business Administration, Office 
of Advocacy, Cost of Employee Benefits in Small and Large Businesses 38 
(2005).
    \5\ Id.
---------------------------------------------------------------------------
    Moreover, small business plan sponsors have a personal stake in the 
cost and operation of the plan since they are also generally plan 
participants. At the start, small business owners typically solicit 
multiple bids for the contract and ask the potential service providers 
questions about the plan before signing up for services. Once the plan 
is established, the small business owner, who is generally also a plan 
participant, has a vested interest in keeping fees down for both the 
plan and the participants.
    Anticipated Liabilities May Drive Small Business Owners Away from 
Plan Sponsorship. We should not underestimate the small business 
owner's concern over additional liabilities (even if they are only 
perceived). Over the past year, plan fees have been the subject of 
congressional hearings, lawsuits, and newspaper articles. While this 
publicity has highlighted the importance of plan fees, it has also 
created a negative impression of plan fees and plan sponsors. Thus, 
there is a heightened scrutiny of plan fees. A small business owner who 
does not have the resources to hire an outside analyst may become wary 
of offering an individual account plan at all. In addition, some small 
business owners may have a difficult time obtaining fee information 
from their service providers in a format that they can easily digest 
and provide for their participants. The ERISA Advisory Council warned 
that ``a balance must be struck between what can reasonably be expected 
of small plan sponsors and the potential capabilities of larger plan 
sponsors.'' \6\ For example, statements that imply that there is an 
``average'' amount for plan fees can be misleading to participants in 
small business plans for the reasons mentioned above and lead to 
additional liability for the plan sponsors. Therefore, it is critical 
to proceed cautiously and thoroughly consider all implications 
associated with any future changes or requirements.
---------------------------------------------------------------------------
    \6\ Advisory Council on Employee Welfare and Pension Benefit Plans, 
ERISA Advisory Council, Report of the Working Group on Fee and Related 
Disclosures to Participants 5 (2004).
---------------------------------------------------------------------------
    Onerous Administrative Burdens Will Negatively Impact Small 
Business Plan Sponsorship. Small business owners are very sensitive to 
administrative and costs increases. Due to their size and resources, 
small business owners often feel these burdens sooner and more deeply 
than their larger counterparts. Small business owners generally have 
fewer resources and, therefore, have greater concerns about taking on 
additional administrative responsibilities. Unlike a large company that 
may have a dedicated human resources or benefits professional or even 
an entire department--this function in a small business may be one of 
several other duties of an employee or, more likely, the owner. 
Therefore, small business owners will be less likely to establish a 
retirement plan, if there are going to be significant administrative 
burdens that they do not have the resources to cover.
    Bundled Service Arrangements are Advantageous to some Small 
Businesses. For both administrative and costs concerns, there are 
employers that may prefer to use bundled services for their retirement 
plans. In terms of administration, it is one-stop shopping. Rather than 
dealing with several different service providers, the plan sponsor can 
deal with only one or two; thereby, maximizing the allocation of his or 
her resources by minimizing administration responsibilities. 
Furthermore, the pricing of bundled services may be more attractive to 
some plan sponsors. Again, for a small business plan sponsor who is 
trying to maximize resources this is an important consideration. 
Congress should consider the need to increase plan sponsorship in the 
small business market if it considers any changes to bundled fee 
arrangements.
    Moreover, as an entrepreneur and member of the Chamber, I believe 
that services and products should be determined by the market and not 
by Congress. There is a need and support for both bundled and unbundled 
services. The choice of which service model to use should be made by 
the consumer--in this case the plan sponsor--based on its needs and 
resources. We sincerely urge Congress not to mandate one type of 
service arrangement over another.
    Bundled Service Arrangements are Consistent with Fiduciary 
Obligations. The fiduciary of the trust (normally 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.\7\ In other words, the fiduciary has a duty 
under the Employee Retirement Income Security Act of 1974 to ensure 
that any expenses of operating the plan, to the extent they are paid 
with plan assets, are reasonable. We do not believe that bundled 
services in any way impede the plan sponsor's ability to carry out its 
fiduciary duties. On the contrary, as long as the plan sponsor receives 
information that includes all of the services provided and the total 
costs, he or she should be able to compare this to information from 
other bundled providers as well as unbundled providers and determine 
whether the fees, taken in totality, are reasonable for the services 
being provided. As long as the plan sponsor is fully informed of the 
services being provided, it can compare and evaluate whether the 
overall fees are reasonable without having to analyze fees on an 
itemized basis.
---------------------------------------------------------------------------
    \7\ ERISA section 404(a)(1).
---------------------------------------------------------------------------
               general principles on plan fee disclosure
    For this hearing, we were asked to specifically highlight the 
concerns of small business plan sponsors. Of course, the issue of plan 
fee disclosure concerns Chamber members of all sizes; therefore, it is 
important to share the Chamber's general principles on plan fee 
disclosure. Over the past year, the Chamber has testified before the 
House of Representatives and submitted several sets of comments to the 
Employee Benefits Security Administration (EBSA).\8\ The Chamber's 
comments reflected not only concerns about new rules on plan fee 
disclosures, but also formed the principles with which the Chamber 
views any forthcoming reforms to plan fee disclosures. These principles 
are outlined below.
---------------------------------------------------------------------------
    \8\ On September 8, 2008, the Chamber submitted comments to the 
Department of Labor on the proposed rule on Fiduciary Requirements for 
Disclosure in Participant-Directed Individual Account Plans. On March 
31, 2008, the Chamber testified before the Department of Labor on the 
disclosure of fees between service providers and plan sponsors. On 
February 11, 2008, the Chamber submitted joint comments with the ERISA 
Industry Committee, the College and University Professional Association 
for Human Resources, the National Association of Manufacturers, the 
Profit Sharing/401(k) Council of America and the Society for Human 
Resource Management to the Department of Labor on the proposed 
regulations issued under ERISA section 408(b)(2). On October 30, 2007 
Harold Jackson, President and CEO of Buffalo Supply, Inc. testified on 
behalf of the Chamber before the House Ways and Means Committee on the 
appropriateness of plan fees from the perspective of the small business 
plan sponsor. On October 4, 2007 the Chamber presented a joint witness 
in a hearing before the House Education and Labor Committee on the 
401(k) Fair Disclosure for Retirement Security Act of 2007 (H.R. 3185). 
On July 24, 2007, the Chamber submitted comments to the DOL in response 
to their request for information on Fee and Expense Disclosures to 
Participant Account Plans.
---------------------------------------------------------------------------
    The Importance of Plan Fees Should be Considered in the Appropriate 
Context. Over the past year, plan fees have received a lot of 
publicity. While highlighting the importance of fees in the investment 
context, this publicity has also possibly had the negative effect of 
implying that plan fees are the only factor to consider when making 
investment decisions. This could be detrimental to both participants 
and plan sponsors.
    Participants making investment decisions should not rely solely on 
the fees associated with the investment option. While the fees are an 
important part of the consideration, there are several other factors 
that may be considered, such as historical performance and investment 
risk. In its testimony before Congress, the Government Accountability 
Office (GAO) also recognized the importance of a variety of factors 
when making investment decisions, even noting that ``higher fees can 
also arise if an investment option has additional features.'' \9\
---------------------------------------------------------------------------
    \9\ United States Government Accountability Office, Private 
Pensions: Changes Needed to Provide 401(k) Plan Participants and the 
Department of Labor Better Information on Fees 19 (2006).
---------------------------------------------------------------------------
    Similarly, plan sponsors may begin to feel that they need to choose 
the least expensive investment option in order to avoid litigation 
claims. However, the lowest fees are not a guarantee of the best 
performance. Moreover, plan sponsors may desire services or features 
that are not included in the lowest fees. Therefore, it is necessary 
for plan sponsors to also consider expenses in the greater context of 
investment performance and features.
    Fee Disclosures to Participants Should be Useful and Easy to 
Understand. As you are aware, plan participants already receive many 
notices from the plan. While some participants may read and digest 
these notices, most participants bypass the information without 
receiving any benefit from it. For this reason, we believe that fee 
information provided to participants should be stated as clearly as 
possible. In addition, the Chamber recommends that this information be 
combined with other notices already required to be sent to the 
participant.
    The Chamber also suggests that information on fees should be 
limited to the amounts that are paid by the participant. There is 
general agreement that analyzing plan fees between providers, plans, 
and participants is complicated. Each individual plan sponsor 
determines how much of the fees they will pay and how much participants 
will pay. As mentioned above, plan sponsors consider a number of 
factors in addition to expenses when choosing a service provider. If 
the plan sponsor chooses to pay those additional costs and it does not 
impact the participants' accounts, then this information is not 
relevant to the participants and may create unnecessary confusion.
    Disclosure Requirements Should Not be Unduly Burdensome. Plan 
sponsors are subject to numerous statutory and regulatory requirements 
and must constantly balance costs against the benefits of maintaining 
the retirement plan. Consequently, it is important to minimize the 
burdens on plan sponsors. In its 2004 report, the ERISA Advisory 
Council noted this concern:

          The working group wants to avoid a rule that is so burdensome 
        that it discourages the adoption and maintenance of defined 
        contribution plans. Section 401(k) plans in particular have 
        become popular and convenient investment vehicles for the U.S. 
        workforce. Disclosure rules should not be so onerous that they 
        impede this popular and useful savings vehicle.\10\
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    \10\ Advisory Council on Employee Welfare and Pension Benefit 
Plans, ERISA Advisory Council, Report of the Working Group on Fee and 
Related Disclosures to Participants 5 (2004).

    The Chamber very much agrees with this statement and urges this to 
be kept in mind as the process moves forward.
    The Chamber does not have a specific proposal for the disclosure 
format, but has several general recommendations. We recommend that 
disclosure information be as efficient in length as possible to keep 
participants from being overwhelmed with information. If possible, we 
also recommend that fee information be included as part of other notice 
requirements to minimize the amount of notices that are being created 
and sent. For example, including fee information with the participant 
benefit statement or the summary annual report should be considered. 
Finally, we recommend that plan sponsors be given flexibility in the 
method of distribution of the notice (electronic, paper, intranet, 
etc.) and in design of the notice. Because plans and investment options 
vary significantly, it could be a tremendous burden on some plan 
sponsors to have to comply with rigid criteria.
    Small Business Plan Sponsors May Require Additional Consideration. 
For all of the reasons mentioned above, we believe that it is critical 
to consider the additional burdens and obstacles that may be placed on 
small business plan sponsors when considering possible legislation.
                               conclusion
    As more workers become dependent on individual account plans for 
retirement, it becomes increasingly important to provide participants 
with information that will allow them to make well-informed decisions. 
Given the complicated nature of plan fees, it is not a simple task to 
discern which information and what format will prove most meaningful to 
participants--rather, it will take input and dialogue from many 
different parties and experts.
    In particular, the concerns of small business plan sponsors need 
additional consideration. Unreasonable administrative requirements, 
additional liabilities, and potential costs increases could drive small 
businesses away from the private retirement system. At a time when 
small business retirement plans are beginning to experience success, we 
should encourage these efforts by creating requirements that fully 
consider the concerns and possible consequences to small business plan 
sponsors. We appreciate the opportunity to express our concerns and 
look forward to future conversations with you and other interested 
parties.

    Senator Harkin. Thank you very much, Mr. Hunt.
    First, the issue has come up--I have listened carefully and 
read the testimony--the question about fiduciary 
responsibilities here. Starting with you, Ms. Lacy. There are 
fiduciary liability responsibilities in ERISA. Why are they 
important? It seems to me that better disclosure would make it 
easier for businesses to fulfill that fiduciary responsibility.
    Ms. Lacy. I entirely agree with you, Senator. We can argue 
whether or not the fiduciary duty should exist as it does, but 
the reality is it does. The small plan sponsor has the same 
obligation as the largest plan sponsor to meet that requirement 
that you act for the sole and exclusive benefit of your plan 
participants and the decisions that you make are prudent and 
reasonable. That duty exists.
    So, it seems to me that the kinds of disclosures that are 
being proposed by the department and in legislation can only 
assist smaller plan sponsors in making sure that the 
information they are going to need has been provided to them. 
It puts the duty on the service providers to hand them the 
information.
    As you well know, ERISA is more about process than if 
ultimately it turns out you made the right decision. No one is 
going to know what happens in the future with investments. So 
your requirement under the law is to be prudent about how you 
went about making your process. So the other advantage of these 
disclosures is they will create that kind of paper trail.
    Senator Harkin. Now you are not suggesting in any way that 
we look at removing this fiduciary responsibility, are you?
    Ms. Lacy. No, I am not. I am saying it exists, and let us 
help people meet it better.
    Senator Harkin. Now, Mr. Benna, you mentioned something I 
wrote down here. What was that term you used, oh, ``fiduciary 
safe harbor.'' In other words, what I took from what you said 
was that maybe somehow we ought to look at removing this 
fiduciary responsibility for small businesses and providing 
some kind of a safe harbor. What does that mean?
    Mr. Benna. Well, the goal that you are talking about here 
is participants doing a better job of investing their money. 
And education, giving them all these choices and providing 
sufficient information for them to go out and make decisions on 
their own hasn't worked real well, and it is not going to.
    Disclosure is necessary. I fully support the disclosure 
efforts you are talking about, but the framework I am talking 
about in terms of reducing employer liability is already there 
in the Pension Protection Act. You already passed it in 
Congress.
    You included in PPA a thing called ``qualified default 
investment option,'' which, when employers choose to utilize 
that provision as it was enacted in PPA and following the 
guidelines of the regulations of Department of Labor, they get 
fiduciary relief, greater fiduciary relief than they get under 
Section 404(c) of ERISA.
    It is already there. I am just--the only thing I am 
suggesting that would be helpful to everybody in this field--
participants, employers inclusive--is to make it clear that 
that protection that is there in PPA through the QDIA is 
applicable when a plan utilizes that structure for the 
operation of its entire plan rather than just default for 
participants who do not pick investments when they are 
enrolled.
    I have used this provision. I mean, you want to talk about 
changing participant behavior. I have taken plans that operate 
the way we are talking here, and I have blown them up and I 
have moved all the participants into these type of funds where 
that is where their money is invested automatically. Then they 
have to choose if they want to go out and go back and run it 
the way they have been doing, by having to worry about knowing 
enough about all these different funds and their track records, 
etc.
    So the framework is already there.
    Senator Harkin. Ms. Lacy, do you have any thoughts on that?
    Ms. Lacy. I believe the relief may be a bit more limited 
than Mr. Benna is describing. Although there are safe harbors 
if you default people into certain types of investments--
lifecycle funds, managed accounts, balanced funds--a plan 
sponsor still has the fiduciary obligation to make a prudent 
selection of that fund, to monitor it and the costs and all of 
those things.
    So the safe harbor in this kind of investment is all right, 
but you still have all your same obligations for putting people 
into them appropriately.
    Mr. Benna. May I come back on it? I agree with that. But 
one big burden that they do not have, which they now have under 
404(c), is providing sufficient information for participants to 
make informed investment decisions, and that has proved to be 
unworkable. I mean, the reality of trying to turn 50 to 60 
million amateurs into professional investors by providing 
enough information and education, you commented DOL's efforts 
on that model notice are admirable.
    But, yes, I agree with you the average participant is going 
to look at it and say, ``Hey, I want this.'' Why in the world 
wouldn't they take the fund with a 15 percent return? I mean, 
it is mission impossible continuing to play that game.
    Senator Harkin. Don't you think there could be decent 
software that could be developed?
    Mr. Benna. Well, it exists. It is there. But the problem is 
what has happened and the reason I concluded that it is not 
doing the job is that those who need help the most don't 
utilize it. The ones that tend to utilize it are the ones that 
are already interested and have investment savvy. They will go 
out and they will go access that and utilize it to fine-tuning 
what they are doing.
    The bulk of participants who are clueless about what they 
are doing and how they are running won't take the time, don't 
have the interest, and still they have to apply it, and they 
may or may not apply it properly.
    So, yes, it is a useful tool. Definitely the efforts to 
expand and make that available should be encouraged, but still 
it is not the ultimate answer.
    Senator Harkin. Thank you.
    Mr. Hunt, I listened to you talk about the role of 
bundling. Nothing in our bill would prevent bundling. It just 
requires that you disclose the elements of the bundling.
    Mr. Hunt. Right, and I think that is fine. But there is a 
danger in that some of the larger providers will use certain 
things as loss leaders to attract the retirement plan assets. 
They may show administrative costs at very small amounts and 
tack it on somewhere else. I just think there is a little 
danger in there.
    Senator Harkin. But if everything was lined up and we knew 
every exact fee that was being charged in the bundle, then both 
the sponsor would have a better idea and, hopefully, the 
participant, too.
    Mr. Hunt. If we can do that--and there is also a danger in 
some of these companies that have proprietary funds. I think 
even just fee disclosure, there may still be some ways to have 
other fees in there that really are not going to be known to 
some degree. If it is a proprietary fund, there is trading 
issues. There is a lot that goes into a lot of this stuff.
    Senator Harkin. My time is running out.
    Senator Enzi.
    Senator Enzi. Thank you, Mr. Chairman.
    I do want to thank all our witnesses on this second panel. 
It has been very educational, very diverse panel, representing 
a cross-section of consumers, small business, and financial 
expert opinions. I do have several technical questions that I 
will just give to you for a response rather than putting 
everybody to sleep in the audience. I have done that before.
    Some of the accounting questions don't work very well, but 
I will address my first question to Mr. Benna and Mr. Hunt. 
While automatic enrollment under the Pension Protection Act has 
begun to get more workers saving in their retirement, we are 
still lagging on getting small businesses to offer retirement 
benefits. What should we be doing to facilitate small 
businesses to offer these 401(k) plans?
    Mr. Benna.
    Mr. Benna. Well, first, they have to want to do it. Reality 
is that there are many small businesses that don't have an 
interest in offering a retirement plan for a variety of 
reasons.
    You have to, in my opinion, segregate the small business--I 
hate to sound negative in terms of referring to ``mom and pop'' 
operation. But if we go out around the Capitol here and do a 
10-, 20-minute tour, there are many small businesses that are 
mom and pop type operations that, for a variety of reasons, 
aren't likely to offer retirement plan, in my opinion and 
experience, pretty much regardless of what you do, other than 
if you picked up all the cost and somebody else paid for it for 
them.
    That will continue to persist as a problem, in my opinion. 
I don't see it going away. I think there have been laudable 
efforts made with plans like the SIMPLE plan. It is 
unfortunate, in my opinion, that that program hasn't received 
more wide support than it has.
    I know, Senator, in answering that question, one of the 
things--I get small business people who come to me frequently, 
and they will say, ``I want to start a 401(k) plan.'' And the 
first question I ask them is, ``Well, really? Are you sure? Let 
us talk about what is involved, and maybe a SIMPLE or a SEPP or 
other type of plan might be a better option for you rather than 
a 401(k).''
    Continuing to get information out, as some of the 
government agencies have and others, showing that there are 
other programs out there for small business, and potentially, 
they should be getting more attention than what they are.
    Coming back to this liability issue for small employers, 
that is a concern. If more effort were made to clarify the 
facts about the Pension Protection Act, such as, structuring 
your plan in a certain way for small business greatly reduces 
their liability exposure by going with that structure. I think 
that would help if the Department of Labor were to take the 
lead on that and clarify in their regulations that that has 
broader application than just for default investment 
opportunities.
    Senator Enzi. Thank you.
    Mr. Hunt.
    Mr. Hunt. A couple of points. I think litigation is an 
issue, but that is not what we really hear is the issue from 
the small business owners that we work with. We work with a 
number of small business owners on their personal side, and 
oftentimes, we will recommend that they have a retirement plan.
    I will give you an example. We have a small business owner 
that owns a countertop company, has 10 employees. He could put 
a large chunk of money away for himself and his employees. Tax 
laws would benefit him. His comment to us was, ``My guys would 
rather have an extra 20 bucks a week in their paycheck.'' And 
that is the mentality that a lot of these small businesses are 
dealing with.
    Education, I am not sure--for that type of business, I am 
not sure that education is going to be the factor. For the 
professional businesses, absolutely.
    I think the other big issue is cost in the 401(k) world. I 
can't quote exactly what the numbers are, but I think the large 
company may run $20 to $30 or $40 per participant, mid-sized 
company $50 to $60 per participant, and a small business, the 
average individual--the fee per individual in that plan runs 
over $400. I know in my own business, we have 7 employees, and 
my estimated administrative cost for this year are $3,800. We 
pay all that for our employees. But that is a big chunk of 
money for a lot of small businesses, and that deters them from 
the 401(k) world.
    As Mr. Benna said, the option of a SIMPLE IRA may be a 
better option. But in that situation, now people want to 
maximize their retirement plan benefits, they can't put away as 
much as they could in a 401(k). So there is a lot of issues 
here that--and a lot of it is education.
    Like the comment you had on financial literacy because we 
have actually launched something called the Millennium 
Financial Literacy Series to be able to provide that type of 
education, a lifecycle type education, because everybody in a 
company is at a different stage in their lifecycle, and where 
does it fit in for you?
    We are trying to take that by the horns and develop those 
types of programs for clients. I think that, as time goes on, 
more businesses in my business world will begin to do those 
types of things, too.
    That is where I think maybe the fee transparency is a help 
because it is going to make people in my business need to be 
more competitive. From our standpoint, education and financial 
literacy is one of the things that helps us become more 
competitive.
    Senator Enzi. Thank you.
    Ms. Lacy, I want to thank you for your comment about the 
chart needing to have something about risk factor. That should 
be really predominant on our minds these last few weeks. There 
are some investments that have high returns, but it is because 
they are high risk.
    On the fee structure, I am really conflicted about whether 
disclosing every single fee and cost would be beneficial, 
especially when we can't get individuals to read their 
disclosure statements, and those are fairly complicated.
    In addition, if we force the disclosure of every single fee 
and cost, I assume that someone is going to have to pay for it, 
and that most likely will be the employee either through higher 
fees or through reduced services. Shouldn't there be a 
balancing of competing interests?
    Ms. Lacy. Senator, I absolutely agree with you that there 
has to be a balancing of the need for more information and 
costs that may result from that. And I can tell you there is no 
group that is more interested in keeping fees low for 
participants than the Pension Rights Center.
    You have to effect that balance, and I think there are 
important differences in the level of information that 
participants need versus plan sponsors. I like the department's 
approach in saying you try and come up with something pretty 
simple that is disclosed to everyone, and then you allow people 
access through the Web, or however they get their information, 
to more details to the extent that they want to--there are 
individuals who do want to get down in the weeds. So you make 
sure the information is available for them.
    At the plan sponsor level, there is definitely a need for a 
higher level of disclosure, not down to every fee or every cost 
certainly, but enough of the information that allows them to 
make prudent choices. I mentioned earlier that when you have an 
all-in fee, you can miss conflicts of interest in that that 
might be revealed with more information.
    Particularly important, even if you said that with one fee 
you could make a prudent choice initially, my concern is there 
is a problem with monitoring over time. And by that, I mean let 
us say that a small plan sponsor looked at a number of 
different funds and made a choice that was an all-in fee of 50 
basis points and 2 or 3 years down the line looked again and 
said, ``I am still paying 50 basis points. That seems pretty 
reasonable to me after a few years.''
    Well, in reality, what has happened is participants are 
putting in more money, even if you don't have more 
participants, and that is compounding, we hope, in markets 
other than this one. And those assets are growing.
    So that same 50 basis points is producing a lot more 
revenue, but a lot of the services, particularly administrative 
services, may not have changed much at all. Still doing the 
same reports, all the things that were done before. So you may 
have created over time opportunities for profits that didn't 
exist at the onset.
    Senator Enzi. Thank you.
    I have run out of time. So I won't----
    Senator Harkin. Ask that last question. I am going to----
    Senator Enzi. Well, I was going to get Mr. Benna and Mr. 
Hunt's opinion on that as well----
    Senator Harkin. Go ahead and ask.
    Senator Enzi [continuing]. On being conflicted on 
disclosing every single fee.
    Mr. Benna.
    Mr. Benna. I think the regs, as proposed by Department of 
Labor, are a good starting point, the level that they require 
disclosure. Clearly, there are a lot of other areas of fees and 
transactions that take place that would not be covered by that. 
But those become even more difficult and costly to uncover, and 
I am not sure what value would be added to that.
    I think the proposed regs disclose the vast majority of 
fees and are much, much better, obviously, than where we are 
currently.
    Senator Enzi. Thank you.
    Mr. Hunt.
    Mr. Hunt. I think the disclosure of fees is a very good 
thing. As I mentioned before, there may be some difficulty from 
some of the plan providers in actually knowing where these fees 
are, exactly what they are disclosing because, I mean, you are 
an accountant. You know numbers can be jiggled here and there, 
and my fear is that low-cost providers may get the upper hand 
when they may not actually be the best choices.
    We are actually working in several markets right now where 
we are seeing that. I am not going to talk names or particulars 
on that. But we are seeing that, and I think it is going to 
give us a competitive edge to--I don't know if ``expose'' is 
the right word. But to be able to go in and evaluate things and 
be able to provide the plan fiduciaries with the right 
information that maybe they are not really getting all the 
information.
    Senator Enzi. I want to thank all of you, and I will submit 
some questions, if you would be so kind just to answer them.
    Thank you.
    Senator Harkin. Thank you very much, Senator Enzi, and I 
thank all of you for great testimony and for the written 
testimony, but also the verbal testimony.
    I ask consent that the record be held open for submissions 
for 10 days from both AARP and ASPPA and for their statements 
to be included in the record. They have submitted testimony.
    [The information referred to may be found in Additional 
Material.]
    Senator Harkin. Thank you very much. I look forward to your 
continued advice and input as we move ahead on this this fall 
and probably again in the next year.
    Thank you all very, very much. I appreciate it.
    The committee will stand adjourned, subject to call of the 
Chair.
    [Additional material follows.]

