[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
 H.R. 1984, 401(k) FAIR DISCLOSURE FOR RETIREMENT SECURITY ACT OF 2009 

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

                                HEARING

                               before the

                        SUBCOMMITTEE ON HEALTH,
                     EMPLOYMENT, LABOR AND PENSIONS

                              COMMITTEE ON
                          EDUCATION AND LABOR

                     U.S. House of Representatives

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

             HEARING HELD IN WASHINGTON, DC, APRIL 22, 2009

                               __________

                           Serial No. 111-14

                               __________

      Printed for the use of the Committee on Education and Labor


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                    COMMITTEE ON EDUCATION AND LABOR

                  GEORGE MILLER, California, Chairman

Dale E. Kildee, Michigan, Vice       Howard P. ``Buck'' McKeon, 
    Chairman                             California,
Donald M. Payne, New Jersey            Senior Republican Member
Robert E. Andrews, New Jersey        Thomas E. Petri, Wisconsin
Robert C. ``Bobby'' Scott, Virginia  Peter Hoekstra, Michigan
Lynn C. Woolsey, California          Michael N. Castle, Delaware
Ruben Hinojosa, Texas                Mark E. Souder, Indiana
Carolyn McCarthy, New York           Vernon J. Ehlers, Michigan
John F. Tierney, Massachusetts       Judy Biggert, Illinois
Dennis J. Kucinich, Ohio             Todd Russell Platts, Pennsylvania
David Wu, Oregon                     Joe Wilson, South Carolina
Rush D. Holt, New Jersey             John Kline, Minnesota
Susan A. Davis, California           Cathy McMorris Rodgers, Washington
Raul M. Grijalva, Arizona            Tom Price, Georgia
Timothy H. Bishop, New York          Rob Bishop, Utah
Joe Sestak, Pennsylvania             Brett Guthrie, Kentucky
David Loebsack, Iowa                 Bill Cassidy, Louisiana
Mazie Hirono, Hawaii                 Tom McClintock, California
Jason Altmire, Pennsylvania          Duncan Hunter, California
Phil Hare, Illinois                  David P. Roe, Tennessee
Yvette D. Clarke, New York           Glenn Thompson, Pennsylvania
Joe Courtney, Connecticut
Carol Shea-Porter, New Hampshire
Marcia L. Fudge, Ohio
Jared Polis, Colorado
Paul Tonko, New York
Pedro R. Pierluisi, Puerto Rico
Gregorio Sablan, Northern Mariana 
    Islands
Dina Titus, Nevada
[Vacant]

                     Mark Zuckerman, Staff Director
                Sally Stroup, Republican Staff Director

         SUBCOMMITTEE ON HEALTH, EMPLOYMENT, LABOR AND PENSIONS

                ROBERT E. ANDREWS, New Jersey, Chairman

David Wu, Oregon                     John Kline, Minnesota,
Phil Hare, Illinois                    Ranking Minority Member
John F. Tierney, Massachusetts       Joe Wilson, South Carolina
Dennis J. Kucinich, Ohio             Cathy McMorris Rodgers, Washington
Marcia L. Fudge, Ohio                Tom Price, Georgia
Dale E. Kildee, Michigan             Brett Guthrie, Kentucky
Carolyn McCarthy, New York           Tom McClintock, California
Rush D. Holt, New Jersey             Duncan Hunter, California
Joe Sestak, Pennsylvania             David P. Roe, Tennessee
David Loebsack, Iowa
Yvette D. Clarke, New York
Joe Courtney, Connecticut



























                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing held on April 22, 2009...................................     1

Statement of Members:
    Andrews, Hon. Robert E., Chairman, Subcommittee on Health, 
      Employment, Labor and Pensions.............................     1
        Prepared statement of....................................     3
        Additional submissions:
            Letter, dated April 22, 2009, from Hon. Hilda L. 
              Solis, Secretary, U.S. Department of Labor.........     8
            Letter, dated April 22, 2009, from AARP..............    70
    Kline, Hon. John, Senior Republican Member, Subcommittee on 
      Health, Employment, Labor and Pensions.....................     4
        Prepared statement of....................................     5
    McKeon, Hon. Howard P. ``Buck,'' Senior Republican Member, 
      Committee on Education and Labor...........................     8
        Prepared statement of....................................    10
        Questions for the record.................................    77
    Miller, Hon. George, Chairman, Committee on Education and 
      Labor......................................................     6
        Submissions for the record:
            Letter, dated April 24, 2009, from the American 
              Society of Pension Professionals & Actuaries 
              (ASPPA)............................................    72
            Prepared statement of the Investment Company 
              Institute (ICI)....................................    73