                          ADDITIONAL MATERIAL

          Prepared Statement of the American Benefits Council
    The American Benefits Council (the Council) welcomes the continued 
dialogue regarding disclosure of fees with respect to section 401(k) 
plans. The role of section 401(k) plans in providing retirement 
security has grown tremendously over the last 25 years and is 
continuing to grow. In that light, legislative and regulatory actions 
with respect to such plans similarly take on an increased importance. 
Applicable legislation and regulations should ensure that these plans 
function in such a way as to help participants achieve retirement 
security. The Council supports fee transparency as a critical means of 
assisting participants in this regard. In the same time, we all must 
bear in mind that unnecessary burdens and costs imposed on these plans 
will reduce participants' benefits, thus undermining the very purpose 
of the plans. In addition, our voluntary retirement plan system depends 
on the willingness of employers to maintain plans; excessive burdens on 
employers will undercut their commitment to a system that millions of 
Americans rely on for their retirement security.
    The Council is a public policy organization representing 
principally Fortune 500 companies and other organizations that assist 
employers of all sizes in providing benefits to employees. 
Collectively, the Council's members either sponsor directly or provide 
services to retirement and health plans that cover more than 100 
million Americans.
    The Defined Contribution Fee Disclosure Act of 2007 (S. 2473), as 
introduced by Senators Harkin and Kohl, reflects a constructive 
dialogue with a broad range of parties in the retirement plan 
community. We commend Senators Harkin and Kohl for their openness to 
such a dialogue and for including many provisions that would improve 
fee transparency without undue burdens. We do, however, have certain 
concerns with respect to the bill and look forward to further 
discussion on a number of issues, including the following:

     Coordination with Department of Labor fee initiatives. The 
Department of Labor is near completion of its plan fee disclosure 
initiative. One of the three regulations, focused on reporting to the 
government from the plan sponsor, has been completed and our members 
are working towards compliance. The second of three, focused on 
disclosure from the service provider to the plan sponsor, has been sent 
in final form from the Department of Labor and is currently at OMB for 
clearance. The Department of Labor publicly stated at this committee's 
hearing that it is their goal to have this published as a final 
regulation in the ``next several months.'' The last of the expected 
regulations, participant fee disclosure, has been proposed and the 
Department of Labor has stated that it is their goal to have it 
published as final by year's end. In its deliberation regarding these 
regulations, the Department of Labor received over 92 comments from 
representatives of the employee benefits, participant, and service 
provider communities. We believe this regulatory approach will best 
balance input the Department of Labor received from various interested 
parties. We understand that Congress may review the regulations and 
conduct oversight of the implementation.
     Liability protections. In recent years, there has been 
significant growth in lawsuits with respect to defined contribution 
plans, giving rise to increased costs and the potential to stunt the 
continued growth of defined contribution plans. The bill creates 
additional potential liabilities even for companies diligently trying 
to comply with all applicable rules. It is important that safe harbors 
be added to the bill so that plan fiduciaries and service providers 
acting reasonably and in good faith are not subjected to such potential 
liabilities.
     Unbundling. Although the bill reflects great strides with 
respect to the ``unbundling'' issue, more work needs to be done. Where 
services are offered only on a bundled basis, disclosure of costs on an 
unbundled basis provides information with no commercial significance. 
The expenses incurred in generating such disclosures thus do not 
generate information that is commercially usable, which is unfortunate 
since participants ultimately bear those expenses.
    Also, to the extent that bundled charges become, in fact, 
unbundled, many more charges will be applied on a per-participant 
basis, rather than based on account size. This would result in a 
dramatic shift of costs from higher income, high-account balance 
employees to lower income, low-account balance employees.
     Effective date. It is extremely important that plan 
fiduciaries and service providers have sufficient time to modify their 
data collection, administrative, and communication systems in order to 
comply with the new disclosure requirements. We commend Senators Harkin 
and Kohl in this regard; their bill provides that its provisions will 
not take effect until at least a year after the Department issues final 
regulations implementing the provisions. We have some thoughts as to 
how to make the Harkin/Kohl effective date rule work even better, but 
we deeply appreciate the Senators' recognition of the critical 
transition issue.

    We look forward to working on these and other issues as the 
legislative process moves forward. We share a common goal with this 
committee and with Senators Harkin and Kohl: a vibrant and transparent 
defined contribution plan system that delivers meaningful retirement 
security at a fair price and without unnecessary costs and liabilities.
   Prepared Statement of the American Council of Life Insurers (ACLI)
    The American Council of Life Insurers (ACLI) has been an active 
participant in the dialogue regarding disclosure of fees with respect 
to section 401(k) plans. The role of section 401(k) plans in providing 
retirement security has grown tremendously over the last 25 years and 
is continuing to grow. In that light, Federal actions with respect to 
such plans similarly take on an increased importance and should ensure 
that these plans function in such a way as to help participants achieve 
retirement security. The ACLI supports fee transparency as a critical 
means of assisting participants in this regard. At the same time, we 
all must bear in mind that unnecessary burdens and costs imposed on 
these plans will reduce participants' benefits, thus undermining the 
very purpose of the plans. In addition, our voluntary retirement plan 
system depends on the willingness of employers to maintain plans; 
excessive burdens on employers will undercut their commitment to a 
system that millions of Americans rely on for their retirement 
security.
    The ACLI represents 373 member companies accounting for 93 percent 
of the life insurance industry's total assets in the United States. 
Life insurers are among the country's leaders in providing retirement 
security to American workers, providing a wide variety of group 
annuities and other products, both to achieve competitive returns while 
retirement savings are accumulating and to provide guaranteed income 
past retirement.
    The ACLI would like to recognize Senators Harkin and Kohl for their 
interest in this issue by introducing S. 2473, The Defined Contribution 
Fee Disclosure Act of 2007. We would also like to recognize the efforts 
of the Department of Labor (Department) on its plan fee initiatives to 
increase transparency. The Department is near completion of its plan 
fee disclosure initiative. One of the three regulations focused on 
revisions to the Form 5500 report plan sponsors must file with the 
government. The Department's revisions include substantial changes to 
the plan fee reporting required on Schedule C. The changes to Schedule 
C are effective for the 2009 reporting year and will dramatically 
expand and modify the information that is required to be reported about 
plan service arrangements.
    The second of three, focused on disclosure of service fees by 
service providers to the plan sponsors, has been sent in final form 
from the Department to the Office of Management and Budget for 
clearance. The proposed regulation sets forth new requirements for 
determining the reasonableness of compensation paid for services to 
employee benefit plans under ERISA. Failure to conform to the rules in 
the proposed regulation would result in a prohibited transaction. The 
Department publicly stated at this committee's hearing that it is their 
goal to have this published as a final regulation in the ``next several 
months.''
    The last of the expected regulations address new requirements for 
the disclosure of plan investment and fee information to participants 
and beneficiaries of individual account plans subject to ERISA. Failure 
to conform to the rules in the proposed regulation would result in a 
breach of the fiduciary's duty to the participants and beneficiaries. 
This regulation has been proposed and the Department has stated that it 
is their goal to have it published as final by year's end. In its 
deliberation regarding these regulations, the Department received over 
90 comment letters from representatives of the employee benefits, 
participant, and service provider communities. We understand that 
Congress may review the regulations and conduct oversight of the 
implementation.
    We share a common goal with this committee: a vibrant and 
transparent defined contribution plan system that delivers meaningful 
retirement security at a fair price and without unnecessary costs and 
liabilities. We look forward to achieving greater transparency for 
participants and plan sponsors as our members work to comply with the 
final regulations.
 Prepared Statement of the American Society of Pension Professionals & 
 Actuaries (ASPPA) and the Council of Independent 401(k) Recordkeepers 
                                 (CIKR)
    The American Society of Pension Professionals & Actuaries (ASPPA) 
and the Council of Independent 401(k) Recordkeepers appreciates the 
opportunity to submit our comments for the record to the U.S. Senate 
Committee on Health, Education, Labor, and Pensions (HELP) on the very 
important issue of 401(k) fee disclosure.
    ASPPA is a national organization of more than 6,000 retirement plan 
professionals who provide consulting and administrative services for 
qualified retirement plans covering millions of American workers. ASPPA 
members are retirement professionals of all disciplines, including 
consultants, administrators, actuaries, accountants and attorneys. 
ASPPA's large and broad-based membership gives ASPPA unusual insight 
into current practical problems with ERISA and qualified retirement 
plans, with a particular focus on the issues faced by small to medium-
sized employers. ASPPA's membership is diverse, but united by a common 
dedication to the private retirement plan system.
    CIKR is a national organization of 401(k) plan service providers. 
CIKR members are unique in that they are primarily in the business of 
providing retirement plan services as compared to larger financial 
services companies that primarily are in the business of selling 
investments and investment products. As a consequence, the independent 
members of CIKR, many of whom are small businesses, make available to 
plan sponsors and participants a wide variety of investment 
alternatives from various financial services companies without bias or 
inherent conflicts of interest. By focusing their businesses on 
efficient retirement plan operations and innovative plan sponsor and 
participant services, CIKR members are a significant and important 
segment of the retirement plan service provider marketplace. 
Collectively, the members of CIKR provide services to approximately 
70,000 plans covering three million participants holding in excess of 
$130 billion in assets.
                               background
    ASPPA and CIKR strongly support the Senate HELP Committee's 
interest in examining issues relating to 401(k) fee disclosure and the 
impact of fees on a plan participant's ability to save adequately for 
retirement. We are encouraged by the introduction of legislation by 
Congress on this issue. In particular, on December 13, 2007, Senate 
Special Committee on Aging Chairman Herb Kohl (D-WI) and Tom Harkin (D-
IA) introduced S. 2473, the ``Defined Contribution Fee Disclosure Act 
of 2007,'' in addition to the two 401(k) fee disclosure bills 
previously introduced in the House of Representatives in 2007:

    (1) H.R. 3185, the ``Fair Disclosure for Retirement Savings 
Security Act,'' sponsored by House Education and Labor Chairman George 
Miller (D-MA) and passed out of the full committee on April 16, 2008; 
and
    (2) H.R. 3765, the ``Defined Contribution of Plan Fee Transparency 
Act,'' introduced on October 4, 2007 and sponsored by House Ways and 
Means Committee Subcommittee on Select Revenue Measures Chairman 
Richard Neal (D-MA) and cosponsored by Rep. John Larson (D-CT).

    We support all three bills' even-handed application of new 
disclosure rules to all 401(k) plan service providers and encourage the 
Senate HELP Committee to take the same path towards uniform disclosure 
requirements. Further, we also encourage you to strike the right 
balance between disclosure information appropriate for plan sponsors 
versus plan participants. To demonstrate how both of these goals can be 
accomplished, we have attached to these comments two sample fee 
disclosure forms for your consideration--one for plan fiduciaries and 
another for plan participants. Each is tailored to provide plan 
fiduciaries and plan participants with the different sets of 
information on fees that are needed to make informed decisions.
    As you know, the Department of Labor (DOL) currently has one final 
and two ongoing 401(k) fee disclosure projects: (1) A revised Form 
5500, including a revised Schedule C, which is now finalized and 
effective beginning on January 1, 2009; (2) a proposed ERISA 
Sec. 408(b)(2) regulation, which provides sweeping changes on what 
constitutes a reasonable contract or arrangement between service 
providers and plan fiduciaries; and (3) a proposed ERISA Sec. 404(a) 
regulation setting forth a complex set of new participant fee 
disclosure requirements. The DOL has publicly announced that they plan 
to have both the 408(b)(2) regulation and the participant fee 
disclosure regulations finalized by the end of 2008, with effective 
dates projected for sometime in 2009.
    ASPPA and CIKR submitted comprehensive comment letters to the DOL 
on both the 408(b)(2) and participant fee disclosure proposed 
regulations.\1\ In both of these comment letters, we recommended an 
extension of the proposed effective date(s) because of the significant 
implementation and compliance issues/costs involved, made a number of 
significant recommendations to improve each of the disclosure regimes 
in order to ensure that understandable and meaningful disclosure is 
provided, and stressed the need for uniform disclosure requirements--
among all types of service providers.
---------------------------------------------------------------------------
    \1\ We note that House Education and Labor Committee Chairman 
George Miller (D-CA), Senate HELP Committee Chairman Kennedy (D-MA), 
Special Aging Committee Chairman Herb Kohl (D-WI), Senate HELP 
Committee Member Tom Harkin (D-IA) and House Education and Labor 
Subcommittee Chairman Rob Andrews (D-NJ) also submitted joint comment 
letters to the DOL on both the 408(b)(2) regulation and participant fee 
disclosure regulation. These comments expressed concerns about the 
DOL's approach to these disclosure initiatives and requested additional 
actions be taken to protect plan participant and beneficiaries.
---------------------------------------------------------------------------
    ASPPA and CIKR strongly support the premise that plans and plan 
participants should be provided all the information they need about 
fees and expenses in their 401(k) plans--in a form that is clear, 
uniform and useful--to make informed decisions about how to invest 
their retirement savings plan contributions. This information is 
critical to millions of Americans' ability to invest in a way that will 
maximize their retirement savings so that they can achieve adequate 
retirement income. We support your efforts to craft legislation that 
will accomplish this goal.
   plan sponsor 401(k) fee disclosure--need for uniform requirements
    The 401(k) plan industry delivers investments and services to plan 
sponsors and their participants using two primary business models--
commonly known as ``bundled'' and ``unbundled.'' Generally, bundled 
providers are large financial 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. Generally, the 
costs of the bundled and unbundled arrangements are comparable or even 
slightly less in the unbundled arrangement. Under current business 
practices, bundled providers disclose the cost of the investments to 
the plan sponsor but do not break out the cost of the administrative 
services. Unbundled providers, however, disclose both, since the costs 
are paid to different providers (i.e., administrative costs paid to the 
independent provider and investment management costs paid to the 
managers of the unaffiliated investment alternatives).
    Bundled and unbundled providers have different business models, but 
for any plan sponsor choosing a plan, the selection process is exactly 
the same. The plan sponsor 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 costs associated with those services. The 
only way to determine whether a fee for a service is reasonable is to 
compare it to a competitor's fee for that service.
    The retirement security of employees is completely dependent upon 
the business owner's choice of retirement plan service providers. If 
the fees are unnecessarily high, the workers' retirement income will be 
severely impacted. It is imperative that the business owner have the 
best information to make the best choice.
    While the DOL's proposed ERISA Sec. 408(b)(2) rules (relating to 
whether a contract or arrangement is reasonable between a service 
provider and plan fiduciary) would require enhanced disclosures for 
service providers to 401(k) plan fiduciaries, the proposed regulation 
would require only an aggregate disclosure of compensation and fees 
from bundled service providers, with narrow exceptions, and would not 
require a separate, uniform disclosure of the fees attributable to each 
part of the bundled service arrangement. While we appreciate the DOL's 
interest in addressing fee disclosure, we do not believe that any 
requirement that benefits a specific business model is in the best 
interests of plan sponsors and 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's services and fees. Knowing only the total cost will not 
allow plan sponsors to evaluate whether certain plan services are 
sensible and reasonably priced and whether certain service providers 
are being overpaid for the services they are rendering.
    In addition, if the breakdown of fees is not disclosed, plan 
sponsors will not be able to evaluate the reasonableness of fees as 
participant account balances grow. Take a $1 million plan serviced by a 
bundled provider that is only required to disclose a total fee of 125 
basis points, or $12,500. If that plan grows to $2 million, the fee 
doubles to $25,000, although the level of plan services and the costs 
of providing such services have generally remained the same.
    The bundled providers want to be exempt from adhering to uniform 
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) plan. In reality, the costs of these ``free'' 
plan services are being shifted to participants through the investment 
management fees charged on the proprietary investment alternatives, 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 is a sample of how a uniform, 
plan sponsor disclosure would look. By breaking down plan fees into 
only three simple categories--investment management, recordkeeping and 
administration, and selling costs and advisory fees--we believe plan 
sponsors will have the information they need to satisfy their ERISA 
duties.
       plan participant 401(k) fee disclosure--need for uniform 
                    and understandable requirements
    The level of detail in the information needed by 401(k) plan 
participants differs considerably than from that needed by plan 
fiduciaries. Plan participants need clear and complete information on 
the investment choices available to them through their 401(k) plan, and 
other factors that will affect their account balance. In particular, 
participants who self-direct their 401(k) investments must be able to 
view and understand the investment performance and fee information 
charged directly to their 401(k) accounts in order to evaluate the 
investments offered by the plan and decide whether they want to engage 
in certain plan transactions.
    The disclosure of investment fee information is particularly 
important because of the significant impact these fees have on the 
adequacy of the participant's retirement savings.
    In this regard, studies have shown that costs related to the 
investments account for between roughly 87 percent and 99 percent of 
the total costs borne by participant accounts, depending on the number 
of participants and amount of assets in a plan.\2\
---------------------------------------------------------------------------
    \2\ 2007 edition of the 401 (k) Averages Book, published by HR 
Investment Consultants.
---------------------------------------------------------------------------
    ASPPA and CIKR urge that any new disclosure requirements to plan 
participants also be uniform, regardless of whether the service 
provider is bundled or unbundled. On July 23, 2008, the DOL issued 
proposed regulations on participant fee disclosure that required the 
annual disclosure to plan participants and beneficiaries of identifying 
information, performance data, benchmarks and fee and expense 
information in a comparative chart format, plus additional information 
upon request. The proposed regulation further required an initial and 
annual explanation of fees and expenses for plan administrative 
services to plan participants and beneficiaries (disclosed on a 
percentage basis) except to the extent included in investment-related 
expenses.
    The effect of this exception will be to highlight administrative 
costs for one business model (unbundled) over another (bundled), which 
would result in a disparity of treatment and confusion.
    In most plans, the administrative costs of recordkeeping, 
reporting, disclosure and compliance are borne, at least to some 
extent, by the investments. For bundled providers, the entire 
administrative cost is generally covered by investment-related fees 
charged on proprietary investments. For an unbundled provider, however, 
those costs are often paid through revenue sharing received from 
unrelated investments, which, in many instances, is not sufficient to 
offset the entire cost. Accordingly, for unbundled providers, there 
would be a direct administrative charge assessed against participants' 
accounts.
    In effect, the DOL's requirement to disclose administrative 
expenses except to the extent included in investment-related expenses 
would impose an additional and burdensome disclosure requirement on 
unbundled service providers, whereas there would be no such disclosure 
in the case of a bundled service provider. This would be misleading to 
most plan participants. In only the unbundled case would participants 
see separate administrative costs charged against his or her account, 
while with bundled providers, participants would be given the 
impression there were no administrative costs at all as the 
administrative costs would be imbedded in the investment costs.
    Accordingly, as the Senate HELP Committee considers any legislation 
in this area, ASPPA and CIKR recommend that the disclosure of 
administrative and investment information be provided on a uniform 
basis. We believe that administrative fee information provided on the 
same annualized basis as investment costs would provide participants a 
more complete picture of the total costs of the plan at a single time, 
regardless of the business model of a service provider.
    It is important to recognize that there is a cost to any 
disclosure, and that cost is most often borne by the plan participants 
themselves. To incur costs of disclosure of information that will not 
be relevant to most participants will unnecessarily depress the 
participants' ability to accumulate retirement savings within their 
401(k) plans. Thus, appropriate disclosure must be cost-effective, too. 
The result of mandatory disclosure should be the provision of all the 
information the plan participant needs, and no more. To require 
otherwise would unjustifiably, through increased costs, reduce 
participants' retirement savings. Those participants who want to delve 
further into the mechanics and mathematics of the fees associated with 
their investment choices and other potential account fees should have 
the absolute right to request additional information--it should be 
readily available on a Web site, or upon participant request. This will 
take care of those participants who feel they need more detailed 
information.
    For the committee's consideration, ASPPA and CIKR have attached a 
sample fee menu to the testimony that we believe would contain, in a 
clear and simple format, all the information a plan participant would 
need to make informed decisions about his or her plan. It is consistent 
with the recommendations ASPPA and CIKR provided to the DOL on July 20, 
2007 (in response to their request for information regarding fee and 
expense to disclosures in individual account plans) and on September 8, 
2008 in a joint comment letter on the recent participant fee disclosure 
regulations.\3\
---------------------------------------------------------------------------
    \3\ ASPPA and CIKR have also submitted the sample participant fee 
disclosure form to the House Education and Labor Committee (October 4, 
2007), the Senate Special Committee on Aging (October 24, 2007) and the 
House Ways and Means Committee (November 1, 2007).
---------------------------------------------------------------------------
                                summary
    The retirement system in our country is the best in the world, and 
competition has fostered innovations in investments 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 at building retirement assets and living the American 
dream.
    ASPPA and CIKR applaud the Senate HELP Committee's leadership in 
exploring issues related to 401(k) plan fee disclosure. The committee's 
consistent focus on retirement issues over the years has advanced 
improvements in the employer-
sponsored pension system and led to an increased concern about the 
retirement security of our Nation's workers. ASPPA looks forward to 
working with Congress and the Administration on ensuring that both plan 
fiduciaries and participants receive complete and consistent 401(k) 
plan fee disclosures from all plan service providers.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                 ______
                                 
     Fund Democracy Consumer Federation of America,
                                        September 22, 2008.
Hon. Edward M. Kennedy, Chairman,
Hon. Michael B. Enzi, Ranking Member,
U.S. Senate,
Committee on Health, Education, Labor, and Pensions,
Washington, DC 20210.

Re: 401(k) Fee Disclosure

    Dear Chairman Kennedy and Ranking Member Enzi: We are writing on 
behalf of Fund Democracy and the Consumer Federation of America to 
supplement the record of the committee's recent hearing, 401(k) Fee 
Disclosure: Helping Workers Save for Retirement. We have responded 
previously to the Department of Labor's request for comments on 401(k) 
fee disclosure (Professor Bullard also has testified on this issue 
before the Senate Aging Committee) and would like to share our views 
with the committee as well. We believe that significant fee disclosure 
reform for 401(k) plans can substantially reduce overall plan expenses 
for beneficiaries and strengthen the foundation of Americans' financial 
security in retirement.
    A primary goal of 401(k) regulation should be to ensure that 
Americans experience as much of the performance of the markets as 
possible.\1\ Excessive investment expenses present one of the most 
significant impediments to the achievement of this goal. Fees paid by 
401(k) beneficiaries directly reduce their investment returns and, as a 
result, their financial security in retirement. Of course, excessive 
regulatory compliance costs can also reduce investment returns. For 
that reason, fee disclosure reforms should be designed so that they 
generate a net benefit to 401(k) participants. We believe that 
transparent, standardized fee disclosure can create substantial net 
benefits for 401(k) beneficiaries by raising fee awareness among 
beneficiaries and increasing competition among industry participants.
---------------------------------------------------------------------------
    \1\ For convenience, we refer to ``401(k) regulation,'' ``401(k) 
participants,'' and ``401(k) plans,'' although our comments generally 
apply to all types of participant-directed plans. In addition, we use 
mutual funds as examples of 401(k) investment options because they are 
the most common type of investment option used in 401(k) plans.
---------------------------------------------------------------------------
    The most important principle for fashioning good fee disclosure is 
to ensure that it is designed, not with the self-directed, fee-
sensitive investor in mind, but rather to increase awareness of fees 
and their impact on investment returns among those retirement plan 
beneficiaries who do not currently demonstrate fee-sensitivity. To be 
effective in reaching these beneficiaries with meaningful information, 
disclosures must provide them with the information they need, in a form 
they can understand, and at a time when it is useful to them in making 
and assessing their investment decisions. Current disclosure practice 
fails all these standards. With that in mind, we believe that 401(k) 
fee disclosure should satisfy the following standards:

     Delivery Vehicles: Require inclusion of a fee table 
(described on p. 57) in the plan summary for all investment options 
available through the plan and require fee disclosures in account 
statements for each investment option in which the beneficiary is 
invested.
     Content: Require disclosure of hypothetical fees paid on a 
$1,000 investment, total expense ratios for the investment, and average 
expense ratios for comparable investment vehicles, with separate 
disclosure of additional (non-expense-ratio) expenses as applicable.
     Fee Table: The plan summary fee table should show: expense 
ratios for the investment option, total plan expenses for each 
investment option; the dollar amount of expenses paid by a hypothetical 
$1,000 account; and comparative expense ratios (see Exhibit A).
     Additional Expenses: Require disclosure of expenses that 
are not included in the plan expense ratio immediately below the fee 
table in the plan summary (see Exhibit A).
     Comparative Fee Information: Require disclosure in the fee 
table of average industry expense ratios for: each investment option 
and the plan in toto (see Exhibit A).
     Format: The fee table and other disclosures should be 
designed in consultation with disclosure experts to ensure that they 
effectively convey the key information in a way that is both readable 
and readily understandable by typical beneficiaries.
     Differential Compensation: If differential compensation is 
allowed for those who advise retirement plan beneficiaries, which we 
recommend against, require separate disclosure of differential 
compensation paid to advisers prior to the retention of an adviser, at 
the time of each recommendation of an investment option in connection 
with which differential compensation is received, and annually as long 
as the relationship with the adviser continues.
    As noted, we have previously provided the Department with general 
guidance regarding 401(k) and, earlier this month, comments on the 
Department's disclosure proposal. We have attached the latter comments 
to this letter at Exhibit B. In short, while we congratulate the 
Department on making significant progress toward an effective, 
efficient disclosure model, we believe that its proposal does not 
satisfy the foregoing principles in significant respects and can be 
greatly improved. We hope that any legislation similarly follows the 
foregoing disclosure principles.
                               background
    The importance of 401(k) plan fees needs no detailed elaboration 
here. As noted by the GAO, 401(k) plan fees ``can significantly 
decrease retirement savings over time.'' \2\ For example, the GAO 
estimates that paying an additional 1 percentage point in fees will 
reduce an account's ending balance after 20 years by 17 percent.\3\ 
Mutual fund fees have a substantial impact on total 401(k) plan fees 
because the bulk of 401(k) plan assets are invested in mutual funds. As 
noted by the SEC, ``[t]he focus on fund fees is important because they 
can have a dramatic impact on an investor's return.'' \4\ The GAO's and 
SEC's observations regarding fees apply equally to other 401(k) 
investment vehicles.
---------------------------------------------------------------------------
    \2\ Private Pensions: Increased Reliance on 401(k) Plans Calls for 
Better Information on Fees, Government Accountability Office at 10 
(Mar. 6, 2007).
    \3\ Id.
    \4\ Report of Mutual Fund Fees and Expenses, SEC Division of 
Investment Management at Part IA (Dec. 2000).
---------------------------------------------------------------------------
    The Department recently estimated the amount by which inefficient 
disclosure inflates 401(k) fees. It found a wide dispersion in 401(k) 
fees that it attributes ``to market inefficiencies'' \5\ and 
estimates--``conservatively''--that ``plan participants on average pay 
fees that are higher than necessary by 11.3 basis points per year.'' 
\6\ One form of market inefficiency is the confusing way in which 
401(k) fees are currently disclosed. We strongly agree with the 
Department's expectation that its fee disclosure proposal will ``result 
in the payment of lower fees for many participants. . . . as more fee 
transparency fosters more price competition in the market.'' \7\ 
However, as noted above we believe that the Department needs to make 
several improvements to its current proposal in order to maximize fee 
reductions that can be realized through truly transparent, coherent 
disclosure.
---------------------------------------------------------------------------
    \5\ Fiduciary Requirements for Disclosure in Participant-Directed 
Individual Account Plans, Employee Benefits Security Administration, 
Department of Labor 73 F.R. 43013, 43020 (July 23, 2008) (``DoL 
proposal'') (citing Investment Company Institute, The Economics of 
Providing 401(k) Plans: Services, Fees, and Expenses (2006)).
    \6\ Id.
    \7\ Id. (citing James J. Choi, David I. Laibson, and Brigitte C. 
Madrian, ``Why Does the Law of One Price Fail? An Experiment on Index 
Mutual Funds,'' NBER Working Paper W12261 (May 2006) (finding ``that 
presenting the participants with a comparison fee chart, and not just a 
prospectus, reduced the fees paid by 12 percent to 49 percent depending 
on the group studied'')).
---------------------------------------------------------------------------
    The amount of fees charged by a 401(k) investment option within any 
particular investment category is arguably the strongest predictor of 
its investment performance. For example, researchers have demonstrated 
the inherent unpredictability of mutual fund returns, with funds 
generally being no more likely, from one quarter to the next, to repeat 
top-quartile performance and to fall into the second, third or fourth 
tier. To the extent that a small minority of fund managers outperform 
the markets over the long-term, there is no evidence that 
professionals, much less amateurs, can identify those managers a 
priori. Unlike past investment performance, fees are highly predictable 
and represent a certain reduction in fund's performance. Thus, within 
any given asset class, fees arguably constitute the most important 
factor in the evaluation of different 401(k) investment options.
                       fee-insensitive investors
    The purpose of fee disclosure is not to provide the minimum 
information necessary to enable diligent, fee-sensitive investors to 
evaluate the cost of investing in their 401(k) plan, but rather to draw 
the attention of all investors to the importance of fees. The purpose 
of 401(k) fee disclosure reform should be to provide beneficiaries who 
are not currently sufficiently sensitive to the effect of fees on the 
performance of their 401(k) accounts the information they need to raise 
their awareness of these important issues.\8\
---------------------------------------------------------------------------
    \8\ Jonathan Clements, Wall St. J. at D1 (July 18, 2007) (citing 
Morningstar finding that 13 percent of stock fund assets are invested 
in fund charging more than 1.5 percent annually and 24 percent of bond 
fund assets are invested in funds charging more than 1 percent 
annually).
---------------------------------------------------------------------------
    Recent research conducted by CFA and assisted by Fund Democracy 
indicates that a large percentage of those who invest through workplace 
retirement plans are not sensitive to fees.\9\ In a recent survey on 
mutual fund purchase practices, only 51 percent of those respondents 
who purchased most of their funds through a workplace retirement plan 
said they considered fees even somewhat important.\10\ Furthermore, 
workplace purchasers were the least fee-sensitive of the three purchase 
groups identified by the survey.\11\ This likely reflects in part the 
fact that workplace purchasers typically make their fund selections 
from a fairly narrow menu of options. However, the relative lack of 
investing experience and financial sophistication among workplace 
purchasers almost certainly also play a role.\12\
---------------------------------------------------------------------------
    \9\ Mutual Fund Purchase Practices, an analysis of survey results 
by Barbara Roper and Stephen Brobeck, Consumer Federation of America, 
June 2006.
    \10\ Id. Thirty percent said fees were a very important factor in 
their fund selection, while 21 percent indicated fees were somewhat 
important. In contrast, 70 percent indicated fund company reputation 
was at least somewhat important, while 68 percent rated past 
performance as at least somewhat important.
    \11\ Id. The other groups were direct purchasers and those who 
purchased most of their funds through a financial professional outside 
a retirement plan.
    \12\ Id. Just 12 percent rate themselves as very knowledgeable 
about mutual funds, while nearly a third (32 percent) rate themselves 
as knowing only a little. They also tend to be somewhat younger and 
less educated than other mutual fund purchasers, and to have held 
mutual fund investments for a shorter period of time, particularly when 
compared with those who purchased most of their funds directly from a 
fund company or through a discount broker or fund supermarket.
---------------------------------------------------------------------------
    This general lack of investing sophistication is compounded by the 
fact that the financial media, financial advertisements and the 
structure of disclosure requirements consistently overemphasize the 
importance of past performance and underemphasize the significance of 
fees. The financial media's focus on ``The Best Funds for 2007'' as 
determined by their short-term investment performance sends exactly the 
wrong message regarding the factors that investors should consider when 
evaluating investment options. Financial advertisements focus almost 
solely on past investment performance, which has little predictive 
power, to the exclusion of fees, the impact of which is significant, 
relatively certain and quantifiable. Fee disclosure presents fees 
almost exclusively as a percentage of assets, which structurally 
minimizes the true significance of fees in the overall picture of an 
investor's portfolio. The effects can be seen in the fact that 68 
percent of workplace purchasers in the CFA survey indicated that a 
fund's past performance was at least somewhat important to their 
selection, with 38 percent indicating it was very important--a far 
higher percentage than considered fees to be even somewhat 
important.\13\
---------------------------------------------------------------------------
    \13\ Id.
---------------------------------------------------------------------------
    For this reason, we believe it is essential that fee disclosure be 
designed to counter the misleading message that investors generally 
receive regarding the relative importance of fees. To benefit fee-
insensitive investors, fee disclosure must be based on a ``push'' 
principle that measures the efficacy of disclosure by its success in 
promoting competition and efficiency. To accomplish this, fee 
disclosure for 401(k) plans should be crafted not only to make fee 
information available, but also to affirmatively direct beneficiaries' 
attention to fees and to do so in a way that helps them understand 
those fees and the effect they have on investment returns. In short, 
fee disclosure should be designed to overcome investors' predilection 
for overemphasizing past investment performance and discounting fees 
when making investment decisions. Investors' insensitivity to fees 
represents a market failure for which fee disclosure (rather than price 
regulation) offers the most cost-effective solution.
                           delivery vehicles
    The delivery vehicles used for fee disclosure play a crucial role 
in determining whether those disclosures are effective in directing 
fee-insensitive investors to consider fees when making investment 
decisions. Yet one of the most significant shortcomings of fee 
disclosure has been the reliance on investor-unfriendly delivery 
vehicles. Fees for 401(k) plan administration (i.e., plan-level fees, 
as apart from fees charged by investment options) are required to be 
disclosed only in Form 5500, where the fees are disclosed as a dollar 
amount, in contrast with the presentation of fees as a percentage of 
assets for most investment options. The Form 5500 is not required to be 
provided to beneficiaries, but is delivered only upon request.
    In the mutual fund context, fund expenses are described in the 
prospectus and the dollar amount of expenses for a hypothetical fund 
account are provided in the annual report. Employers generally provide 
plan participants with the prospectus or a document that contains the 
fee information in the prospectus,\14\ but they do not provide the 
annual report or the hypothetical fee information, and neither fund 
documents or any documents provided by employers provide fee 
information about comparable investment options. Thus, basic fee 
information for each investment option are not provided in the same 
place as plan-level fees, no hypothetical or comparative fee 
information is provided at all, and no information is provided that is 
specific to a beneficiary's account. Investor-specific information is 
contained only in the quarterly statement. The latter document is 
generally the document that investors read, whereas fund prospectuses 
and plan summaries are likely to be summarily discarded with little or 
no review.
---------------------------------------------------------------------------
    \14\ As discussed further below, although fund expense ratios are 
standardized, they sometimes are not comparable because expenses that 
appear in the fund expense ratio for some funds may be excluded from 
the fund expense ratio for others (e.g., transfer agency expenses may 
appear either in the fund expense ratio or in plan-level expenses). 
Expense ratios for non-mutual-fund investment options generally are not 
even standardized.
---------------------------------------------------------------------------
    Reliance on these delivery vehicles assumes that investors are 
proactive and fee sensitive. The prospectus and Form 5500 require 
401(k) beneficiaries to request information, calculate their total 
fees, and seek out comparative data on their own to put their total 
fees in context. One witness before the Department's Advisory Group 
suggested that, by combining Form 5500 and prospectus fee disclosure, a 
401(k) beneficiary ``should be able to readily calculate the aggregate 
fees that reduce the value of his or her account.'' \15\ The witness 
concluded that 401(k) fees are ``currently disclosed to participants in 
sufficient detail to allow participants to evaluate the costs they pay 
against the services they receive.'' \16\
---------------------------------------------------------------------------
    \15\ Report of the Working Group on Fee and Related Disclosures to 
Participants, Advisory Council on Employee Welfare and Pension Benefit 
Plans at n.4 (2004) (Advisory Report) (quoting testimony of John 
Kimpel, Sr. Vice President and Deputy General Counsel, Fidelity 
Investments). Actually, the fee dollar amounts in the Form 5500 would 
have to be converted to a percentage of assets and then added to the 
investment option's asset-based fees.
    \16\ Id.
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    We disagree. Few investors, and certainly not fee-insensitive 
investors, will make the effort to ``calculate'' fees in the manner 
described above. As we have noted previously, they simply do not place 
sufficient emphasis on fees in the first place. In addition, according 
to the CFA survey, most workplace mutual fund purchasers are unlikely 
to make use of the written information sources available to them. Just 
over 4 in 10 (43 percent), for example, rated the prospectus as even 
somewhat influential on their investment purchases, with only 19 
percent rating it as very influential.
    To change the behavior of fee-sensitive beneficiaries, fees must be 
presented in a document beneficiaries are likely to read, they must be 
presented in a standardized format, and they must be presented in a 
manner that makes it easy for beneficiaries to understand how they 
compare to fees charged by comparable plans and investment options. In 
keeping with this approach, we urge the Department to use the delivery 
vehicle most likely to be read by beneficiaries--the account 
statement--for disclosure of fee and other important information. 
Investors are most interested in monitoring the value and performance 
of their account and, secondarily, confirming recent account activity. 
The account statement therefore provides the ideal vehicle through 
which to direct beneficiaries' attention to their 401(k) plans' fees.
    Account statements, however, provide information after the 
investment selection has been made. To provide beneficiaries with pre-
investment fee disclosures, we also urge the Department to require that 
such disclosures be provided in a short document that summarizes the 
plans' essential features. Such plan summaries should be required to be 
presented to all employees who are eligible to participate in the plan. 
Like the account statement disclosures described above, these 
disclosures should also provide information that enables beneficiaries 
to easily determine how those fees compare to fees for comparable plans 
and investment options.
    Finally, we strongly recommend that the Department encourage the 
use of the Internet and electronic communications as one appropriate 
delivery vehicle for fee information. The Internet and electronic 
communications offer the opportunity both to enhance fee disclosure for 
beneficiaries and to reduce plan expenses. For increasing numbers of 
investors, the Internet and e-mail constitute their primary information 
source and communication tool. According to the CFA survey, for 
example, nearly all workplace investors (91 percent) have access to the 
Internet, and the vast majority (87 percent) expressed a willingness to 
use the Internet for at least some mutual fund purchase-related 
activities.
    At a minimum, all fee disclosure requirements should be required to 
be made on or should be easily accessible from employer web pages. 
Where delivery is required, e-mail, including especially employer 
intranets, should be mandated as a delivery option investors can choose 
to use. In appropriate circumstances, such as when an employee has 
affirmatively decided to use either medium to obtain and receive 
information, Internet posting and delivery by e-mail should be deemed 
sufficient to satisfy legal delivery requirements.
                           form of disclosure
    Disclosure of 401(k) fees should be provided in two forms. As noted 
above, 401(k) fees should be disclosed on beneficiaries' account 
statements, in order to ensure that they take fees into account when 
evaluating their 401(k) plans, and in a plan summary document, to 
ensure that beneficiaries are made aware of fees when they make their 
initial investment selections.
    Account Statement Disclosure. The 401(k) plan document that 
investors are most likely to review is their account statement, and the 
Department therefore should require that account statements include 
401(k) fee disclosure. The GAO recommended, for example, that the SEC 
require mutual funds to disclose in shareholders' account statements 
the dollar amount of fees paid during the period covered.\17\ The SEC 
decided instead to require the disclosure of the dollar amount of fees 
charged on a hypothetical account in the annual report.\18\ Although 
there are reasonable arguments regarding the relative costs and 
benefits of disclosing fees paid on a hypothetical account and actual 
fees, we believe there is no reasonable argument that fee disclosure is 
materially improved by including this information in the annual report 
instead of the account statement. It is simply unrealistic to believe 
that fee-insensitive investors read the annual report, much less find 
and study fee information that might be disclosed there. We commend the 
Department for proposing to require the disclosure of fees in dollar 
amounts and that this disclosure appear in quarterly statements, but we 
believe that this disclosure will be misleading if it does not reflect 
the total cost of investing in the plan.
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    \17\ See Mutual Funds: Information on Trends in Fees and Their 
Related Disclosure, Government Accountability Office (March 12, 2003).
    \18\ See Shareholder Reports and Quarterly Portfolio Disclosure of 
Registered Management Investment Companies, Investment Company Act Rel. 
No. 26372 (Feb. 27, 2004).
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    Ideally, 401(k) fee disclosure would require that the following 
information appear in account statements: the fees paid on a 
hypothetical $1,000 account as a dollar amount, fees paid as a 
percentage of assets, and comparative fees for comparable plans and 
investments. Although disclosure of actual fees paid by beneficiaries 
is more likely to be understood by beneficiaries than hypothetical 
fees, we recognize that, at this stage in the development of fee 
disclosure for different collective investment vehicles (mutual funds 
and guaranteed investment contracts), requiring disclosure of 
hypothetical expenses may be the best solution. However, we believe 
that any solution should move current practices toward a disclosure 
system under which investors are told the dollar amount of fees they 
actually have paid.
    The disclosure of the dollar amount of fees is of particular value 
because beneficiaries are more accustomed to thinking about expenses in 
dollars rather than percentages. Fee-insensitive beneficiaries are more 
likely to take notice of disclosure that looks more like a common bill 
for services than a mathematical calculation. A limitation of both 
dollar amount and percentage fee disclosures is that they mean little 
or nothing without a comparative context in which to place them. We 
therefore recommend that account statements also include comparative 
expense information (as described below) for each investment option. 
This information will help put the dollar amount of expenses in context 
and provide a basis for beneficiaries to consider whether the fees that 
they are paying are worth the price.
    Standardized Fee Disclosure. Fee disclosure for 401(k) plans should 
be provided in the plan summary document and standardized to facilitate 
comparisons across different investment options within the 401(k) plans 
and to expenses in other comparable plans. To some extent, 
standardization of investment option fees already exists. For example, 
mutual funds are required to use a standardized format for their 
expenses ratios and other expenses. However, other investment options 
use non-standardized fee disclosure, which prevents investors from 
comparing the true cost of different investment options. The goal of 
standardization is further frustrated by the fact that payments for 
services sometimes occur at the investment option level and sometimes 
at the plan level. For example, 401(k) plans that invest in a retail 
class of mutual fund shares often pay lower plan expenses, because the 
mutual fund rebates part of its fees to the plan administrator to cover 
those expenses. If the mutual fund's fees are compared to investment 
options that do not use such a rebate structure, the mutual fund's fees 
will appear higher. An accurate fee comparison can be made only when 
the plan's total fees are considered.
    There are a number of potential solutions to the standardization 
challenge. One solution would be to impose fee disclosure requirements 
on non-mutual-fund investment options that are similar to those for 
mutual funds. Such standardization is clearly in the best interests of 
beneficiaries. However, a variety of agencies have primary 
responsibility for fee disclosure for non-mutual-fund collective 
investment vehicles, and it is appropriate that these agencies' rules 
govern disclosure of fees charged by these investment vehicles. Until 
these agencies' rules can be brought into alignment, this is probably 
not a realistic approach. We encourage the committee to develop a 
framework under which different agencies will work toward establishing 
standardized fee disclosure for 401(k) investment options.
    Another potential solution would be to require the disclosure of 
401(k) fees on a functional basis. For example, fees for transfer 
agency functions could be identified separately, which would permit 
comparisons of these fees across different plans regardless of whether 
the fees were collected by the plan administrator, or by a mutual fund 
and then rebated to the plan administrator. We believe that, at this 
stage, such functional fee disclosure could be administratively 
burdensome and excessively costly, and would be unlikely to greatly 
benefit plan beneficiaries. Fees generally are not disclosed on a 
functional basis under existing legal rules for collective investment 
vehicles or for 401(k) plans, and the cost of designing and 
implementing new systems to provide functional disclosure might not be 
justified. In any case, it is not clear that functional fee disclosure 
as a general matter is a cost-effective disclosure approach, and it can 
be misleading.\19\
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    \19\ For example, one of the problems with mutual fund 12b-1 fees, 
which purport to reflect the use of mutual fund assets for distribution 
services, is that investors in funds that do not charge 12b-1 may 
actually pay just as much for distribution services as investors in 
12b-1 fee funds. It can be extremely difficult to define precisely the 
different types of services for purposes of functional disclosure of 
fees.
---------------------------------------------------------------------------
    We believe that the best immediate solution to the problem of 
standardizing 401(k) fees is to present each fee component in the 
context the plan's total fees. Toward this end, we recommend that 
standardization of 401(k) fees be accomplished through the use of a fee 
table (including a fee example) and a list of additional expenses as 
described below.\20\
---------------------------------------------------------------------------
    \20\ The overall structure of this approach is similar to fee 
disclosure for mutual funds, which includes an expense ratio, a list of 
other expenses, and a dollar-amount fee illustration.
---------------------------------------------------------------------------
    Fee Table. As illustrated in Exhibit A, the fee table would include 
three categories of data for each investment option. These are: the 
investment option expense ratio,\21\ total plan fees (including both 
the investment fees and the plan-level fees) as a percentage of assets, 
and the dollar amount of fees on a hypothetical account. For each 
category, a comparative expense figure would also be included. This 
approach has the advantage of permitting easy comparison of different 
investment options when the investment options' expense ratios are 
comparable, such as for mutual funds, and when they are not. The total 
expense ratio figure would not only provide a total cost figure, it 
would also help address the problem of non-comparable investment fee 
information. Where easily comparable fee information of the type 
provided by mutual funds is not available,\22\ it would indirectly 
indicate the relative cost of different investment options, because the 
plan-level expenses for each option generally could be assumed to be 
relatively constant. Assuming that plan-level expenses are comparable 
across different investment options, to the extent that the total 
expense ratio for different investment options differed, the difference 
generally would be attributable to the cost of the investment options.
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    \21\ The Department has specifically noted a significant failing of 
the mutual fund expense ratio in its omission of portfolio transaction 
costs, which can equal many multiples of a fund's other expenses. See 
DoL Proposal at n.13; see also Jason Karceski, Miles Livingston and 
Edward O'Neal, Portfolio Transaction Costs at U.S. Equity Mutual Funds 
(2004), available at http://www.zeroalphagroup.com/news/
Execution_CostsPaper_Nov_15_2004.pdf. Although the SEC has requested 
comments on ways to address this omission, it has yet to take final 
action. See Request for Comments on Measures to Improve Disclosure of 
Mutual Fund Transaction Costs, Investment Company Act Rel. No. 26313 
(Dec. 18, 2003). We hope that the Department, the SEC and other 
regulators will work together to ensure that the mutual fund expense 
ratio and the expense ratio of other investment options include all of 
the relative costs of investing.
    \22\ As noted supra note 14, although fund expense ratios are 
standardized, they sometimes are not comparable because expenses that 
appear in the fund expense ratio for some funds may be excluded from 
the fund expense ratio for others (e.g., transfer agency expenses may 
appear either in the fund expense ratio or in plan-level expenses). 
This distinction is partly responsible for the recent flurry of 
excessive fee cases brought against employers in connection with their 
401(k) plans.
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    Additional Expenses. By making expenses charged through asset-based 
fees more visible, this approach may create an incentive to shift costs 
to other forms. To minimize any such cost-shifting designed to avoid 
disclosure, the Department should require that additional disclosures 
be provided along with the fee table listing expenses that are not 
included in the expense ratio table but that may be incurred directly 
or indirectly by beneficiaries. These expenses would include, for 
example, purchase and redemption fees, minimum account charges, and 
non-asset-based sales charges. These expenses should be presented as a 
percentage of assets or a dollar amount, depending on the basis on 
which they are deducted, with explanations as appropriate.
    One disadvantage of the foregoing approach is that it may not fully 
remove the incentive to shift expenses, in this case from the expense 
ratio to the additional expenses category. For example, a 401(k) 
provider could reduce the plan's expense ratio by replacing an asset-
based transfer agency fee with a flat fee for each account. This 
strategy would have the effect of artificially reducing the expense 
ratio, on the assumption that investors would pay less attention to the 
concomitant increase in the expenses listed in the additional expenses 
table. The problem of expenses being shifted out of the expense ratio 
could be addressed by requiring that beneficiaries' account statements 
disclose, either as a dollar amount or a percentage of assets, the 
expenses incurred during the period that were not included in the 
expense ratio. Where such expenses were deducted, the disclosure would 
be disclosed in three parts: the expense ratio, the additional expenses 
calculated as an expense ratio, and the sum of the two.
          conflicts of interest and differential compensation
    One of the most difficult challenges presented by fee disclosure is 
the need to apprise investors of the conflicts of interests that fees 
can create. Advisers to 401(k) beneficiaries are permitted, subject to 
their fiduciary duty to their clients, to receive compensation from 
sponsors of products that the adviser recommends (``distribution 
compensation''). In limited circumstances, distribution compensation 
can be higher for one product than another, which creates a conflict 
between the interests of the adviser and the 401(k) beneficiary, as the 
adviser has an economic incentive to recommend the product that pays 
him the greatest compensation, even if it is not the best product for 
the beneficiary. The cleanest and best way to deal with such conflicts, 
in our view, is to eliminate them, by prohibiting all differential 
compensation to advisers of 401(k) plan beneficiaries. Absent such a 
ban, fee disclosure for 401(k) plans should inform beneficiaries of the 
existence of any conflict of interest created by differential 
compensation so that they can evaluate the objectivity and quality of 
the advice provided. We note that the Department's proposal is most 
deficient in this respect because it includes no provisions that 
address the issue of differential compensation.
    Distribution compensation generally is paid out of other fees that 
already will have been disclosed to beneficiaries. This means that 
disclosure of the amount of distribution compensation is not needed to 
inform investors about the total cost of investing (although it would 
tell them how their fees were allocated among different services). 
Rather, disclosure of the existence and extent of the conflict is 
needed to inform beneficiaries about advisers' financial 
incentives.\23\
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    \23\ See Confirmation Requirements and Point of Sale Disclosure 
Requirements for Transactions in Certain Mutual Funds and Other 
Securities, and Other Confirmation Requirement Amendments, and 
Amendments to the Registration Form for Mutual Funds, Investment 
Company Act Rel. No. 26341, at Part II (Jan. 29, 2004) (explaining 
conflicts of interest necessitating requirement for point-of-sale of 
distribution compensation disclosure). There is no indication that 
final action on this four-year-old proposal is imminent.
---------------------------------------------------------------------------
    Advisers should be required to disclose prominently the extent to 
which their compensation may vary based on the investment options 
selected by the beneficiary. In order to qualify as ``prominent,'' the 
disclosure should be in a separate document, e-mail message or web 
page. The disclosure must be provided separately because otherwise it 
is likely to be confused with fee disclosure that is designed to 
highlight the costs of investing, rather than the economic incentives 
of the adviser.\24\ The disclosure should focus on the amount of the 
adviser's differential compensation in order to permit the beneficiary 
to evaluate the objectivity of the adviser's recommendations.
---------------------------------------------------------------------------
    \24\ See Investment Advisers Act Rule 206(4)-3 (requiring 
disclosure of solicitor's capacity and compensation in a separate 
document).
---------------------------------------------------------------------------
    Moreover, differential compensation disclosure should be provided 
before the beneficiary makes the decision to retain the adviser so that 
the beneficiary can evaluate the adviser's services before soliciting 
recommendations. After the beneficiary has retained the adviser and 
received the adviser's recommendations, the opportunity to evaluate the 
wisdom of retaining that adviser will have passed. In this respect, the 
Department should require that, in addition to disclosure made prior to 
the retention of the adviser, the adviser specifically disclose any 
differential compensation received in connection with the recommended 
investments at the time that the recommendation is made. Finally, the 
Department should require that periodic reminders be provided to 
beneficiaries as long as differential compensation payments continue.
    Some may argue that disclosure of differential compensation is too 
costly and complex. Advisers who choose to create the conflict of 
interest that differential compensation disclosure would address should 
not be allowed, however, to avoid disclosure of differential 
compensation because of the complexity and disclosure costs they are 
responsible for creating. If, for example, a mutual fund charged dozens 
of different fees that depended on an investor's particular situation, 
the fund's sponsor should not be heard to complain that the cost of fee 
disclosure far exceeded its benefits. In short, the cost of fee 
disclosure should be viewed not as a reason to permit conflicts of 
interest to be concealed, but as a natural market constraint on 
inefficient pricing practices. To the extent that investors reject 
complex fee structures, such as differential compensation arrangements, 
when they are fully disclosed, fee disclosure should be viewed as 
having operated successfully by promoting informed investor choice, 
competition and efficiency.\25\
---------------------------------------------------------------------------
    \25\ Although the speciousness of arguments that fee disclosure is 
too costly due to its complexity is most applicable to differential 
compensation arrangements, it is not limited to such arrangements. The 
same analysis applies to all types of complex fee arrangements, such as 
the use of different types of account and activity charges that are in 
addition to a fund's expense ratio and plan expenses as disclosed in 
the Form 5500.
---------------------------------------------------------------------------
                      comparative fee information
    As noted above, we believe it is critical that the disclosure of 
401(k) fees be accompanied by comparative fee information. The 
disclosure of fees accomplishes little when it is presented in a 
vacuum, because few investors can readily assess whether the fees 
charged are high or low relative to the services provided or the fees 
charged by comparable investments. Mutual fund investment performance 
information is required to be compared to the performance of a 
comparable market index, because regulations recognize the importance 
of putting performance in context, but funds are not required to do the 
same for fees. Providing comparative fee information makes even more 
sense than providing comparative investment performance information, 
because past fees (unlike past performance) are strongly predictive of 
future fees. Furthermore, fee comparisons are more valid than 
performance comparisons, because fees of different 401(k) plans 
generally will be more comparable than investment performance across 
different investment options.
    Putting fee information in context by providing comparative 
information is important for a number of reasons. First, comparative 
information would promote competition among investment option providers 
and place downward pressure on fees. Second, comparative information 
would enable beneficiaries to evaluate the costs and benefits of 
investing in the 401(k) plan relative to other taxable and tax-
deferred investment options.\26\ Third, fiduciaries' interests may 
conflict with benefi-
ciaries' with respect to the negotiation of 401(k) fees, since 
fiduciaries may be able to lower the administrative costs paid by the 
employer by shifting them onto plan beneficiaries in the form of asset-
based fees.
---------------------------------------------------------------------------
    \26\ In theory, comparative disclosure would enable employees to 
compare employers based on the relative qualities of their 401(k) 
plans. We believe that this potential benefit is secondary to the 
benefits of promoting competition among investment option providers and 
facilitating an informed comparison of 401(k) and non-401(k) investment 
options.
---------------------------------------------------------------------------
    Investment Option Fees. Without the context of comparative fee 
disclosure, the disclosure of an investment option's expense ratio is 
of limited utility. This information conveys the fact that an 
investment option and the plan are not free, but virtually all 
beneficiaries already know this.\27\ Standing alone, the fees provide 
little basis for evaluating whether they are reasonable in light of the 
services provided. The disclosure of comparative fee information would 
provide beneficiaries with a general sense of whether an investment 
option is more or less expensive than its peers and increase the 
likelihood that beneficiaries will think about whether above-average-
cost options are worth the price. Also, providing average cost 
information for comparable investments should increase the likelihood 
that beneficiaries will make appropriate cost comparisons--comparing a 
bond fund's fees to average bond fund fees rather than to fees for an 
actively managed stock fund, for example--rather than simply comparing 
costs among various investment options with very different cost 
characteristics and choosing the cheapest option.
---------------------------------------------------------------------------
    \27\ Although fee information may disabuse some beneficiaries of 
the misimpression that their employer pays all of the costs of a 401(k) 
plan, we are not aware of any evidence that a material number of 
employees hold this view.
---------------------------------------------------------------------------
    Providing comparative fee information to beneficiaries would 
promote competition among investment option providers for several 
reasons. First, providing this information should help incentivize 
employers, who are primarily responsible for the selection of 
investment options, to choose a plan with lower investment costs. 
Second, many 401(k) plans offer multiple investment options with 
overlapping asset or style categories. In this context, beneficiaries' 
investment decisions constitute a secondary marketplace (the plan 
itself) within which investment option providers compete for assets. 
This marketplace is recreated in every plan with multiple investment 
options, which has the effect of combining the market power of 
investment decisions by beneficiaries across many plans. Even if 
fiduciaries fail to populate plans with low-cost investment options, 
beneficiaries will tend to move assets to lower cost providers, if the 
comparative cost of different options is prominently disclosed. Such 
intra-plan dynamics will promote competition and place downward 
pressure on fees.
    Plan Fees. Second, even when a plan does not offer overlapping 
investment options, and comparative fee information therefore does not 
facilitate the comparison of different options,\28\ comparative fee 
information would enable beneficiaries to make informed comparisons 
between 401(k) and non-401(k) investment vehicles. The axiom that 
employees should ``max out their 401(k)'' before investing elsewhere is 
no longer always valid advice,\29\ because employees will sometimes be 
able to experience superior long-term, after-tax investment returns in 
other contexts. The proliferation of tax-deferred investment vehicles, 
many of which are designed, like 401(k) plans, for retirement planning, 
has provided numerous investment alternatives that offer tax advantages 
that are comparable to those offered by 401(k) plans. The historically 
low level of capital gains taxes relative to income taxes means that 
capital gains in 401(k) plans are taxed at higher income rates when 
distributed than are capital gains in taxable accounts when they are 
distributed.\30\ Tax-managed funds, index funds and exchange-traded 
funds employ strategies that minimize taxes, thereby substantially 
minimizing their tax disadvantage relative to 401(k) plans. Thus, non-
401(k) tax-advantaged investment vehicles, lower capital gains rates, 
and tax-minimizing investment vehicles mean that an employee may 
sometimes be better off investing outside of a high-cost 401(k) plan. 
Fee disclosure for 401(k) plans should facilitate fee comparisons with 
non-401(k) investment vehicles.
---------------------------------------------------------------------------
    \28\ In this context, comparative fee information would allow 
beneficiaries to appreciate that, for example, an international stock 
fund charged higher fees than a domestic stock fund, but we believe 
that the comparison among different investment categories should be 
based on beneficiaries' overall investment objectives, not their 
relative expenses. Comparisons of fees for investment options with 
different investment objectives may mislead beneficiaries by confusing 
the primary basis on which comparisons across different options should 
be made, which is one of the shortcomings of the Department's current 
proposal. Comparisons between actively and passively managed investment 
options, however, would yield significant benefits, and the committee 
certainly should consider mandating such comparisons.
    \29\ In contrast, the related axiom that employees should always 
``max out their 401(k) match'' (i.e., fully exploit matching employer 
contributions) still holds.
    \30\ To some extent, this taxable account advantage is reduced 
because capital gains taxes are paid on an ongoing basis, whereas 
income taxes on 401(k) capital gains are not paid until distributions 
from the account are made. We encourage the committee to consider 
legislation that has been proposed that would permit the deferral of 
taxation of capital gain distributions by mutual funds that are re-
invested in the funds. The taxation of re-invested distributions 
penalizes investors who choose to diversify their investments through 
mutual funds.
---------------------------------------------------------------------------
    Potential Conflicts of Interest. It is important that comparative 
fee information be placed in the hands of beneficiaries, as their 
interests may not be aligned with those of the fiduciaries who choose 
investment options for plans and negotiate administrative agreements. 
Beneficiaries may have a stronger economic incentive than fiduciaries 
to reduce fees, because it is often beneficiaries who pay them. In some 
cases, beneficiaries' and fiduciaries' interests can conflict. 
Fiduciaries may have an incentive to choose high-cost investment 
options as a means of shifting expenses from the employer to the 
beneficiaries. Plan fiduciaries therefore may be conflicted, because 
they have an incentive to reduce plan expenses (i.e., expenses incurred 
by their employer) in return for accepting higher investment option 
expenses. Plan fiduciaries also may wish to be perceived as having 
successfully negotiated a low-cost administrative contract, or may 
simply be unaware of the trade-off between higher cost investment 
options and lower cost administrative services. Although fiduciaries 
generally will be more financially sophisticated than the average 
beneficiary, this is not always the case. Ultimately, beneficiaries 
have stronger economic incentives to uncover such tradeoffs. It takes 
only a single, activist beneficiary, armed with the appropriate 
information, to bring these issues to the attention of plan 
fiduciaries.
    Form of Comparative Fee Information. Comparative fee information 
should be provided in the fee table for each investment option. The 
comparative expense ratio row should show average expense ratios for 
the investment option, and for total expenses, including investment and 
plan-level expenses charged as a percentage of assets (see Exhibit A). 
These data should be presented in a manner that ensures that they are 
easily distinguishable from, and readily comparable to, the plan's 
actual expense ratios. The Department should consider whether 
additional comparative information should be provided, such as the 
amount of the difference between each average expense ratio and the 
actual expense ratio or a graphic illustration of each investment 
option's expenses relative to the average. In making such decisions, 
about both content and format, the Department should consult with 
disclosure experts to help design disclosures that maximize 
beneficiaries' ability to understand key fee information.
    Employers should be permitted to use a variety of sources for 
comparative data, provided that the information is provided by an 
independent third party. It may be necessary, however, to establish 
guidelines regarding what constitutes appropriate comparative data for 
different types of investment. Employers also should be permitted to 
use average plan-level expense ratios that reflect the size of the 
plan, subject to appropriate guidelines.
                              cost issues
    As to the issue of which parties should bear the cost of providing 
fee information, we believe that the allocation of disclosure costs 
generally should be left to the marketplace. Each of the three 
principal providers of information to 401(k) beneficiaries--employers, 
plan administrators and investment option sponsors--has sufficient 
negotiating power to ensure that markets work efficiently to find the 
optimal allocation of costs among the different parties. For example, 
we recommend that beneficiaries' quarterly statements include uniform 
dollar fee disclosure, which would require the calculation of the 
dollar amount of fees that would have been paid by a hypothetical 
$1,000 account. If the annual cost of producing that information were 
$1.00 for the investment option sponsor, $1.05 for the administrator, 
and $1.10 for the employer, then we would expect the cost ultimately to 
be allocated to the investment option sponsor as the lowest-cost 
provider. Formally ``allocating'' the cost to the administrator, for 
example, would simply result in the administrator's paying the 
investment option sponsor to provide the information at lower cost, 
with the only economic difference being the added cost of negotiating 
the transfer of this responsibility from the administrator to the 
investment option sponsor.
    Thus, allocating costs by rule will not change the ultimate 
allocation of costs, but it can be expected to increase total costs to 
the extent that the rule does not choose the most efficient information 
provider. In a competitive 401(k) market, all costs ultimately will be 
borne by the lowest-cost provider, because structures that allocate 
costs to higher-cost providers will lose market share to more 
efficient, lower-cost competitors.
    Another aspect of cost allocation is the allocation of costs across 
different employers. The greatest risk of implementing new fee 
disclosure requirements is that they will increase the cost of 401(k) 
plans for small employers to the point that they will choose not to 
offer the plan at all. We urge the committee to be sensitive to these 
relative cost burdens for small plans and to seek ways to minimize 
them, including by identifying disclosure and other requirements that 
could be modified or eliminated in order to reduce 401(k) expenses.
    Finally, some have questioned the relative costs and benefits of 
fee disclosure reform. As discussed at page 3 supra, we agree with the 
Department that fee disclosure stands to generate billions of dollars 
in savings for investors. Although we recognize that the economic 
analysis of the benefits of fee disclosure reform lacks scientific 
precision, the Department's findings are consistent with the widely 
accepted economic principle that price transparency promotes 
competition and reduces expenses. There is substantial evidence that 
investors are not sufficiently price sensitive, and we believe that 
enhanced price transparency, price standardization and comparative 
information will provide a powerful stimulus toward lowering the 
overall cost of investing by increasing price sensitivity. The steady 
migration of mutual fund investors to lower-cost mutual funds is 
partly, if not substantially, attributable to the high level of fee 
transparency mandated by the securities laws. We believe that fee 
disclosure reform will generate substantial net economic benefits to 
401(k) participants.
                               conclusion
    Investment expenses represent a significant drag on the performance 
of 401(k) accounts that can be substantially mitigated through well-
designed fee disclosure requirements. Although it is possible for an 
enterprising beneficiary to determine the total cost of his or her 
401(k) plan's investment options and to find comparative fee 
information to place those costs in context, it requires enormous 
effort that only a tiny number of beneficiaries are likely to make. Fee 
disclosure reform is premised on the failure of many beneficiaries to 
be sufficiently sensitive to the impact of fees on their investment 
returns. Fee disclosure should therefore be designed to proactively 
direct fee-insensitive beneficiaries' attention to fees in order to 
stimulate competitive market forces and thereby reduce beneficiaries' 
expenses. We strongly encourage the committee to embrace the 
opportunity that efficient, proactive 401(k) fee disclosure reform 
offers as a means to enhance the retirement security of tens of 
millions of Americans.
            Sincerely,
                                            Mercer Bullard,
                                            President and Founder, 
                                               Fund Democracy, Inc.

                                             Barbara Roper,
                                  Director of Investor Protection, 
                                    Consumer Federation of America.
                               EXHIBIT A

                                Fee Table
------------------------------------------------------------------------
                                                    Total   Illustrative
                                          Fund      Plan     Annual Fee
           Investment Option            Expenses  Expenses     Paid on
                                           [In       [In       $1,000
                                        percent]  percent]     Balance
------------------------------------------------------------------------
Stock Fund............................      0.80      1.00      $10.00
Industry Average......................      0.70      0.88       $8.80
Bond Fund.............................      0.50      0.70       $7.00
Industry Average......................      0.45      0.63       $6.30
Balanced Fund.........................      0.65      0.85       $8.50
Industry Average......................      0.60      0.78       $7.80
------------------------------------------------------------------------
Additional Expenses: Small Account Fee--$2.50/quarter; Redemption Fee--
  1.00 percent.

                               EXHIBIT B
     Fund Democracy Consumer Federation of America,
                                         September 8, 2008.
Office of Regulations and Interpretations,
Employee Benefits Security Administration,
Room N-5655,
Department of Labor,
200 Constitution Avenue,
Washington, DC 20210.

Re: Participant Fee Disclosure Project

    Dear Ms. Halliday: We are writing on behalf of Fund Democracy and 
the Consumer Federation of America in response to the Department's 
request for comments on its proposed regulation on the disclosure of 
fee and other information for beneficiaries of participant-directed 
individual account plans (``401(k) plan participants''). Like the 
Department, we believe that fee disclosure reform for 401(k) plans can 
substantially reduce overall plan expenses for beneficiaries and 
strengthen the foundation of Americans' financial security in 
retirement.
    In an earlier comment letter, we set forth the principles that 
should guide the disclosure of 401(k) fees,\31\ and the Department's 
proposal substantially reflects key elements of those principles. For 
example, the Department proposes to require that all fees appear in a 
standardized, tabular format, which will be a significant improvement 
over fee disclosure for non-standardized investment options and the 
disclosure of plan expenses. The Department also proposes to require 
the disclosure of certain fees as a dollar amount and that this 
disclosure appear in participants' quarterly account statements. We 
applaud the Department for taking decisive steps to direct the 
attention of fee-insensitive participants to the impact of fees in a 
document that they are likely to read and in a way that is likely to 
draw their attention to the fees. As a whole, the proposal makes 
significant progress in increasing the transparency of 401(k) fees, 
promoting greater competition in the 401(k) marketplace, and, 
ultimately, helping to secure Americans' financial security in 
retirement.
---------------------------------------------------------------------------
    \31\ See Letter from Mercer Bullard, Founder and President, Fund 
Democracy, and Barbara Roper, Director of Investor Protection, Consumer 
Federation of America to Office of Regulations and Interpretations, 
Employee Benefits Security Administration, Department of Labor (July 
24, 2007) available at http://www.funddemocracy.com/
401k%20fee%20letter%20final.pdf.
---------------------------------------------------------------------------
    In some respects, however, we believe that the Department's 
proposal can be improved. Our principal recommendations are as follows:

     Total Fee Disclosure: Investment option fees and 
administrative fees should be disclosed together in order that plan 
participants can evaluate the total cost of the 401(k) plan.
     Revenue Sharing: Fee disclosure should avoid misleading 
participants by suggesting false comparisons between investment option 
fees that include administrative fees (i.e., that compensate plan 
administrators through revenue sharing) and investment option fees that 
do not.
     Comparative Fees: Comparative fee information should be 
disclosed across comparable asset classes in order to promote 
competition among service providers.
     Quarterly Statement Disclosure: The disclosure in the 
quarterly statement of fees in dollar amounts should reflect total plan 
fees paid by the participant and clearly segregate fees that are 
specific to the participant.
     Differential Compensation: In order to fully apprise 
participants of the adviser's potential conflicts of interest, fee 
disclosure should include a prominent description of any compensation 
received by an adviser in connection with providing advisory services 
to a participant that may vary based on the participants' decisions 
with respect to the plan.

    We look forward to working with the Department toward a final 
proposal that will provide the 401(k) plan participants with the kind 
of fee disclosure that will help them receive as much of the 
performance of the market as possible and thereby achieve financial 
security after their retirement.
                               background
    As noted, we previously provided comments to the Department 
regarding 401(k) fee disclosure. Rather than re-state these comments, 
we incorporate them by reference in this letter. To summarize, we have 
listed below the key policies that we believe 401(k) fee disclosure 
should promote:

     Fee Insensitive Participants: Fee disclosure should target 
401(k) participants who are less likely to be sensitive to the impact 
of fees on their investment returns by locating disclosure where fee 
insensitive participants are likely to review it and in a format that 
such participants are likely to understand.
     Total Fee Disclosure: Fee disclosure should clearly 
present the total cost of the plan in one place so as to facilitate 
comparisons and promote sensitivity to the true impact of fees on 
participants' investment returns.
     Comparative Information: Fee disclosure should promote 
competition by providing or at least facilitating comparisons across 
products and services both at the investment option and plan levels.
     Differential Compensation: If differential compensation is 
allowed for those who advise 401(k) participants, then fee disclosure 
should include specific information as to the amount of and trigger for 
such compensation paid to advisers: (1) at or before the initiation of 
the relationship with the adviser, (2) at the time of each 
recommendation of an investment option in connection with which 
differential compensation is received, and (3) annually as long as the 
relationship with the adviser continues.

    Like the Department, we believe that fees can have a significant 
impact on a 401(k) participant's account balance at retirement and that 
improving fee disclosure can help reduce fees. We especially appreciate 
the Department's unequivocal position on the relationship between fee 
disclosure and excessive fees. The Department found a wide dispersion 
in 401(k) fees that it attributes ``to market inefficiencies'' \32\ and 
estimates--``conservatively''--that ``plan participants on average pay 
fees that are higher than necessary by 11.3 basis points per year.'' 
\33\ One form of market inefficiency is the confusing way in which 
401(k) fees are currently disclosed. We strongly agree with the 
Department's expectation that its fee disclosure proposal will ``result 
in the payment of lower fees for many participants. . . . as more fee 
transparency fosters more price competition in the market.'' \34\
---------------------------------------------------------------------------
    \32\ Text accompanying note 11 (citing Investment Company 
Institute, The Economics of Providing 401(k) Plans: Services, Fees, and 
Expenses (2006)).
    \33\ Text accompanying note 13.
    \34\ Text accompanying notes 14-15 (citing James J. Choi, David I. 
Laibson, and Brigitte C. Madrian, ``Why Does the Law of One Price Fail? 
An Experiment on Index Mutual Funds,'' NBER Working Paper W12261 (May 
2006) (finding ``that presenting the participants with a comparison fee 
chart, and not just a prospectus, reduced the fees paid by 12 percent 
to 49 percent depending on the group studied'')).
---------------------------------------------------------------------------
                               fee table
    The clearest example of how fee disclosure creates market 
inefficiencies is the current practice of providing investment option 
fees and plan fees in separate locations, and providing plan fees in a 
format that is difficult to understand or use for comparison purposes. 
Plan fees currently are required to be disclosed only in Form 5500 as a 
dollar amount on a plan-wide basis. Mutual fund fees (when they are the 
investment option) are disclosed in a fee table in the prospectus as a 
percentage of assets. Providing fee disclosure in the prospectus and 
Form 5500 makes it impracticable for participants to determine the 
total cost of their 401(k) plans. They cannot even compare fees of 
investment options because there is no standardized set of rules that 
applies across all types of investment options. Further, fees for 
certain services are included in investment option fees in some cases 
and in plan fees in others.
    The Department's proposal to require disclosure of standardized 
fees for all investment options in a single fee table represents 
significant progress toward fee disclosure that will promote 
competition and reduce fees paid by 401(k) participants. The proposal 
will enable participants to compare the costs of different investment 
options and make a more informed investment decision. This will, in 
turn, promote competition among investment option providers and reduce 
fees. For example, participants will be able to compare easily the cost 
of an actively managed U.S. stock fund with the cost of a passively 
managed U.S. stock fund (if offered) and thereby make an informed 
decision as to which form of management provides a better value. 
Similarly, the proposed disclosure for plan fees will constitute a 
significant improvement over the Form 5500.
    We are concerned, however, that the fee disclosure will be 
deficient--and even misleading--in important respects. One drawback of 
the proposal is that the investment option fees and plan fees would 
continue to be presented separately. We appreciate that it is important 
to encourage participants to compare the cost of different investment 
options within a 401(k) plan, but the separate presentation of 
investment option fees and plan fees effectively discourages the 
comparison of 401(k) fees with fees charged by other types of 
investment accounts. We recognize that, at one time, it would have been 
rare for an investor to be better off investing outside of their 401(k) 
plan, but changes in tax laws, the proliferation of tax-deferred 
investment vehicles, and the availability of low-cost mutual funds have 
created an environment in which many participants may be better off 
foregoing a high-cost 401(k) plan (although probably never to the 
extent of an employer matching contribution, if offered).\35\
---------------------------------------------------------------------------
    \35\ See Testimony of Mercer Bullard before the Senate Special 
Committee on Aging at 7-8 (Oct. 24, 2007) (chart showing larger balance 
after 20 years in taxable account than in 401(k) account) available at 
http://www.funddemocracy.com/Senate%20Aging%20Testimony%2010.24.07.pdf.
---------------------------------------------------------------------------
    We believe that the Department should design fee disclosure that 
facilitates not only comparisons within the plan, but also comparisons 
with investment options outside of the plan. Fee disclosure for 401(k) 
plans should show all of the costs of the plan in a single table that 
provides a total expense ratio for each option, including 
administrative expenses. Presenting the investment option fees and 
administrative fee separately will make it unlikely if not 
impracticable for participants to evaluate the total cost of the plan 
and compare it with non-plan investment options.
    Another drawback of the proposal is that it encourages comparisons 
among investment options that are not truly comparable. The 
Department's Model Comparative Chart shows the fees for a Large Cap, 
International Stock and Mid Cap ETF option stacked one above the other 
in a single column. This is a false and potentially harmful comparison. 
Historically, large cap funds have been less expensive to operate than 
mid cap funds, which have been less expensive to operate than 
international funds. The Chart creates the impression that the 
international fund is more expensive relative to the others and this 
factor should count as a strike against it,\36\ even if the 
international fund's fees were lower than the average for an 
international fund and the fees for the other two funds were above 
average relative to their peers. Thus, the investor might be inclined 
to choose the most expensive funds (relative to their class) while also 
failing to gain the benefit of diversification that investing in all 
three asset classes would provide. Most financial planners recommend 
that clients diversify their investments among different asset classes 
notwithstanding that this will mean paying higher fees for certain 
types of investments. The point of fee transparency is not to promote 
competition among different asset classes, but among providers of 
product offerings within a single asset class.
---------------------------------------------------------------------------
    \36\ The actual Chart does not do this because the illustrative fee 
amounts are unrepresentative. The Large Cap fee is 2.45 percent and the 
International fee is 0.79 percent. The Mid Cap fee is only 0.20 
percent, probably because it is actually a passively managed fund (as 
of the date of the Department's proposal virtually all ETFs were 
passively managed).
---------------------------------------------------------------------------
    The appropriate fee comparison for the Large Cap fund would be fees 
charged by the average Large Cap fund or the average offered by 401(k) 
plans. This information would apprise participants of the cost of the 
Large Cap fund offered by the plan relative to its peers and promote 
competition among Large Cap funds and plan sponsors to provide lower 
cost alternatives. We recognize that there is no universally accepted 
standard for determining the appropriate average fee to use as the 
benchmark for a particular type of fund, but it should not be difficult 
to generate one. The fund management industry cannot credibly complain, 
as it has in the past, that an objective classification standard would 
be too difficult to implement or understand when it willingly 
identifies funds as belonging in particular asset classes and other 
categories for marketing purposes, a practice that certainly implies 
that funds have an objective basis for doing so. Third-party 
information providers such as Morningstar and Lipper also have provided 
comparative fee information on funds in the same asset classes that 
fund boards use to satisfy their fiduciary duty to ensure that fund 
fees are reasonable. The data are available; there is no excuse for not 
providing it to 401(k) participants.
    As illustrated by our proposed fee table at Exhibit A to this 
letter, 401(k) fee disclosure should provide participants with direct 
comparisons to similar types of funds. The classifications for 
different types of funds exist. It only remains for the Department to 
require that plans use this information in a way that will shine a 
spotlight on investment options whose fees significantly exceed a 
reasonable average. It is frankly remarkable that regulators require 
that the performance of a benchmark investment be disclosed with the 
presentation of an investment option's investment performance, while 
not requiring the same type of disclosure for fees. Studies have 
consistently shown that past mutual fund investment performance has a 
weak (if any) relationship to future performance, whereas fees and 
their impact are, obviously, very predictable from year to year. 
Requiring disclosure of benchmark fees would actually provide 
participants with meaningful information with which to make investment 
decisions and, we believe, have a profound impact on competition. In 
contrast, the most appropriate accompaniment for 1-year investment 
performance data generally would not be the performance of a benchmark, 
but rather a statement that the information reveals nothing about the 
relative merits of the investment.
    A third drawback of the proposal is that participants, particularly 
fee-insensitive participants, will be inclined to assume that the fees 
that they see in one location reflect the total fees they will incur. 
If they review the investment option fee disclosure, they will tend to 
assume that those fees represent the total cost of the plan, and vice 
versa for those who review the administrative fee disclosure. This is 
not such an unreasonable assumption, for it seems counterintuitive to 
provide the fees for a single 401(k) plan in two parts in two separate 
locations. The Department has noted that the ``lack of transparent fee 
disclosure in this market suggests . . . that individuals may 
underestimate the impact that fees and expenses can have on their 
account balances.'' \37\ The separate disclosure of investment option 
fees and administrative fees will often cause participants to 
underestimate the total cost of the plan. We believe that it is 
imperative that the total fees for a 401(k) plan be presented in a 
single location.
---------------------------------------------------------------------------
    \37\ Text accompanying note 11.
---------------------------------------------------------------------------
    A final drawback of the proposal is that it does not account for 
the different ways in which fees are charged by different plans. Fees 
for certain services may be charged at either the investment option 
level or the plan level. Specifically, certain administrative fees such 
as those charged for recordkeeping, accounting and legal services can 
be collected by the plan's third party administrator (``TPA'') or by 
the investment option. When the fee is collected by the investment 
option and the services are actually provided by the TPA, the 
investment option remits the fees to the TPA. This practice is commonly 
referred to as ``revenue sharing.'' When the administrative fees are 
charged at the investment option level, they will appear in the 
investment option fee disclosure and make the investment option fees 
seem higher and the plan fees lower. When they are charged at the plan 
level, they will appear in the plan fee disclosure and make the plan 
level fees seem higher and the investment option fees lower.
    This diversity of practice has the potential to create confusion 
among participants who compare the investment option fees to investment 
options in other 401(k) plans or to investments in other types of tax-
deferred and taxable accounts. The Department's proposal does nothing 
to resolve that confusion. When the 401(k) plan investment option fees 
do not include administrative expenses that are paid to the TPA, then 
the 401(k) plan investment option fee will be artificially suppressed 
and seem lower, in comparison, than it actually is because the 
disclosure of the 401(k) plan's administrative fees will be provided in 
a separate location. If all expenses were combined in one place, as 
illustrated in Exhibit A to this letter, the true total cost of the 
401(k) plan option would be transparent and provide a meaningful 
comparison.
                          quarterly statements
    We also agree with the Department's decision to require the 
disclosure of fees in dollars in the quarterly statement, as opposed to 
disclosure only as a percentage of assets and only in plan documents. 
The primary target of 401(k) fee disclosure should be participants who 
are less sensitive to the impact of fees on their 401(k) accounts. 
These fee-insensitive participants are less likely to review plan 
documents for the purpose of evaluating fees charged to their accounts, 
and they are less likely to appreciate the impact of fees expressed as 
a (small) percentage of assets. These participants are more likely to 
review their quarterly statements, and they are more likely to take 
note of fees expressed as a dollar amount, especially when presented in 
the context of the dollar value of the participant's account. To 
illustrate, a 2 percent fee might seem insignificant to a less savvy 
401(k) participant, but the presentation of a quarterly fee of $500 on 
an account with a $100,000 balance is likely to increase the likelihood 
that the participant will consider whether their fees could be reduced 
by switching to another fund in the 401(k) plan or choosing a lower 
cost investment in a taxable account.
    We are concerned, however, that the quarterly statement disclosure 
will be misleading because it will not show the participant's total 
fees. As discussed above, participants will be inclined to assume that 
the fees disclosed in their quarterly statement reflect all of the fees 
they paid for the quarter. In fact, unless the proposal is amended, the 
quarterly disclosure will not show the investment option fees and will 
further understate total fees when fees for administrative services 
provided by the TPA are charged at the investment option level. 
Quarterly statement fee disclosure should show the participant's total 
fees. As noted in our previous comment letter, this disclosure need not 
necessarily show the actual dollar amount paid by the participant (we 
recognize the potential expense of such disclosure), but rather could 
reflect a rough estimation based on the account's beginning, ending or 
average account size. The goal here is not the precision of the 
disclosure, but rather the dollar format and the prominent location. 
Even an estimate will provide more accurate information than the 
partial information proposed to be disclosed.
    Another difficulty is that the fee disclosure in the quarterly 
statement will be inconsistent across different plans. As discussed 
above, certain administrative services can be charged at either the 
investment option level or the plan level. This means that the fees 
disclosed in the quarterly statement for one participant may include 
fees for these services, whereas the fees disclosed on his neighbor's 
quarterly statement might not and would appear (artificially) lower.
    Further confusion may be created by the mixing of participant-
specific expenses with plan administrative expenses. The Department 
proposes that the ``amounts actually assessed'' for individual 
expenses, such as expenses attendant to a qualified domestic relations 
order, a loan to a beneficiary or investment advisory services be 
disclosed, and permits such disclosure to be provided ``in a quarterly 
benefit statement.'' We believe that it would be extremely confusing 
for the dollar amount of administrative (or total plan expenses, as 
discussed above) to be combined with the dollar amount of individual 
expenses as an aggregate number. Based on the wording of paragraphs 
(c)(2)(ii) and (c)(3)(ii) of rule 404a-5, we assume that the Department 
does not intend to permit such combining of these expenses and suggest 
that it clarify this position to avoid any doubt.
    However, even if the dollar amounts for administrative (total) and 
individual expenses are presented separately, as the rule seems to 
require, we are concerned that participants might not appreciate the 
important differences between the two types of expenses. We recommend 
that the Department require that administrative (total) expenses be 
presented in the quarterly statement in a way that makes it clear that 
the former are plan expenses and that the latter are expenses incurred 
on account of individual services provided to the beneficiary.\38\ We 
believe that similar explanatory disclosure should be provided where 
information about the individual expenses that might be assessed is 
disclosed at the time of the beneficiary's eligibility and annually 
thereafter pursuant to paragraph (c)(3)(i).
---------------------------------------------------------------------------
    \38\ We agree that it is not necessary or cost-effective to ``have 
administrative charges broken out and listed on a service-by-service 
basis.'' See Part B.2.
---------------------------------------------------------------------------
          conflicts of interest and differential compensation
    One of the most difficult challenges presented by fee disclosure is 
the need to apprise investors of the conflicts of interests that fees 
can create. Advisers to 401(k) beneficiaries are permitted, subject to 
their fiduciary duty to their clients, to receive compensation from 
sponsors of products that the adviser recommends (``distribution 
compensation''). In limited circumstances, distribution compensation 
can be higher for one product than another, which creates a conflict 
between the interests of the adviser and the 401(k) beneficiary, as the 
adviser has an economic incentive to recommend the product that pays 
him or her the greatest compensation, even if it is not the best 
product for the beneficiary. The cleanest and best way to deal with 
such conflicts, in our view, is to eliminate them, by prohibiting all 
differential compensation to advisers of 401(k) plan beneficiaries. 
Absent such a ban, fee disclosure for 401(k) plans should inform 
beneficiaries of the existence of any conflict of interest created by 
differential compensation so that they can evaluate the objectivity of 
the advice provided.
    Distribution compensation generally is paid out of other fees that 
already will have been disclosed to beneficiaries. This means that 
disclosure of the amount of distribution compensation is not needed to 
inform investors about the total cost of investing (although it would 
tell them how their fees were allocated among different services). 
Rather, disclosure of the existence and extent of the conflict is 
needed to inform beneficiaries about advisers' financial 
incentives.\39\
---------------------------------------------------------------------------
    \39\ See Confirmation Requirements and Point of Sale Disclosure 
Requirements for Transactions in Certain Mutual Funds and Other 
Securities, and Other Confirmation Requirement Amendments, and 
Amendments to the Registration Form for Mutual Funds, Investment 
Company Act Rel. No. 26341, at Part II (Jan. 29, 2004) (explaining 
conflicts of interest necessitating requirement for point-of-sale of 
distribution compensation disclosure).
---------------------------------------------------------------------------
    We recommend that the Department require that advisers prominently 
disclose the extent to which their compensation may vary based on the 
investment options selected by the beneficiary. In order to qualify as 
``prominent,'' the disclosure should be in separate document, e-mail 
message or web page. The disclosure must be provided separately because 
otherwise it is likely to be confused with fee disclosure that is 
designed to highlight the costs of investing, rather than the economic 
incentives of the adviser.\40\ The disclosure should focus on the 
amount of the adviser's differential compensation in order to permit 
the beneficiary to evaluate the objectivity of the adviser's 
recommendations.
---------------------------------------------------------------------------
    \40\ See Investment Advisers Act Rule 206(4)-3 (requiring 
disclosure of solicitor's capacity and compensation in a separate 
document).
---------------------------------------------------------------------------
    Moreover, differential compensation disclosure should be provided 
before the beneficiary makes the decision to retain the adviser so that 
the beneficiary can evaluate the adviser's services before soliciting 
recommendations. After the beneficiary has retained the adviser and 
received the adviser's recommendations, the opportunity to evaluate the 
wisdom of retaining that adviser will have passed. In this respect, the 
Department should require that, in addition to disclosure made prior to 
the retention of the adviser, the adviser specifically disclose any 
differential compensation received in connection with the recommended 
investments at the time that the recommendation is made. Finally, the 
Department should require that periodic reminders be provided to 
beneficiaries as long as differential compensation payments continue.
    Some may argue that disclosure of differential compensation is too 
costly and complex. Advisers who choose to create the conflict of 
interest that differential compensation disclosure would address should 
not be allowed, however, to avoid disclosure of differential 
compensation because of the complexity and disclosure costs they are 
responsible for creating. If, for example, a mutual fund charged dozens 
of different fees that depended on an investor's particular situation, 
the fund's sponsor should not then be heard to complain that the cost 
of fee disclosure far exceeded its benefits. In short, the cost of fee 
disclosure should be viewed not as a reason to permit conflicts of 
interest to be concealed, but as a natural market constraint on 
inefficient pricing practices. To the extent that investors reject 
complex fee structures, such as differential compensation arrangements, 
when they are fully disclosed, fee disclosure should be viewed as 
having operated successfully by promoting informed investor choice, 
competition and efficiency.\41\
---------------------------------------------------------------------------
    \41\ Although the speciousness of arguments that fee disclosure is 
too costly due to its complexity is most applicable to differential 
compensation arrangements, it is not limited to such arrangements. The 
same analysis applies to all types of complex fee arrangements, such as 
the use of different types of account and activity charges that are in 
addition to a fund's expense ratio and plan expenses as disclosed in 
the Form 5500.
---------------------------------------------------------------------------
                               conclusion
    We applaud the Department for a forward-thinking, creative and 
decisive approach to the current rules for the disclosure of 401(k) 
fees. With the growth of defined contribution plans and the increasing 
importance of participants' individual decisionmaking role, it has 
never been more critical to Americans' retirement security that 401(k) 
fees be subject to the disinfecting light of full transparency and the 
benefits of unencumbered market competition. The Department's proposal 
takes a significant step toward truly transparent, complete disclosure 
of 401(k) fees in a way that in the long term will save Americans 
billions of dollars in excess fees. We hope that the Department will 
capitalize on this opportunity to increase transparency and promote fee 
competition by addressing the concerns that we have discussed in 
developing its final proposal. Thank you for your consideration of our 
comments.
            Sincerely,
                                            Mercer Bullard,
                                            President and Founder, 
                                               Fund Democracy, Inc.

                                             Barbara Roper,
                                  Director of Investor Protection, 
                                    Consumer Federation of America.
                                 ______
                                 
         Prepared Statement of the Investment Company Institute
    The Investment Company Institute \1\ welcomes the interest of 
Chairman Kennedy, Senator Harkin, Ranking Member Enzi and the committee 
in enhancing disclosure in 401(k) plans and appreciates the opportunity 
to provide its views in connection with the committee's September 17 
hearing. The Institute has long supported effective disclosure to 
participants in individual account plans and the employers who sponsor 
those plans.\2\ Mutual funds currently provide the most complete 
disclosure of any investment product available in 401(k) plans and the 
Institute has extensively studied what information is useful to and 
used by investors. We value the opportunity to offer constructive input 
as the committee explores these issues and oversees regulatory efforts 
at the Department of Labor (DOL).
    The defined contribution system of 401(k) and similar plans has 
been a huge success. As of 2007, Americans saved $4.5 trillion in 
private defined contribution plans, and another $4.7 trillion in IRAs. 
(Estimates suggest about half of all IRA assets originate from 401(k) 
and other employer plans.) Around half of all of the assets in defined 
contribution plans and IRAs are invested in mutual funds.\3\
    Collaborative research between the Employee Benefit Research 
Institute (EBRI) and the Institute demonstrates that participants 
generally make sensible choices in allocating their investments \4\ and 
that a full career with 401(k) plans produces adequate replacement 
rates at retirement.\5\ Institute research also suggests that plan 
participants and plan sponsors are cost conscious when selecting mutual 
funds for their 401(k) plans. On an asset-weighted basis (that is, 
taking into account where 401(k) participants concentrate their 
assets), the average asset-weighted expense ratio for 401(k) stock 
mutual fund investors was 0.74 percent, half of the simple average 
stock mutual fund expense ratio in 2006 (1.50 percent).\6\
    The biggest challenge in ensuring adequate retirement security for 
all Americans lies in encouraging workers to contribute and encouraging 
employers to offer a workplace plan. Disclosure reform should seek to 
improve the 401(k) system without imposing burdens, costs and 
liabilities that deter employers from offering plans. For these 
reasons, we urge the committee to proceed carefully as it examines the 
401(k) disclosure regime.
    Initiatives to strengthen the 401(k) disclosure regime should focus 
on the decisions that plan sponsors and participants must make and the 
information they need to make those decisions. The purposes behind fee 
disclosure to plan sponsors and participants differ. Participants have 
only two decisions to make: whether to contribute to the plan (and at 
what level) and how to allocate their account among the investment 
options the plan sponsor has selected. Disclosure should help 
participants make those decisions. Voluminous and detailed information 
about plan fees could overwhelm the average participant and could 
result in some employees deciding not to participate in the plan or 
focusing on fees disproportionately to other important information, 
such as investment objective, historical performance, and risks. On the 
other hand, plan sponsors, as fiduciaries, must consider additional 
factors in hiring and supervising plan service providers and selecting 
plan investment options. Information to plan sponsors should be 
designed to meet their needs effectively.
    While we welcome congressional oversight and improved transparency, 
at this point we do not see the need for congressional action in light 
of the comprehensive DOL regulatory initiatives that should close the 
disclosure gaps that exist under current law.
                         principles for reform
     Disclosure to plan sponsors should provide information 
that allows them to fulfill their fiduciary responsibilities.

    ERISA requires that plan fiduciaries act prudently and solely in 
the interest of plans and participants. Plan assets can only be used 
for the exclusive purpose of providing benefits and defraying 
reasonable expenses of administering plans. ERISA's prohibited 
transaction rules require that a contract with a service provider be 
for necessary services and provide only reasonable compensation. The 
Institute has consistently supported efforts to ensure that plan 
sponsors have the information they need as fiduciaries to select and 
monitor service providers and review the reasonableness of plan 
fees.\7\
    Plan sponsors should obtain information from service providers on 
the services that will be delivered, the fees that will be charged, and 
whether and to what extent the service provider receives compensation 
from other parties in connection with providing services to the plan. 
These payments from other parties, commonly called ``revenue sharing,'' 
but which are really cost sharing, often are used in bundled and 
unbundled service arrangements to defray the expenses of plan 
administration.
    We also recommend that a service provider that offers a number of 
services in a package be required to identify each of the services and 
total cost but not to break out separately the fee for each of the 
components of the package. If the service provider does not offer the 
services separately, requiring the provider to assign a price to the 
component services will produce artificial prices that are not 
meaningful. In today's competitive 401(k) market, bundled and unbundled 
providers compete effectively for plan business. This healthy 
competition has helped spur innovation in 401(k) products and services, 
such as new education and advice programs and target date funds. 
Forcing a 401(k) provider to quote separate prices for component 
services would constitute an inappropriate decision by policymakers to 
favor one business model over another. So long as plan fiduciaries can 
compare the total cost of recordkeeping and investments of a bundled 
provider with the total costs of recordkeeping and investments of an 
unbundled provider, they have the relevant information to discharge 
their fiduciary obligations.
    The Institute supports requiring that a service provider disclose 
to plan sponsors information about compensation it receives from other 
parties in connection with providing services to the plan. This 
information will allow the plan sponsor to understand the total 
compensation a service provider receives under the arrangement. It also 
will bring to light any potential conflicts of interest associated with 
revenue sharing payments, for example, where a plan consultant receives 
compensation from a plan recordkeeper.
    Allocations among affiliated service providers are not revenue 
sharing. When services are provided by affiliates of the service 
provider, a plan sponsor should understand all the services that will 
be provided and the aggregate compensation for those services. The 
service provider should not be required to disclose how payments are 
allocated within the organization. These allocations are not market 
transactions and any pricing of these transactions will be artificial, 
and, thus, of little value. Disclosure of allocations within a firm 
will not inform the plan sponsor of additional compensation retained by 
the firm and will not inform the plan sponsor of a potential conflict 
that is not already apparent given the affiliation of the entities.
    The DOL has issued proposed comprehensive disclosure regulations to 
address the information plan fiduciaries need. The regulations will 
require plan recordkeepers and other service providers to give 
employers comprehensive information on the aggregate compensation they 
receive before a contract is entered into, and on an ongoing basis 
thereafter. This includes information on direct payments from 401(k) 
plans to recordkeepers and payments from third parties. The disclosures 
will have to include information on other potential conflicts of 
interest faced by the recordkeeper. The regulations would not favor a 
particular business model by requiring providers to quote component 
prices for services offered as a package. Although the Institute made 
suggestions to DOL to improve the effectiveness of the regulation, the 
Institute supports DOL's general proposed approach.\8\
     Disclosure to plan participants should be simple and 
focused on key information.

    Participants should receive the following key pieces of information 
for each investment product offered under the plan:

         Types of securities held and investment objective of 
        the product.
         Principal risks associated with investing in the 
        product.
         Annual fees and expenses expressed in a ratio or fee 
        table.
         Historical performance.
         Investment adviser that manages the product's 
        investments.

    Participants also need information about the plan fees that they 
pay, to the extent the 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).
    This list is informed by research on what information investors 
actually consider before purchasing mutual fund shares.\9\ The research 
also found that investors find a summary of information more helpful 
than a detailed document. This basic information should be provided on 
all investment options available under the plan, regardless of 
type.\10\
    Fees and expenses are only one piece of necessary information. 
While the fees associated with a plan's investment options are an 
important factor participants should consider in making investment 
decisions, no participant should decide whether to contribute to a plan 
or allocate his or her account based solely on fees. In many plans the 
lowest fee option is a money market fund or other low-risk investment 
because these funds are the least costly to manage. It is not 
appropriate for most participants to invest solely in these relatively 
lower return options.'' \11\
    ERISA disclosure rules should encourage and facilitate electronic 
delivery of investment information to participants. Plans should be 
allowed to provide online disclosure for every investment option for 
those employees who have reasonable access to the Internet.
    DOL has also issued a proposed regulation to improve the investment 
information provided to plan participants. Under the regulation, 
employers will have to provide all participants in 401(k) plans with 
critical and comparable information on all the investment options 
available to them. DOL's proposal uses a layered approach to ensure 
each participant receives key information, with more detail available 
online and upon request for those participants who want it. The 
proposal imposes new disclosure requirements with respect to all 
investment options, not just mutual funds, which the Institute believes 
is essential to an effective disclosure structure.\12\ The need for 
cost-effective, simple disclosure focusing on the key information 
participants need to make informed choices, and which facilitates 
comparisons among investments, enjoys broad support.\13\
    DOL's proposal coordinates with the SEC's proposal to improve and 
streamline the information provided to mutual fund investors.\14\ With 
half of defined contribution plan assets in mutual funds, the 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.

     Congress should not mandate a 401(k) plan's investment 
line-up.

    One proposal that is pending in Congress (H.R. 3185) would require 
a 401(k) plan to offer an index fund meeting certain requirements. The 
Institute is concerned with mandating in Federal law that 401(k) plans 
offer a particular type of investment option. Congress should not 
substitute its judgment for investment experts and mandate investment 
choices properly reserved to plan sponsors as fiduciaries. It also 
should not endorse one type of investment strategy (indexing) over 
another (active management). This represents a significant departure 
from the basic fiduciary structure of ERISA and the Institute is 
concerned about the precedent this would set.
    The mutual fund industry is committed to meaningful 401(k) 
disclosure, which is critical to ensuring secure retirements for the 
millions of Americans that use defined contribution plans. We thank the 
committee for the opportunity to submit this statement and look forward 
to continued dialogue with the committee and its staff.
                               References
    1. The Investment Company Institute is the national association of 
U.S. investment companies, including mutual funds, closed-end funds, 
exchange-traded funds (ETFs), and unit investment trusts (UITs). ICI 
seeks to encourage adherence to high ethical standards, promote public 
understanding, and otherwise advance the interests of funds, their 
shareholders, directors, and advisers. Members of ICI manage total 
assets of $12.14 trillion and serve almost 90 million shareholders.
    2. Attached to the testimony is a Policy Statement on Retirement 
Plan Disclosure adopted by the Institute Board of Governors in January 
2007 that reaffirms and chronicles the Institute's long record in 
support of better disclosure.
    3. Brady and Holden, The U.S. Retirement Market, 2007, ICI 
Fundamentals, vol. 17, no. 3 (July 2008), available at http://
www.ici.org/pdf/fm-v17n3.pdf.
    4. For example, in 2006, participants in their 20s allocated 59.7 
percent of their accounts to pooled equity investments and company 
stock, and only 18.4 percent to GICs and other fixed-income 
investments. Participants in their 60s allocated 35.6 percent to GICs 
and other fixed-income investments. See Holden, VanDerhei, Alonso, and 
Copeland, 401(k) Plan Asset Allocation, Account Balances, and Loan 
Activity in 2006, ICI Perspective, vol. 13, no. 1, and EBRI Issue 
Brief, Investment Company Institute and Employee Benefit Research 
Institute, August 2007, available at http://www.ici.org/pdf/per13-
01.pdf. The 2006 EBRI/ICI database contains 53,931 401(k) plans with 
$1.228 trillion in assets and 20.0 million participants.
    5. See Holden and VanDerhei, Can 401(k) Accumulations Generate 
Significant Income for Future Retirees? and The Influence of Automatic 
Enrollment, Catch-Up, and IRA Contributions on 401(k) Accumulations at 
Retirement, ICI Perspective and EBRI Issue Brief, Investment Company 
Institute and Employee Benefit Research Institute, November 2002 and 
July 2005, respectively, available at http://www.ici.org/pdf/per08-
03.pdf and http://www.ici.org/pdf/per11-02.pdf, respectively.
    6. Holden and Hadley, The Economics of Providing 401(k) Plans: 
Services, Fees, and Expenses, 2006, ICI Fundamentals, vol. 16, no. 4 
(September 2007), available at http://www.ici.org/pdf/fm-v16n4.pdf.
    7. See Statement of the Investment Company Institute to ERISA 
Advisory Council Working Group on Fiduciary Responsibilities and 
Revenue Sharing Practices (September 20, 2007), available at http://
www.ici.org/statements/tmny/07_dol_ 
disclose_tmny.html; Statement of the Investment Company Institute to 
ERISA Advisory Council Working Groups on Disclosure (September 21, 
2004), available at http://www.ici.org/statements/tmny/
04_dol_krentzman_tmny.html.
    8. A copy of the Institute's comment letter is available at http://
www.ici.org/statements/cmltr/08_dol_provider_com1.html.
    9. See Investment Company Institute, Understanding Investor 
Preferences for Mutual Fund Information (2006), available at http://
www.ici.org/pdf/rpt_06_inv_ 
prefs_full.pdf.
    10. Disclosure of this information is appropriate for mutual funds, 
insurance separate accounts, bank collective trusts, and separately 
managed accounts. The same key pieces of information are relevant and 
should be disclosed for fixed-return products, where a bank or 
insurance company promises to pay a stated rate of return. In 
describing fees and expenses of these products, for example, the 
disclosure should explain that the cost of the product is built into 
the stated rate of return because the insurance company or bank covers 
its expenses and profit margin by any returns it generates on the 
participant's investment in excess of the 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 
the risks of interest rate changes, the long-term risk of inflation, 
and the risks associated with the product provider's insolvency.
    11. In 2006, the asset-weighted average total mutual fund expense 
ratio for money market funds held in 401(k) plans was 0.43 percent, 
compared with 0.56 percent for bond mutual funds and 0.74 percent for 
stock mutual funds. See Holden and Hadley, supra note 6. In plans 
offering investment in employer stock, the employer stock option fund 
may be the lowest fee option because essentially no active investment 
management is involved, but it also would not be appropriate for 
participants to invest solely in one security. This point is made in 
the Department of Labor's publication for participants, Taking the 
Mystery Out of Retirement Planning, page 11, available at http://
www.dol.gov/ebsa/publications/NRTOC.html.
    12. Attached is the Institute's comment letter to the Department of 
Labor regarding improvements to participant disclosure.
    13. This broad support is reflected in the joint recommendation by 
12 trade associations to the Department of Labor in response to DOL's 
request for information. See http://www.ici.org/statements/cmltr/2007/
07_dol_401k_joint_com.html.
    14. See Enhanced Disclosure and New Prospectus Delivery Option for 
Registered Open-End Management Investment Companies, 72 Fed. Reg. 67790 
(Nov. 30, 2007). 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).
Attachments.--Institute Policy Statement on Retirement Plan Disclosure 
   and Institute Comment Letter to DOL on Participant Fee Disclosure 
                                Proposal
            ICI Policy Statement--Retirement Plan Disclosure
    In 2005, there were 47 million active participants in 401(k) plans, 
with their retirement savings invested not only in mutual funds but 
also a wide range of other investment products. As 401(k) plans assume 
increasing importance for future retirees, plan sponsors must be able 
to make the right choices in setting up their plans and participants 
must have the information necessary to make informed investment 
decisions. To that end, the Institute urges that the Department of 
Labor clarify the requirements for disclosure of the fees and expenses 
associated with 401(k) plans to assist plan sponsors in making 
meaningful comparisons of products and service providers. Similarly, we 
support action by the Department of Labor to require straightforward 
descriptions of all the investment options available to participants in 
self-directed plans. To achieve these important goals:

     The Department of Labor should require clear disclosure to 
employers that highlights the most pertinent information, including 
total plan costs.

    We believe required disclosure to employers should focus on the 
total fees paid by the plan to a service provider (in the form of a 
percentage or ratio) and how expenses are allocated between the sponsor 
and participants. Required disclosure also should address the various 
categories of expenses associated with a plan, including arrangements 
where a service provider receives some share of its revenue from a 
third party. Under ERISA, the obligation to provide this information 
should rest with those parties having a direct relationship with the 
employer.
    In the late 1990s, the Institute, in cooperation with other 
private-sector organizations, created a Model 401(k) Plan Fee 
Disclosure Form, which is posted on the Department of Labor Web site. 
More recently, the Institute also helped develop a list of service- and 
fee-related items that plan sponsors should discuss with potential 
providers. These tools serve to identify what services will be provided 
for the fees charged, show all forms of expenses, and help employers 
make meaningful comparisons among the products and services offered to 
the plan. The tools also can be useful to the Department in crafting 
regulations and other guidance.
     The Department of Labor should require that participants 
in all self- directed plans receive simple, straightforward 
explanations about each of the investment options available to them, 
including information on fees and expenses.

    In making investment elections under a plan, individuals should 
receive information on: investment objectives; principal risks; annual 
fees (expressed in a ratio or fee table); historical performance; and 
the investment adviser that manages the product's investments.
    The Department should expand the current disclosure requirements to 
require plan administrators to provide participants with a concise 
summary of these five key pieces of information for each investment 
option. One effective way to deliver this information is through e-mail 
and other forms of electronic communication. Additional information, 
such as how fees and expenses are allocated among service providers, 
should be made available to participants (for example, posted on the 
Internet).
    Such disclosure requirements would fill gaps in the information 
currently required to be provided to participants. The existing 
disclosure regime does not cover all plans in which participants make 
investment decisions for their accounts. For plans that are covered, 
participants must receive full information about mutual funds, in the 
form of the fund prospectus. For other products, important 
information--such as operating expenses and historical performance--is 
available only on request. We support revising current rules to require 
a summary document for all self-directed plans that provides, for each 
investment product, the type of information that investors value and 
use. This information will empower participants in self-directed plans 
to manage their accounts effectively.
    The mutual fund industry is committed to meaningful disclosure. 
Over the past 30 years, the Institute has supported efforts to improve 
the quality of information provided to plans and participants and the 
way in which that information is presented. Meaningful disclosure is 
critical to ensuring secure retirements for millions of Americans.
   Appendix.--ICI'S Record: 30 Years of Advocating Better Disclosure
    The Institute has long acted both in conjunction with other 
organizations and on its own to enhance the ability of employers to 
make appropriate choices for their plans. The Institute also has 
consistently called for effective disclosure to plan participants about 
investment options. This appendix describes the Institute's efforts 
over time to improve disclosure for both plan sponsors and 
participants.
                       disclosure to participants
    For more than 30 years, the Institute has provided specific 
recommendations to the Department of Labor on the disclosure 
participants in self-directed plans should receive about investment 
options. Through letters and testimony before the Department and the 
ERISA Advisory Council, we recommended regulatory measures to ensure 
that participants and beneficiaries receive adequate information on 
which to base their investment decisions.

     In a 1976 letter to the Department, the Institute 
advocated that when an individual becomes a participant, he or she 
should receive complete, up-to-date information about plan investment 
options, and, thereafter, regular and current information as to his or 
her investments.
     In 1987, the Institute recommended that under then-
proposed 404(c) regulations, participants should receive the kind of 
information included in a mutual fund prospectus or Statement of 
Additional Information for all investment options--not just investment 
options subject to Federal securities laws. We repeated this suggestion 
in 2001 to the Department and in testimony in 2004 and 2006 before the 
ERISA Advisory Council.
     In 1992, the Institute recommended that where a 404(c) 
plan has a limited number of investment alternatives, plan fiduciaries 
should be required to provide sufficient investment information about 
each option up front. We urged the Department to specify the investment 
information that would be deemed sufficient, including information on 
fees and expenses and investment objectives.
     In testimony before the Department in 1997, the Institute 
asked the Department to address gaps in the disclosure regime, 
especially disclosure of administrative fees charged to participant 
accounts and information on annual operating expenses, which, for non-
mutual fund investment vehicles, are required to be provided only upon 
request.
     In 1999, the Institute urged the Department to expand the 
scope of its proposed rules on electronic delivery to cover a broader 
range of disclosures and recipients.
     In testimony before the ERISA Advisory Council in 2004 and 
2006, the Institute called for participants to receive clear and 
concise summaries of each investment option, including the product's 
investment objective, principal risks, fee/expense ratio (in the form 
of a fee table), and information about the investment adviser. In 2006, 
we added historical performance to the list. In the 2006 testimony, we 
also urged that this disclosure regime should apply to all self-
directed plans--not just 404(c) plans--and that the Department update 
and expand its electronic disclosure rule in light of the increasing 
role of the Internet.
                      disclosure to plan sponsors
    The Institute likewise has consistently advocated clear rules for 
disclosure to plan sponsors and has developed various tools for use by 
sponsors and service providers.

     In 1999, the Institute published a Uniform 401(k) Plan Fee 
Disclosure Form, developed jointly with the American Bankers 
Association (ABA) and American Council of Life Insurance (ACLI). The 
form, which the Department posted on its Web site, is designed to help 
employers identify and monitor 401(k) plan fees and expenses and 
compare the fees and services of different providers.
     In testimony before the ERISA Advisory Council in 2004, 
the Institute called for clear, meaningful, and effective disclosure to 
plan sponsors. We recommended that plan sponsors be required to obtain 
complete information about investment options before adding them to the 
plan menu and obtain information concerning arrangements where a 
service provider receives some share of its revenue from a third party. 
The Institute offered to organize a task force to assist the Department 
in developing a disclosure regime for these compensation arrangements.
     In 2005, the Institute published a Model Disclosure 
Schedule for Plan Sponsors that might be used to disclose information 
on receipt by service providers of revenue from unaffiliated parties in 
connection with services to a plan. The Institute began discussions 
with other trade associations on developing an appropriate disclosure 
regime.
     In 2006, the Institute published a 401(k) plan fee and 
expense reference tool, developed jointly with the ACLI, ABA, 
Securities Industry Association, and American Benefits Council. The 
tool is a list of fee and expense data elements that plan sponsors and 
service providers may want to discuss when entering into service 
arrangements. We have asked the Department to post the tool on its Web 
site.
                                 ______
                                 
                      Investment Company Institute,
                                 Washington, DC 20005-2148,
                                                 September 8, 2008.
Office of Regulations and Interpretations,
Employee Benefits Security Administration, Room N-5655,
U.S. Department of Labor,
200 Constitution Avenue, NW,
Washington, DC 20210.

Attn: Participant Fee Disclosure Project

    Ladies and Gentlemen: The Investment Company Institute, the 
national association of U.S. investment companies,\1\ strongly supports 
the Department of Labor's participant fee disclosure proposal, which 
will require that participants and beneficiaries in all self-directed 
defined contribution plans receive basic and comparable information on 
all the investment options available to them, regardless of type.
---------------------------------------------------------------------------
    \1\ The Investment Company Institute is the national association of 
U.S. investment companies, including mutual funds, closed-end funds, 
exchange-traded funds (ETFs), and unit investment trusts (UITs). ICI 
seeks to encourage adherence to high ethical standards, promote public 
understanding, and otherwise advance the interests of funds, their 
shareholders, directors, and advisers. Members of ICI manage total 
assets of $12.14 trillion and serve almost 90 million shareholders.
---------------------------------------------------------------------------
    Under the proposal, participants would receive, at enrollment and 
annually thereafter, basic information about the plan, including plan-
level fees. They would receive a chart containing information about 
each investment option designated by the plan fiduciaries, including 
the type of investment, whether it is active or passive, the 
investment's 1-, 5-, and 10-year return (compared against a benchmark), 
and the fees associated with the investment alternative, with annual 
expenses expressed as a total expense ratio. Participants would be 
referred to a Web site for more information on each investment, 
including the investment strategies and risks, the identity of the 
investment issuer or provider, portfolio turnover, and the assets held 
in the portfolio. More detailed information, like a copy of a 
prospectus or similar document, would be available to participants upon 
request.
    We applaud the Department for seeking input prior to issuing this 
proposal through its Request for Information. This process showed 
dividends. The proposal focuses on the key information of use to 
participants and provides for comparability and clarity. It provides 
key information on fees, balanced with layered web-based disclosure on 
other key information. Many features of the proposal help ensure that 
the disclosure is useful to participants, the requirements are clear to 
plan fiduciaries, who have the obligation to provide the disclosure, 
and that the disclosure regime is cost-effective for plans and service 
providers. We urge the Department to retain these features:

     Avoiding a focus solely on fees. The fees associated with 
a plan's investment options are an important factor participants should 
consider in making investment decisions, but no participant should 
decide whether to contribute to the plan or allocate his or her account 
based solely on fees. The Department should retain the balance struck 
in the proposal so that participants do not receive disclosure that 
places undue emphasis on fees.
     Disclosing investment expenses in a straightforward format 
through the expense ratio. The expense ratio is a simple and widely 
understood way to disclose annual operating costs of an investment fund 
that can be applied to a variety of pooled products. It has been time-
tested in SEC rules for disclosing mutual fund operating costs. Use of 
the total expense ratio also ensures comparability across investment 
products.\2\
---------------------------------------------------------------------------
    \2\ We agree that fixed return products do not charge expenses in 
the same way that pooled products do. While an expense ratio may not be 
appropriate for GICs, certificates of deposit, and similar products 
(although it is for pooled funds of bonds or GICs), we recommend that 
the chart include a disclosure alerting participants that the cost of 
the fixed return 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 stated rate of return.
---------------------------------------------------------------------------
     Ensuring participants understand the costs for buying and 
selling the plan's designated investments prior to making a decision. 
The proposal contains a requirement to disclose shareholder-type fees, 
which should include fees imposed at the time of purchase (brokerage or 
insurance commissions, sales charges or front-end loads) or at the time 
of sale or redemption (redemption fees, deferred sales loads, surrender 
fees, market value adjustment charges). It is particularly important 
that participants, before making an investment decision, understand any 
fees for exiting the investment within a certain period of time.
     Applying disclosure across all products. This proposal 
would establish baseline disclosure of key information for all 
products, regardless of type. This would fill a gap in the current 
404(c) regulation which requires that participants receive a prospectus 
for mutual funds and other products subject to the Securities Act of 
1933, but does not require delivery of key information like annual 
operating expenses and historical return information for other 
investment products. Closing this gap is important as investment funds 
that are not subject to the 1933 Act are increasingly being marketed to 
plans and participants.\3\ We recognize that current disclosure systems 
do not always require that this information be developed and made 
available to participants and that plans, recordkeepers, and product 
providers will need to develop processes to do so. But that is exactly 
the point of this proposal and why adoption is so necessary. We 
strongly urge the Department to retain this feature of the proposal.
---------------------------------------------------------------------------
    \3\ See ``Collective Funds Gain Traction in 401(k)s,'' Wall Street 
Journal, July 24, 2008, page D1.
---------------------------------------------------------------------------
     Allowing fees to be disclosed in the manner in which they 
are charged. The proposal allows fees to be disclosed in the manner in 
which they are charged, recognizing that different types of fees are 
charged differently. While operating expenses of pooled funds in the 
plan's menu are charged in basis points (percentage of assets), plan 
level fees typically involve per capita or per transaction costs.
     Coordinating participant disclosures with securities law 
disclosures. Throughout the proposal the Department coordinated the 
proposed requirements with similar disclosures registered investment 
companies provide investors. This has the benefit of using time-tested 
disclosure methodologies and avoids requiring mutual funds to recompute 
information or produce entirely new calculations beyond those currently 
required by the SEC. For example, the methodology for computing mutual 
fund expense ratios, performance data, and benchmark information will 
satisfy the rule.
     Harnessing the power of web-based disclosure. The Internet 
is a particularly effective and efficient means to deliver disclosure, 
because of its ability to offer layers of information. The proposal 
makes an important step in this direction by allowing use of a Web site 
to provide layered disclosure. Below we offer recommendations on how 
the Department should update its electronic disclosure rules for this 
proposal.

    These principles enjoy broad support, as evidenced by the letter in 
response to the Department's RFI signed by 12 groups representing both 
employer sponsors of defined contribution retirement plans and the 
financial institutions that provide services or investments to 
plans.\4\
---------------------------------------------------------------------------
    \4\ See Joint Letter of the Investment Company Institute, American 
Benefits Council, American Council of Life Insurers, Committee on 
Investment of Employee Benefit Assets, The ERISA Industry Committee, 
American Bankers Association, Profit Sharing/401(k) Council of America, 
Securities Industry and Financial Markets Association, National 
Association of Manufacturers, U.S. Chamber of Commerce, The Financial 
Services Roundtable, and Society for Human Resource Management (July 
24, 2007), available at http://www.ici.org/statements/cmltr/2007/
07_dol_401k_joint_com.html.
---------------------------------------------------------------------------
    Our comments on specific elements of the proposal are set forth 
below.
a. the department should enhance the ability of plans to use electronic 
                   delivery and web-based disclosure
    Although the proposal contemplates the use of a Web site for 
layered disclosure, it otherwise simply incorporates the Department's 
current electronic disclosure rules. Benefits of the layered approach 
to disclosure in the proposal can best be realized if the Department 
updates its electronic disclosure rules.
    Use of the Internet is now virtually universal among a significant 
majority of 401(k) participants. Participants under age 60 constituted 
91 percent of active 401(k) participants at the end of 2006,\5\ and in 
this age group, access to an Internet-enabled PC at home is generally 
above 80 percent, based on Neilsen ratings (as of May 2008).\6\ The 
Institute's data on mutual fund shareholders, including those who own 
funds through employer plans, show broad Internet usage across all 
groups. For example, 75 percent of mutual-fund owning U.S. households 
with a high school education or less report having Internet access in 
2006.\7\ This number is even higher--85 percent--for those with a high 
school education or less who own mutual funds through a 401(k).\8\
---------------------------------------------------------------------------
    \5\ See S. Holden, J. VanDerhei, L. Alonso, and C. Copeland, 401(k) 
Plan Asset Allocation, Account Balances, and Loan Activity in 2006, ICI 
Perspective, vol. 13, no. 1, fig. 4, and EBRI Issue Brief, no. 308, 
Investment Company Institute and Employee Benefit Research Institute, 
August 2007, available at http://www.ici.org/pdf/per13-01.pdf.
    \6\ See Nielsen On-Line, Industry Vertical News on Internet 
Penetration (May 2008), available at http://www.nielsen-netratings.com/
resources.jsp?section=btn_filter&nav=5.
    \7\ See 2008 Investment Company Institute Fact Book, 48th ed., 
figure 6.12, available at http://www.icifactbook.org. Educational 
attainment reported is for the sole or co-decisionmaker for savings and 
investing decisions.
    \8\ Data tabulated from ICI's 2006 Annual Mutual Fund Shareholder 
Tracking Survey.
---------------------------------------------------------------------------
    The Internet is widely used for financial transactions. One 
Institute member with a large recordkeeping business reported to us 
that in 2007, about 75 percent of investment changes by participants 
were made on-line via the plan participant Web site, compared with 
about 25 percent of changes made over the phone.\9\ A 2006 Institute 
study of Americans who own mutual funds (whether through employer plans 
or through the retail market) found that nearly three-quarters of 
shareholders who go online use the Internet to access their bank or 
investment accounts, and 55 percent use the Internet to obtain 
investment information.\10\
---------------------------------------------------------------------------
    \9\ In fact, in 2007, 84 percent of all participant contacts with 
the recordkeeper were made via the participant Web site.
    \10\ See 2008 Investment Company Institute Fact Book, 48th ed., 
figure 6.13, available at http://www.icifactbook.org.
---------------------------------------------------------------------------
    In a joint letter, the Institute and the American Benefits Council 
recently recommended that the Department consider alternatives to the 
affirmative consent requirement in the Department's current electronic 
disclosure regulation (29 CFR Sec. 2520.104b-1(c)). We understand that 
the issue of electronic delivery of information and documents required 
by ERISA is the subject of a separate regulatory project. We see no 
reason, however, why the Department could not include in these final 
regulations rules that facilitate electronic delivery of information 
required by these regulations. The Department has done so on an interim 
basis for e-delivery of participant benefit statements in Field 
Assistance Bulletin 2006-03 and for qualified default investment 
alternatives (QDIAs). The Department should adopt a similar user-
friendly approach for this regulation.
    For example, many plans enroll participants via a secure Web site. 
Participants designate a contribution percentage, enter enrollment 
information, and select investments at the same time. Information on 
investment options is presented at the time the participant selects 
investments, and the participant typically has the option to print any 
of this information. It is clear that any participant who enrolls via 
this process has access to the Internet because the participant is 
online to enroll. The Department's rules should allow the plan to 
furnish this participant with the required disclosures online.
    The Department's final regulations for QDIAs allow plans to satisfy 
their notice requirements using either the Department of Labor's 
electronic disclosure rules or the guidance issued by the Department of 
Treasury and Internal Revenue Service (26 CFR Sec. 1.401(a)-21) 
relating to use of electronic media.\11\ The process of notifying 
participants about a plan's QDIA typically will be intertwined with 
disclosure under this new rule. The Department needs to harmonize these 
rules with the QDIA electronic disclosure requirements.
---------------------------------------------------------------------------
    \11\ See Preamble to Final QDIA rule, 72 Fed. Reg. 60452, 60458 
(October 24, 2007). See also Field Assistance Bulletin 2008-3, Q&A-7.
---------------------------------------------------------------------------
    Finally, as a technical matter, the Department should clarify that 
the use of a Web site to provide the additional investment disclosure 
described in paragraph (d)(1)(i)(B) of the proposal will not violate 
the Department's general electronic disclosure rules, so long as a 
participant can request and receive in paper the required information 
that is on the Web site.\12\
---------------------------------------------------------------------------
    \12\ The Department should not require that all the information on 
the Web site, which may include information beyond that required by the 
rule, be available in paper at no charge. A requirement on the plan to 
provide a paper copy should be restricted to the information required 
by the regulation.
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  b. comments on the presentation and content of required information
    1. The Department should clarify that the Web site information 
includes a description of the type of assets in the portfolio, not a 
list of securities in the portfolio.
    Under the proposal, participants must have access to a Web site 
address that provides supplemental information on each designated 
investment alternative, including ``the assets comprising the 
investment's portfolio.'' We assume that the Department intended to 
require information about the type of assets in the portfolio, and not 
a list of every security held in the portfolio. The current 404(c) 
requirement is that participants receive ``information relating to the 
type and diversification of assets comprising the investment's 
portfolio.'' \13\ Requiring web-based continuous disclosure of 
portfolio holdings would be unnecessary and unwise.
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    \13\ See 29 CFR Sec. 2550.404c-1(b)(2)(i)(B)(ii). In addition, one 
of the items that must be available upon request under the proposal is 
a list of assets comprising the portfolio that constitute plan assets 
and the value of each such asset; this requirement is redundant if the 
proposal is read to require that information be continuously available 
on a Web site.
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    Mutual funds are required to disclose their portfolio holdings on a 
quarterly basis under SEC rules. Funds provide this information as part 
of their required reports provided to shareholders twice a year,\14\ 
and then during the two ``off '' quarters on Form N-Q, which is filed 
with SEC. The Department's proposal would of course allow participants 
to obtain shareholder reports on request (see paragraph (d)(4)(ii)).
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    \14\ See SEC Form N-1A, Item 22(b)(1); Rule 30e-1 under the 
Investment Company Act of 1940. Many funds voluntarily disclose this 
information on their Web sites on a more frequent (e.g., monthly) 
basis, with a lag time designed to avoid subjecting the fund to 
predatory trading practices.
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    There are good reasons why the SEC does not require mutual funds to 
disclose portfolio holdings continuously and contemporaneously. Besides 
the administrative burden and expense of doing so, this could have an 
adverse impact on funds and their shareholders, because it could 
subject funds to predatory trading practices like front-running and 
free riding.\15\
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    \15\ If the Department intends to require disclosure of actual 
portfolio holdings on the Web site, it should provide that mutual funds 
should provide this information with the frequency, currentness, and 
detail required by SEC rules.
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    2. The Department should clarify that plans may provide additional 
benchmark comparisons.
    The proposal would require that participants receive, for each 
investment other than fixed return products, the name and 1-, 5-, and 
10-year returns of an appropriate broad-based securities market index, 
for comparison purposes. The description of the required benchmark 
parallels what mutual funds provide pursuant to SEC Form N-1A.
    Form N-1A recognizes that a broad-based securities index may not 
always provide the best comparison to a particular fund. The 
instructions to Form N-1A allow mutual funds to compare their 
performance not only to the required broad-based securities index, but 
also to other, more narrowly based indices that reflect the market 
sectors in which the fund invests or to use an additional broad-based 
index or non-securities index (e.g., the Consumer Price Index), so long 
as the comparison is not misleading.\16\ The Department should clarify 
that these additional comparisons are allowed.
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    \16\ See SEC Form N-1A, Item 2(c)(2)(iii), Instruction 2(b); Item 
22(b)(7), Instruction 6.
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    3. The Department should clarify that investments with less than 
the full period of performance should disclose performance from 
inception date.
    The Department's proposal is modeled on SEC Form N-1A, which 
requires disclosure of performance over a 1-, 5-, and 10-year period, 
but the Department's proposal does not address explicitly how funds 
with less than a full period of performance should present their 
performance. SEC rules require that funds that have been in existence 
for less than a full period disclose performance for the life of the 
fund. For example, a fund that has been in existence for 9 years would 
disclose its 1- and 5-year performance and the performance over the 9 
years since inception of the fund.
    The model disclosure chart lists one of the funds (the ``B Fund'') 
as ``NA'' for the 10-year performance figure, suggesting that ``NA'' 
should be used if the fund has been in existence for less than 10 
years. We recommend that the Department clarify that plans should 
disclose the performance for the life of the investment if that is less 
than 1, 5, or 10 years, as applicable. This could be done by placing 
the performance over the life of the fund in the column for the next 
highest period, and including either an explanatory parenthetical or a 
footnote.
    4. If the Department retains the requirement to disclose portfolio 
turnover, it should clarify that funds should calculate portfolio 
turnover in accordance with Item 8 of Form N-1A.
    Web site information for each designated investment alternative 
under the proposal includes the portfolio turnover rate. While we would 
not put fund portfolio turnover on a list of the most important pieces 
of information that all investors should review,\17\ we understand that 
the Department may be concerned that participants have information 
about the trading costs of a fund. In that context the portfolio 
turnover rate can be an indicative measure, particularly for equity 
funds.
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    \17\ In a survey of just over 500 households conducted in March 
2008, ICI found that only 38 percent thought the section on portfolio 
turnover in the proposed Summary Prospectus was ``very important, need 
to keep.'' Indeed, the portfolio turnover section was ranked second 
from the bottom in the list of 13 sections that respondents were asked 
to prioritize, and only the name of the portfolio manager received a 
lower percentage saying the information is ``very important.'' See 
Investment Company Institute, Investor Views on the U.S. Securities and 
Exchange Commission's Proposed Summary Prospectus (March 14, 2008), 
available at http://www.ici.org/pdf/ppr_08_summary_prospectus.pdf. This 
finding confirmed earlier ICI research on investor preferences about 
portfolio turnover information. See Investment Company Institute, 
Understanding Investor Preferences for Mutual Fund Information (2006), 
available at http://www.ici.org/pdf/rpt_06_inv_prefs_full.pdf.
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    The SEC has determined that the fund's turnover rate is the most 
reasonable proxy for the trading costs of a mutual fund. While it is 
not a perfect measure of trading costs,\18\ it is a widely-used proxy 
for transaction costs, and it has the advantage of comparability. It 
can be easily calculated by funds and is more easily understood by 
investors than other measures.
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    \18\ For example, a fund that frequently trades securities on a low 
cost-per-trade basis may incur lower overall transaction costs than a 
fund that trades infrequently but on a high cost-per-trade basis.
---------------------------------------------------------------------------
    If the Department decides to retain the requirement in the final 
rule, it should apply to all investment funds--mutual funds, collective 
trusts, separately managed accounts, and insurance company separate 
accounts.
    The Department should clarify that funds should calculate and 
disclose portfolio turnover in accordance with Item 8 of Form N-1A. 
This will assure comparability of disclosure across products. For 
example, Form N-1A instructs mutual funds, in calculating portfolio 
turnover, to exclude amounts relating to securities whose maturities or 
expiration dates at the time of acquisition were 1 year or less.\19\ 
This is appropriate because the portfolio turnover rate is a measure of 
the relationship between the adviser's investment strategies and how 
frequently the portfolio turns over within a year.
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    \19\ See Form N-1A, Item 8(a), Instruction 4(d)(ii).
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    Similarly, Item 8 of Form N-1A exempts money market mutual funds 
from the requirement to calculate and provide portfolio turnover.\20\ 
Since money market funds almost exclusively hold very short-term 
interest-bearing securities (e.g., 60 days), and hold them to maturity, 
most of the securities money market funds hold are exempt from the 
calculation because they have maturities of less than 1 year. However, 
because of a 1991 modification to the rules for money market funds, 
these funds can now purchase a security with a remaining maturity of up 
to 13 months. To avoid requiring money market funds to calculate 
portfolio turnover on a small slice of their portfolios, the SEC simply 
exempted all money market funds from the requirement to calculate and 
provide their portfolio turnover rate.\21\ Disclosing money market fund 
portfolio turnover rate could be misleading and would not provide a 
comparison against the other investment options in the plan. For 
example, a fund that maintains an average maturity of 60 days \22\ 
would have a turnover rate of about 600 percent.
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    \20\ See Form N-1A, Item 8(a), Instruction 4(c).
    \21\ See SEC No-Action Letter to Investment Company Institute (pub. 
avail. Aug. 6, 1991). The SEC amended Form N-1A to reflect this 
interpretative position 2 years later. See Securities and Exchange 
Commission, Disclosure of Mutual Fund Performance and Portfolio 
Managers, Final Rule, 58 Fed. Reg. 19050, 19051 n.3 (April 6, 1993).
    \22\ The average maturity of taxable money market mutual funds has 
been lower than 60 days in every year since 1984. See 2008 Investment 
Company Fact Book, 48th ed., Table 38, available at http://
www.icifactbook.org.
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    5. The Department should clarify that shareholder-type fees that 
are waived for 401(k) investors should not be disclosed.
    The proposal would require disclosure of ``shareholder-type'' fees 
like front-end loads and redemption fees. It is very common for mutual 
funds, or share classes of funds, that impose a front-end sales load or 
account charges to waive the load or account fee for 401(k) and other 
defined contribution investors.\23\ This would typically apply to all 
participants in a plan. We read the Department's proposal to provide 
that shareholder-type fees should be disclosed only if they apply to 
participants, but the Department should clarify this point. The example 
in the model comparative chart references a $20 annual service fee that 
``[m]ay be waived in certain circumstances.'' The Department should 
clarify that if a fund does not impose the fee on that plan's 
participants, the waived fee should not be included.
---------------------------------------------------------------------------
    \23\ See B. Reid and J. Rea, Mutual Fund Distribution Channels and 
Distribution Costs, ICI Perspective, vol. 9, no. 3 (July 2003), 
available at http://www.ici.org/pdf/per09-03.pdf.
---------------------------------------------------------------------------
    In addition, the Department's proposal would require that the 1-, 
5-, and 10-year performance be calculated and disclosed in the same 
manner as average annual total return is calculated under Item 21 of 
SEC Form N-1A. That instruction requires mutual funds to assume that 
the shareholder paid the maximum sales load. The Department should 
clarify that, if a fund does not impose a sales load on the plan or its 
participants, the chart could omit the performance numbers that would 
be required in the fund's prospectus and instead display the average 
annual total return without including the sales load (assuming the 
presentation is not inaccurate or misleading).
    Finally, the Department should clarify that round trip or purchase 
block restrictions, which do not impose a fee for exiting an 
investment, but merely prohibit reinvestment in the same fund for a 
short period of time to prevent market timing, are not considered 
``shareholder-type fees.'' \24\
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    \24\ The Department came to a similar conclusion with respect to 
QDIAs.
---------------------------------------------------------------------------
    6. The Department should retain the requirement to disclose 
quarterly only plan-level administrative fees in dollar amounts and not 
impose dollar-based disclosure for investment-level fees.
    Under the proposal, participants would be provided quarterly the 
amount actually charged to their account for plan administrative 
expenses and any fees charged for use of individual plan services 
(e.g., loans). These administrative expenses exclude amounts otherwise 
included in investment-related expenses (which are disclosed to 
participants at enrollment and annually thereafter). The Department 
should retain this feature of the proposal.
    The Department should not require that plans create individualized 
dollar-based disclosures for fees that are included in investment-
related expenses. This would require systems that are expensive to 
design and implement and which would produce rough estimates at best.
    The SEC looked at this issue in the context of disclosure of mutual 
fund fees. A June 2000 General Accounting Office (now Government 
Accountability Office) report on mutual fund fees suggested various 
approaches to improving fee disclosure, one of which was to require 
that funds calculate and disclose to each fund investor the actual 
dollar amount of fund operating expenses attributable to that 
investor.\25\ The SEC examined the GAO's report and concluded that the 
best way to improve shareholder understanding was to require a fee 
example in shareholder reports showing the expenses paid on each $1,000 
invested, based both on the fund's actual operating expenses and actual 
return for the period and, to allow comparisons among funds, based on 
an assumed return of 5 percent per year.\26\
---------------------------------------------------------------------------
    \25\ See General Accounting Office, ``Mutual Fund Fees: Additional 
Disclosures Could Encourage Price Competition'' (June 2000), available 
at http://www.gao.gov/new.items/gg00126.pdf.
    \26\ See Securities and Exchange Commission, Final Rule, 
Shareholder Reports and Quarterly Portfolio Disclosure of Registered 
Management Investment Companies, 69 Fed. Reg. 11244 (March 9, 2004).
---------------------------------------------------------------------------
    In its adopting release, the SEC cited Institute research 
concluding that the aggregate costs to responding firms associated with 
calculating and disclosing individualized fund expenses on quarterly 
statements would be $200.4 million in initial implementation and $65 
million in annual, ongoing costs.\27\ This estimate covered only the 
costs for calculation and disclosure to retail investors. Providing 
this type of disclosure in 401(k) plans would be even more costly 
because a plan sponsor or recordkeeper must consolidate fee and account 
information with respect to each investment in a participant's account, 
information that derives from different sources. Current recordkeeping 
systems are not designed to receive the needed information from mutual 
fund companies and other financial product providers on a daily basis.
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    \27\ The Institute survey was conducted in 2000, and included 
responses from 39 mutual fund complexes with total net assets of $4.8 
trillion (approximately 77 percent of total industry net assets as of 
June 2000).
---------------------------------------------------------------------------
    If the Department decides to modify the proposal to require that 
plans reduce asset-based investment charges into estimated dollar 
amounts, the Department should follow the illustrative example that 
accompanies the fee table in a mutual fund prospectus or the example in 
a fund's shareholder report.\28\
---------------------------------------------------------------------------
    \28\ A mutual fund's prospectus provides a quantitative example 
showing the dollar amount of expenses an investor would pay on a 
hypothetical $10,000 investment that earns 5 percent annually over 1-, 
3-, 5- and 10-year periods. This calculation number takes into account 
any sales charges imposed by the fund. The fund's semi-annual and 
annual reports include a table showing the expenses paid on each $1,000 
invested, based both on the fund's actual operating expenses and actual 
return for the most recent 6-month period and, to allow comparisons 
among funds, based on an assumed return of 5 percent per year.
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    7. The Department should retain flexibility of format for the 
information on the Web site.
    The proposal does not specify the format of the Web site 
information, and we agree plans should have flexibility in how to 
present this information. For example, many retirement services 
providers now use fund ``fact sheets'' or post web-based versions of 
fund fact sheets. These helpful tools, which are typically limited to 
one or two pages, provide basic information about a plan investment's 
investment objectives, risk, historical performance, and fees, in a 
format that investors find useful. Innovative formats like these should 
be encouraged.
    In some cases it may be cost-effective for plans to provide at the 
designated Web site a copy of a mutual fund's most recent prospectus, 
or a short-form or summary prospectus. In addition, particularly if a 
mutual fund's public Web site will be used to disclose the information, 
the fund will need to ensure that information is presented in a way 
that complies with all securities laws.\29\ Providing plans, service 
providers, and investment providers flexibility to use fact sheets, 
prospectuses or short-form or summary prospectuses (so long as the 
document includes the required information) \30\ will allow plans to 
provide disclosure that works best for participants.
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    \29\ Along with the requirements of Form N-1A, other rules require 
that information about a fund be presented in a particular way. See, 
e.g., Rule 482 under the Securities Act of 1933 (17 CFR Sec. 230.482).
    \30\ We believe a prospectus would include all of the information 
described in paragraph (d)(i)(B). As proposed, a summary prospectus 
would also include all of this information. See Enhanced Disclosure and 
New Prospectus Delivery Option for Registered Open-End Management 
Investment Companies, 72 Fed. Reg. 67790 (Nov. 30, 2007).
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    Although the Department should provide flexibility as to format, we 
urge the Department to provide guidance as to how the requirements 
apply to products other than mutual funds (which already provide the 
required Web site information). For example, we agree that participants 
should understand the risks of investing in a fixed return product. We 
recommend that the Department state that in describing the principal 
risks of these products, the plan should explain, at a minimum, that 
the risks associated with the fixed rate of return include the risks of 
interest rate changes, the long-term risk of inflation, and the risks 
associated with the product provider's insolvency.
    8. The Department should address changes in the cross-references to 
Form N-1A.
    The proposed regulations include references, by number, to items 
and instructions in the SEC's Form N-1A. The Department should clarify 
that these also refer to successor items and instructions. The items 
and instructions in Form N-1A are renumbered from time to time, and in 
fact the SEC's current proposed changes to Form N-1A would renumber 
some of them.
c. the department should revise the timing requirements to accommodate 
                    plans with immediate eligibility
    The Department's proposal would require that a host of plan and 
investment information be provided on or before eligibility. A failure 
to do so, under the Department's proposal, would be a breach of 
fiduciary duty. The point of the requirement to disclose the required 
information upon eligibility is to ensure participants have sufficient 
information to make the decision whether or not to enroll in the plan 
and how to allocate their contributions \31\ among the options that 
plan fiduciaries have designated to be available in the plan.
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    \31\ Under the proposal, the initial and annual plan-level 
information must identify ``any designated investment managers,'' but 
does not define the term ``designated investment manager.'' The 
preamble explains that this means ``any designated investment managers 
to whom participants and beneficiaries may give investment 
directions.'' The Department should clarify that this plan-level 
disclosure needs to identify any person designated to receive and 
implement investment instructions from participants and beneficiaries 
(whether or not this person is an investment manager within the meaning 
of ERISA Sec. 3(38)).
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    Many participant-directed defined contribution plans provide for 
immediate eligibility. For these plans, the Department's rule will 
require, essentially, that the disclosure be made on the first day of 
work. Many employers do not provide information on benefits on the 
first day of work, in part to avoid information overload with all the 
other information new employees must absorb. Plans with immediate 
eligibility could be vulnerable to violating the timing requirements, 
if even by a few days.
    Plans with immediate eligibility typically have a lag time between 
the date a participant is eligible and the date of first investment, 
because the first paycheck (with the first plan contribution deducted) 
often does not occur on the first day of employment. We recommend that 
the Department amend the requirements so that fiduciaries will be 
deemed to have provided timely disclosure if it is provided on or 
within a reasonable period after the date the employee becomes eligible 
for the plan, but in any event on or before the date the employee makes 
his or her first election to contribute to the plan or first election 
to allocate his or her account to a designated investment alternative.
          d. the department should extend the compliance date
    While we believe participants are by and large already receiving 
the information required by the proposal, at least with respect to 
mutual funds, it may not be in the chart format, or at the times, 
required by proposal. There is programming that will be required, and 
coordination between plans, recordkeepers, and investment providers, 
which our members inform us would be impossible to complete by January 
1, 2009. If the Department is able to finalize and publish the rule by 
the end of 2008, plans likely will be able to comply within a year, 
provided the Department does not substantially increase the burdens and 
disclosures of the proposal.
    It is unclear whether the Department expects plans to provide the 
enrollment disclosure to all existing participants on the rule's 
effective date. This would be very difficult, since it would require 
that the industry create disclosures that would go out to millions of 
plan participants simultaneously. The Department should clarify that 
plans can provide to existing participants the annual disclosure within 
1 year of the regulation's effective date. Moreover, to avoid piece 
meal compliance, the Department should require that plans come into 
compliance for new participants, and for quarterly statements, no later 
than when the plan provides its first annual update for the first plan 
year beginning on or after January 1, 2009.
  e. while we agree that the proposal will have significant economic 
   benefits, we believe they will result from lower search costs and 
                        better asset allocation
    In analyzing the rule's likely costs and benefits, the Department 
states that plan participants will benefit because they will be able to 
make better investment decisions with lower search costs. We agree. The 
Department estimates that the benefits over a 10-year period (in 
today's dollars) could be $6.9 billion to $8 billion. These estimates 
seem plausible. However, we believe that these estimated benefits will 
stem in significant part from participants being better equipped to 
engage in knowledgeable asset allocation rather than an assumed 
reduction in fees.
    In the Department's analysis, benefits arise from two sources. 
First, plan participants will spend less time searching for information 
about their funds. This source accounts for roughly two-thirds of the 
estimated benefits. The methodology on which this estimate is based 
appears reasonable and could, if anything, be conservative.\32\
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    \32\ For example, to estimate the benefits from plan participants 
spending less time searching for information about their plans, the 
Department assumes that the hourly value of plan participants' leisure 
time is $31.3 per hour. This is based on an hourly wage rate of $35 for 
private sector workers participating in a pension plan, which is then 
reduced by 10 percent to adjust for the possibility that the 
opportunity cost of leisure may be less than observed wage rates for 
individuals. This 10 percent downward adjustment is based on a study by 
P. Feather and W.D. Shaw, ``Estimating the Cost of Leisure Time for 
Recreation Demand Models,'' Journal of Environmental Economics and 
Management, 38(1), July 1999. It is possible that the Department relies 
on this finding in order to be conservative, which in our view is a 
sensible approach. However, the estimates in the Feather and Shaw paper 
are highly uncertain, are based on a small sample of individuals living 
in four States (Indiana, Nebraska, Pennsylvania, and Washington), and 
costs that individuals attach to a particular kind of recreation. In 
short, it is quite possible that an opportunity cost of leisure at $35 
per hour for private sector workers is perfectly appropriate. If so, 
the Department underestimates by 10 percent the benefits of reduced 
search costs by plan participants.
---------------------------------------------------------------------------
    Second, the Department assumes that plan participants will benefit 
from reductions in the fees that plan participants incur through their 
401(k) plans. The Department bases this on its interpretation of 
academic literature as suggesting that 401(k) plan participants pay 
fees that are on average higher than necessary by 11.3 basis points per 
year. We believe that this assumption is based on a misreading of the 
literature cited, misinterpretation of the statistics presented, and 
may have failed to recognize empirical difficulties in some of those 
studies (see attached appendix).
    We agree that better information, or information presented in a 
more understandable way for all investment products offered to 
participants, may result in some participants incurring lower 
investment fees. For example, participants now will be able to compare 
fees and expenses of all pooled investment products offered in the 
plan, while previously there was no requirement that participants 
receive information on annual operating expenses for products other 
than registered investment companies. Participants whose plans offer 
more than one investment option in a particular asset class may choose 
the lower cost option. But we know of no evidence that would allow one 
to conclude that 401(k) plan participants are systematically overpaying 
for the investments and services they receive.
    Nevertheless, as noted, we believe that the Department's estimated 
benefits are plausible. Along with fee information, the proposal would 
provide participants with information on the investment type (e.g., 
large cap, international equity), the risks of the investments, and the 
historical return of each designated investment option. This 
information will assist plan participants to make better investment 
decisions. Research shows that investments with equity exposure make a 
positive difference in generating retirement savings.\33\ For those 
plan participants who may be too conservatively invested given their 
age and risk profile, the proposed disclosure could prompt them to re-
allocate their portfolios. Previous analysis conducted by the Institute 
shows that the majority of investors who have some exposure to equities 
will have accumulated more retirement assets at retirement than those 
with no exposure to equities.\34\
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    \33\ See S. Holden and J. VanDerhei (2005) ``The Influence of 
Automatic Enrollment, Catch-Up, and IRA Contributions on 401(k) 
Accumulations at Retirement,'' ICI Perspective, Vol. 11, No. 2 and EBRI 
Issue Brief, No. 283, Washington, DC: Investment Company Institute and 
Employee Benefit Research Institute, July 2005.
    \34\ See letter from Brian Reid, Chief Economist, and Elena Barone, 
Assistant Counsel, Investment Company Institute, to Susan Dudley, 
Administrator, Office of Information and Regulatory Affairs, Office of 
Management and Budget, dated May 31, 2007. For example, a worker who 
begins investing at age 30 could expect, on average, to have more than 
twice the retirement assets at retirement by investing in a lifecycle 
fund with exposure to equities than in a stable value fund. Lifecycle 
funds performed better than stable value funds in the vast majority of 
cases, even for investors who began to make contributions later in 
life, when the lifecycle fund would be more conservatively invested 
with less exposure to equities.
---------------------------------------------------------------------------
    For example, according to Morningstar, the average annual return 
over the past decade for mutual funds that specialize in large blend 
domestic stocks is 5.2 percent. In contrast, the average annual return 
over the past decade for intermediate government bond funds is 1.3 
percent. Plan participants who allocate their investments more 
efficiently based on the new disclosure are likely to reap higher 
returns over the long-term. Accordingly, we agree that the benefits of 
the disclosure regime that the Department has proposed justify its 
costs.
    The mutual fund industry is committed to meaningful ERISA 
disclosure. Over the past 30 years, the Institute has supported efforts 
to improve the quality of information provided to plans and 
participants and the way in which that information is presented. We 
strongly support the Department's proposal. If you have any questions, 
please contact the undersigned at 202-326-5826 or Michael Hadley at 
202-326-5810.
            Sincerely,
                                           Mary S. Podesta,
                                Senior Counsel, Pension Regulation.
                                 ______
                                 
                         Attachment.--Appendix
    assessing the department of labor's assumption that 401(k) plan 
          participants pay fees that are higher than necessary
    The cost/benefit analysis in the Department of Labor's rule 
proposal assumes that 401(k) plan participants ``on average pay fees 
that are higher than necessary by 11.3 basis points per year.'' We know 
of no evidence that would allow one to draw such a conclusion.
    It is unclear how the Department reaches this 11.3 basis point 
figure. The Department cites a number of academic studies and industry 
studies in support of this estimate.\35\ No such estimate appears in 
any of these studies and the Department provides no details on how it 
arrived at the 11.3 basis point estimate. Presumably, the Department 
calculated the 11.3 basis points from statistics presented in the 
studies it cites. If so, this calculation likely misinterpreted the 
statistics in those studies, misapplied some of those studies to 401(k) 
plans, and failed to recognize empirical difficulties inherent in some 
of those studies. In addition, the Department's cost/benefit study 
failed to consider evidence showing that the mutual fund industry \36\ 
is highly competitive.
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    \35\ The Department's cost/benefit analysis cites six papers in 
support of its view that plan participants pay fees that are on average 
too high by 11.3 basis points: Brad M. Barber, Terrance Odean and Lu 
Zheng, ``Out of Sight, Out of Mind, The Effects of Expenses on Mutual 
Fund Flows,'' Journal of Business, 79(6), 2095-2119, 2005; James J. 
Choi, David I. Laibson, and Bridgette Madrian, ``Why Does the Law of 
One Price Fail? An Experiment on Index Mutual Funds,'' NBER working 
paper W12261, May 2006; Deloitte Financial Advisory Services LLP, Fees 
and Revenue Sharing in Defined Contribution Plans, December 6, 2007; 
Edwin J. Elton, Martin J. Gruber, and Jeffrey A. Busse, ``Are Investors 
Rational? Choices Among Index Funds,'' NYU working paper, June 2002; 
Sarah Holden and Michael Hadley, ``The Economics of Providing 401(k) 
Plans: Services, Fees, and Expenses 2006, Fundamentals, 16(4), 
September 2007; and Jason Karceski, Miles Livingston, and Edward 
O'Neal, ``Portfolio Transactions Costs at U.S. Equity Mutual Funds,'' 
University of Florida working paper, 2004.
    \36\ The Department's analysis and cited references appear to 
relate almost exclusively to mutual fund fees, and as a result (and 
because of the Institute's expertise), our comments also relate to 
mutual fund issues. The Department's analysis is incomplete because 
mutual funds represent only about half of the assets in participant-
directed plans. We believe one benefit of the proposal is that 
participants will now be able to compare fees and expenses of all 
pooled investments.
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    While we agree that the rule the Department has proposed may result 
in some participants paying less in investment-related fees (although 
some may pay more if their asset allocation results in more equity 
exposure), there is no basis for concluding that plan participants 
systematically overpay for the investments and services they receive.
    Misinterpretation of Statistics Presented in the Literature Cited 
by the Department: The Department's cost/benefit analysis argues that 
dispersion in 401(k) fees implies market inefficiency.\37\ As evidence, 
the Department points to a study by the Institute of average costs 
incurred by participants in 401(k) plans (not ``the fees that plans 
pay'' as the Department suggests).\38\ Figure 9 in the cited Institute 
study shows that the bulk (77 percent) of the 401(k) plan assets 
invested in stock mutual funds are invested in funds with expense 
ratios of less than 1 percent.\39\ The remainder (23 percent) is 
invested in stock funds with expense ratios of 1 percent or more.
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    \37\ There is a ``wide dispersion of fees paid in 401(k) plans. As 
supported by a report of the Investment Company Institute, the fees 
that plans pay vary over a wide range. According to their study, 23 
percent of 401(k) stock mutual fund assets are in funds with expense 
ratios of less than 50 basis points, while an equal amount are in funds 
with an expense ratio of over 100 basis points. Some of this variation 
could be explained by varying amounts of assets in plans and their 
accompanying economies of scale. In addition, some plans might offer 
more, or more expensive, plan features. The Department believes, 
however, that a significant portion of the variation in plan fees is 
due to market inefficiencies.'' 73 Fed. Reg. at 43020.
    \38\ See Sarah Holden and Michael Hadley, ``The Economics of 
Providing 401(k) Plans: Services, Fees, and Expenses, 2006,'' 
Fundamentals, Vol. 16, No. 4, September 2007 (hereinafter Holden and 
Hadley), available at http://www.ici.org/pdf/fm-v15n7.pdf.
    \39\ See Holden and Hadley, Figure 9, page 13.
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    These percentages, however, say little, if anything, about market 
efficiency or whether plan participants overpay or underpay for the 
services they receive. The percentages are driven largely by the broad 
asset allocation decisions that plan participants make, not by whether 
plan participants pay too much or too little for a given type of fund. 
For example, nearly half of the 23 percent of 401(k) plan assets that 
are invested in stock funds with expense ratios of 1 percent or more 
are invested in international equity funds. International equity funds 
tend to be more costly to manage and therefore have higher expense 
ratios than domestic equity funds (especially large-cap domestic equity 
funds).\40\ Plan participants who choose to invest in a mix of domestic 
equity and international funds will incur higher fees than participants 
who invest only in domestic equity funds, but they also expect to earn 
higher returns.
---------------------------------------------------------------------------
    \40\ As evidence, see Figure 8 in Holden and Hadley, which shows 
that in 2006 the average expense ratio incurred by 401(k) plan 
participants for investing in foreign stock funds was 97 basis points, 
compared to 70 basis points incurred for investing in domestic stock 
funds.
---------------------------------------------------------------------------
    Dispersion in 401(k) fees can also reflect differences in plan 
services or characteristics, differences in employer subsidization of 
plans, and differences in arrangements for how plan participants and 
employers defray plan administrative costs. For example, as the ICI 
study discusses, the costs of running a 401(k) plan generally are 
shared by plan sponsors and participants and these arrangements can 
vary widely. Many employers voluntarily cover some or all of plan-
related costs that plan participants would otherwise incur. Thus, an 
employer's decision to pay a portion of plan costs can have a 
significant effect on the 401(k) plan fees charged to plan 
participants. Generally, when more plan costs are subsidized by 
employers, plan participants incur lower fees.\41\
---------------------------------------------------------------------------
    \41\ See, for example, Figure 4 in Holden and Hadley, which shows 
that about 40 percent of plan sponsors pay some or all 401(k) 
recordkeeping and administrative costs.
---------------------------------------------------------------------------
    Literature Cited Inapplicable to 401(k) Plans: The Department 
states that a ``review of the relevant literature suggests that plan 
participants, on average, pay fees that are higher than necessary by 
11.3 basis points per year.'' In support, the Department references six 
studies. Only two of these studies, those by the ICI and Deloitte 
Financial Advisory Services LLP, relate to 401(k) plans. The ICI and 
Deloitte studies provide evidence on the level of fees that plan 
participants pay, not whether they overpay or underpay for services 
received. To judge from these studies whether plan participants pay too 
much or too little, one would have to determine the ``right'' level of 
fees and services. Neither study does this, nor is it obvious how one 
would go about determining such a level.
    The remaining four studies consider neither 401(k) fees nor the 
behavior of 401(k) plan investors. Two of the studies consider choices 
made by load fund investors.\42\ A third study compares the fees 
charged by load and no-load S&P 500 index funds.\43\ Since 401(k) plan 
investors do not generally incur load fees, these three studies would 
appear to be irrelevant. The fourth study examines brokerage fees 
incurred by equity mutual funds.
---------------------------------------------------------------------------
    \42\ Brad M. Barber, Terrance Odean and Lu Zheng, ``Out of Sight, 
Out of Mind, The Effects of Expenses on Mutual Fund Flows,'' Journal of 
Business, 79(6), 2095-2119, 2005; James J. Choi, David I. Laibson, and 
Bridgette Madrian, ``Why Does the Law of One Price Fail? An Experiment 
on Index Mutual Funds,'' NBER working paper W12261, May 2006.
    \43\ Edwin J. Elton, Martin J. Gruber, and Jeffrey A. Busse, ``Are 
Investors Rational? Choices Among Index Funds,'' NYU working paper, 
June 2002.
---------------------------------------------------------------------------
    Empirical Difficulties with the Studies Cited by the Department: 
Putting aside the relevance of the studies cited by the Department, 
some of these studies have empirical issues that challenge the validity 
of their conclusions generally.
    For example, the Department cites a study by Elton, Gruber, and 
Busse (2002) on the expenses of S&P 500 funds.\44\ That study claims, 
on the basis of the expense ratios of S&P 500 funds available in the 
marketplace, that investors make irrational choices when selecting 
mutual funds. The ICI has previously disputed that claim,\45\ showing 
that: (a) S&P 500 index funds are commodities in that they have 
essentially identical portfolios; (b) these funds nevertheless differ 
from one another in many respects; and (c) nearly all of the dispersion 
in the expense ratios of S&P 500 funds is explained by fund 
characteristics (such as fund size and investors' average account 
balances) rather than by market inefficiency or investor irrationality.
---------------------------------------------------------------------------
    \44\ Id.
    \45\ See Sean Collins, Investment Company Institute, ``Are S&P 500 
Index Mutual Funds Commodities,'' Perspective, Vol. 11, No. 3, August 
2005.
---------------------------------------------------------------------------
    In addition, Elton, Gruber, and Busse (2002) claim that a ``large 
amount of new cash flow goes to the poorest-performing [S&P 500 index] 
funds.'' \46\ That is incorrect: over the 10-year period 1998 to 2007, 
about 85 percent of the net new cash flowing to S&P 500 index funds 
went to the least costly funds, those with expense ratios of 20 basis 
points or less.\47\ Elton, Gruber, and Busse (2002) appear to reach 
this inappropriate conclusion because they analyze flows scaled by 
assets rather than dollar flows. As a result, in their study, very 
small funds can have a disproportionate influence.
---------------------------------------------------------------------------
    \46\ Edwin J. Elton, Martin J. Gruber, and Jeffrey A. Busse, ``Are 
Investors Rational? Choices Among Index Funds,'' NYU working paper, 
June 2002, page 25.
    \47\ Investment Company Institute, 2008 Investment Company 
Factbook, 48th edition, page 65.
---------------------------------------------------------------------------
    In addition, the paper by Barber, Odean, and Zheng (2005) is 
subject to alternative interpretations. Barber, Odean, and Zheng (2005) 
claim to have found that ``[i]investors are more sensitive to salient 
in-your-face fees, like front-end loads and commissions, than [fund] 
operating expenses.'' One statistic that Barber, Odean, and Zheng 
(2005) provide in support is that repeat buyers of front-end load funds 
tend to pay lower loads on subsequent purchases than on initial 
purchases, while repeat purchasers of all funds tend to pay nearly 
identical expense ratios on initial and subsequent purchase. Our view 
is that this says little, if anything, about whether investors are 
sensitive to front-end loads and fund expense ratios. Instead, it 
simply illustrates how front-end load funds are priced: front-end load 
funds typically offer discounts on load fees when the cumulative dollar 
value of shares purchased exceeds a given dollar amount.\48\
---------------------------------------------------------------------------
    \48\ Thus, for example, an investor who initially invests $25,000 
and pays a front-load of 5.25 percent might expect to pay a front-load 
of just 3.00 percent on a subsequent purchase of $25,000 in the same 
front-end load fund.
---------------------------------------------------------------------------
    Another issue is that some of the studies cited by the Department 
rely on samples that are representative of neither 401(k) plan 
participants, nor mutual fund investors in general. One of the 
studies--Barber, Odean, and Zheng (2005)--relies on a sample of load 
fund investors provided by a single brokerage firm. Another study cited 
by the Department--the study by Choi, Laibson, and Madrian (2006) 
\49\--relies on a survey that asks a relatively small number of 
individuals how they would invest in load funds, not how they do 
invest. It is unclear whether the surveyed individuals are 401(k) plan 
participants, whether they have any mutual fund investments, or any 
investments at all.
---------------------------------------------------------------------------
    \49\ James J. Choi, David I. Laibson, and Bridgette Madrian, ``Why 
Does the Law of One Price Fail? An Experiment on Index Mutual Funds,'' 
NBER working paper W12261, May 2006.
---------------------------------------------------------------------------
    The Mutual Fund Market is Highly Competitive: Finally, the 
Department failed to cite studies indicating that the mutual fund 
industry is highly competitive. The textbook definition of a 
competitive industry is one in which there are many firms, none of 
which has a dominant market share. Firms may freely enter or exit the 
industry, and consumers are free to vote with their feet. In a 
competitive industry, firms cannot overcharge and consumers do not 
``overpay.''
    The mutual fund industry is ``a classic, competitively structured 
industry, with hundreds of competing firms offering thousands of 
products, low barriers to entry . . . and low concentration.'' \50\ 
About 600 advisers manage mutual fund assets in the United States. 
Competition has prevented any one firm from dominating the market. For 
example, of the largest 25 fund complexes in 1985, only 13 remained in 
this top group in 2007.\51\ Other measures also indicate that the fund 
market is competitive. In 2007, for instance, the industry had a 
Herfindahl index (a standard measure of industry concentration) of 440; 
index numbers below 1,000 indicate that an industry is unconcentrated. 
In addition, competition in the fund industry is fostered by low 
barriers to entry. Indeed, the number of mutual fund advisers nearly 
tripled from 1984 to 2004.\52\
---------------------------------------------------------------------------
    \50\ John C. Coates IV and R. Glenn Hubbard, ``Competition and 
Shareholder Fees in the Mutual Fund Industry: Evidence and Implications 
for Policy,'' American Enterprise Institute, working paper #127, June 
2006, page i.
    \51\ See Investment Company Institute, 2008 Investment Company 
Factbook, 48th edition, page 21.
    \52\ See Table 1 in John C. Coates IV and R. Glenn Hubbard, 
``Competition and Shareholder Fees in the Mutual Fund Industry: 
Evidence and Implications for Policy,'' American Enterprise Institute, 
working paper #127, June 2006.
---------------------------------------------------------------------------
    Fund investors are mobile: they can take their investments 
elsewhere if they feel a given fund's fees are too high. To be sure, in 
a typical 401(k) plan, participants are limited to the menu of 
investments selected by plan fiduciaries. But plan fiduciaries can and 
do alter plan menus in order to replace poorly performing funds \53\ 
and plan participants can select from among funds in a plan's menu. 
There is considerable evidence that 401(k) plan participants invest in 
low cost funds. For example, although the fees of S&P 500 index funds 
exhibit considerable dispersion, nearly all (more than 90 percent) of 
401(k) plan assets invested in S&P 500 funds are in the least costly of 
such funds (those with expense ratios of 20 basis points or less).
---------------------------------------------------------------------------
    \53\ See Deloitte Consulting, 401(k) Benchmarking Survey, 2008 
Edition, page 22. The report finds that 95 percent of responding plan 
sponsors evaluate and benchmark their plan's investments at least 
annually, and that 64 percent have replaced a fund due to poor 
performance in the past 2 years.
---------------------------------------------------------------------------
    As we state in our letter, we agree that the Department's proposed 
disclosure regime will have significant benefits. But there is no basis 
for concluding that plan participants systematically overpay for the 
investments and services they receive in their 401(k) plans.
                                 ______
                                 
                                              AARP,
                                      Washington, DC 20049,
                                                September 16, 2008.
Hon. Edward M. Kennedy,
Committee on Health, Education, Labor, and Pensions,
U.S. Senate,
Washington, DC 20510.

Hon. Michael B. Enzi,
Committee on Health, Education, Labor, and Pensions,
U.S. Senate,
Washington, DC 20510.
    Dear Mr. Chairman: AARP commends you and the other members of the 
committee for holding this timely hearing on the need for 
comprehensive, informative and timely disclosure of fee and expense 
information to defined contribution plan participants. Thank you for 
providing us with this opportunity to submit this statement and the 
attached reports for the record of this hearing. AARP also appreciates 
the opportunity to comment on S. 2473, the Defined Contribution Fee 
Disclosure Act of 2007 introduced by Senator Tom Harkin. AARP supports 
the enactment of S. 2473 and urges the members of the committee to 
approve this measure as soon as possible.
    With 40 million members, AARP is the largest organization 
representing the interests of Americans age 50 and older and their 
families. About half of AARP members are working either full-time or 
part-time. All workers need access to a retirement plan that 
supplements Social Security's solid foundation. For those who 
participate in a defined contribution plan, such as a 401(k) plan, 
better and easy to understand information is essential to help them 
make prudent investment decisions.
    There were approximately 50 million active participants in 401(k) 
plans in 2006, and overall, 401(k) plans held more than $2.7 trillion 
in assets. These plans have become the dominant employer-based pension 
vehicle. The participants in these plans have a need and a right to 
receive timely, accurate, and informative disclosures from their 401(k) 
plans to help them prepare for a financially secure retirement. The fee 
information participants currently receive about their plan and 
investment options is often scattered among several sources, difficult 
to access, or nonexistent. Even if fee information is accessible, plan 
investment and fee information is not always presented in a way that is 
meaningful to participants. This must change because fees reduce the 
level of assets available for retirement.
    The Government Accountability Office (GAO) estimated that $20,000 
left in a 401(k) account that had a 1 percentage point higher fee for 
20 years would result in an over 17 percent reduction--over $10,000--in 
the account balance. We estimate that over a 30-year period, the 
account would be about 25 percent less. Even a difference of only half 
a percentage point--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 commissioned a report in 2007 to determine the extent to which 
401(k) participants were aware of fees associated with their accounts 
and whether they knew how much they actually were paying in fees. The 
report revealed participants' lack of knowledge about fees as well as 
their desire for a better understanding of fees. In response to these 
findings, the report suggested that information about plan fees be 
distributed regularly and in plain English, including a chart or graph 
that depicts the effect that the total annual fees and expenses can 
have on a participant's account balance. I have attached a copy of this 
report, 401(k) Participants' Awareness and Understanding of Fees,\54\ 
July 2007, for the consideration of the members of the committee.
---------------------------------------------------------------------------
    \54\ The report referred to may be located at http://
assets.aarp.org/rgcenter/econ/401k_fees 
.pdf.
---------------------------------------------------------------------------
    AARP commissioned a second study in 2008 to gather information and 
evaluate a model fee disclosure form developed by the Department of 
Labor and an alternative disclosure form developed by AARP. I have 
attached a copy of this report entitled, ``Comparison of 401(k) 
Participants Understanding of Model Fee Disclosure Forms Developed by 
the Department of Labor and AARP.'' \55\ The report suggests that a 
disclosure form that contains participant-specific information and 
actual dollar figures may improve participants' comprehension of the 
form. The report also suggests modifications in the DOL form that would 
make it more helpful to 401(k) plan participants. A copy of this report 
was provided to the Department of Labor as part of our comments on the 
Department's proposed rule on fee disclosure for participant-directed 
individual account plans.
---------------------------------------------------------------------------
    \55\ The report referred to may be located at http://
assets.aarp.org/rgcenter/econ/fee_disclosure 
.pdf.
---------------------------------------------------------------------------
    AARP's Public Policy Institute has just published the attached 
paper entitled, ``Determining Whether 401(k) Plan Fees are Reasonable: 
Are Disclosure Requirements Adequate? '' \56\ The paper explains how 
excessive fees on 401(k) plans can drastically reduce the size of a 
retirement nest egg and documents the unsatisfactory state of fee 
disclosure and the lack of knowledge about fees among plan 
participants. The paper argues convincingly for a reform of the current 
regulatory framework to provide participants with the clear and basic 
information necessary for them to make better-informed investment 
decisions.
---------------------------------------------------------------------------
    \56\ The report referred to may be located at http://
assets.aarp.org/rgcenter/econ/i8_fees.pdf.
---------------------------------------------------------------------------
    AARP supports the enactment of S. 2473. The bill would establish a 
solid framework for providing timely information about fees and 
expenses to plan participants in a format that is easy for them to 
understand. The bill would require plan sponsors to provide a complete 
picture of investment options to participants--including risk, fees, 
and historic returns, as well as certain basic information to help 
investors better understand their investment options and whether those 
investments will provide long term retirement security on their own or 
if greater diversification is needed. The comprehensive annual benefit 
statement required by S. 2473 would provide a more complete picture of 
a participant's 401(k) status than available under current law. All of 
the information that a participant needs would be available in a single 
disclosure form, rather than requiring a participant to piece together 
information from several different documents.
    AARP commends you and the committee for your commitment to preserve 
and enhance retirement security. We look forward to working with you 
and the other members of your committee to enact legislation as soon as 
possible that would require defined contribution plans to disclose 
comprehensive, informative and timely information about fees and 
expenses to plan participants.
    If you have any questions or need additional information, please 
feel free to call Cristina Martin Firvida, Director of Economic 
Security in Government Relations at 202-434-6194.
            Sincerely,
                                           David P. Sloane,
                                            Senior Vice President, 
                                 Government Relations and Advocacy.

    [Whereupon, at 11:23 a.m., the hearing was adjourned.]