Statement of Witnesses:
    Borland, Alison, retirement strategy leader, Hewitt 
      Associates, LLC............................................    21
        Prepared statement of....................................    23
    Bullard, Mercer E., founder, Fund Democracy and assistant 
      professor of law, University of Mississippi................    12
        Prepared statement of....................................    15
    Chambers, Robert G., on behalf of the American Benefits 
      Council....................................................    38
        Prepared statement of....................................    40
    Goldbrum, Larry H., Esq., general counsel, the SPARK 
      Institute..................................................    42
        Prepared statement of....................................    44
        Additional submissions:
            ``The Case for Employer Sponsored Retirement Plans: 
              Benefits and Accomplishments,'' Internet address to    47
            ``The Case for Employer Sponsored Retirement Plans: 
              Coverage, Participation and Retirement Security,'' 
              Internet address to................................    47
            ``The Case for Employer Sponsored Retirement Plans: 
              Fees and Expenses,'' Internet address to...........    48
            Memo, dated May 18, 2009, ``Suggested Alternative 
              Approaches and Concepts for 401(k) Plans Fee 
              Transparency''.....................................    48
    Mitchem, Kristi, managing director, head of U.S. Defined 
      Contribution, Barclays Global Investors, N.A...............    15
        Prepared statement of....................................    17
    Onorato, Julian, CEO, ExpertPlan, Inc., on behalf of CIKR, 
      ASPPA and NAIRPA...........................................    28
        Prepared statement of....................................    30


 H.R. 1984, 401(k) FAIR DISCLOSURE FOR RETIREMENT SECURITY ACT OF 2009

                              ----------                              


                       Wednesday, April 22, 2009

                     U.S. House of Representatives

         Subcommittee on Health, Employment, Labor and Pensions

                    Committee on Education and Labor

                             Washington, DC

                              ----------                              

    The subcommittee met, pursuant to call, at 10:30 a.m., in 
room 2175, Rayburn House Office Building, Hon. Robert Andrews 
[chairman of the subcommittee] presiding.
    Present: Representatives Andrews, Hare, Tierney, Kucinich, 
Fudge, Holt, Kline, Guthrie, and Roe.
    Also present: Representatives Miller and McKeon.
    Staff present: Aaron Albright, Press Secretary; Tylease 
Alli, Hearing Clerk; Jody Calemine, General Counsel; Fran-
Victoria Cox, Staff Attorney; David Hartzler, Systems 
Administrator; Ryan Holden, Senior Investigator, Oversight; 
Therese Leung, Labor Policy Advisor; Alex Nock, Deputy Staff 
Director; Joe Novotny, Chief Clerk; Megan O'Reilly, Labor 
Counsel; Rachel Racusen, Communications Director; Meredith 
Regine, Junior Legislative Associate, Labor; Michele Varnhagen, 
Labor Policy Director; Mark Zuckerman, Staff Director; Robert 
Borden, Minority General Counsel; Cameron Coursen, Minority 
Assistant Communications Director; Ed Gilroy, Minority Director 
of Workforce Policy; Rob Gregg, Minority Senior Legislative 
Assistant; Alexa Marrero, Minority Communications Director; Jim 
Paretti, Minority Workforce Policy Counsel; and Linda Stevens, 
Minority Chief Clerk/Assistant to the General Counsel.
    Chairman Andrews [presiding]. Good morning ladies and 
gentlemen. The subcommittee will come to order. We would like 
to thank you for your participation here today. We are honored 
to have our chairman, George Miller, with us; our senior 
Republican member, Buck McKeon, with us. And you will be 
hearing from each of those two leaders in a moment.
    In the news report which discussed the chairman's efforts 
to provide more disclosure to American investors and 
pensioners, an industry representative said that the 401(k) 
system is about ``freedom and choice and personal 
responsibility.''
    We agree completely, which is why the legislation that the 
chairman has introduced, and that I support, provides people 
with the basis to make an intelligent choice about a decision 
so important to their future.
    It is common to the American experience, that when you buy 
something, the person who sells it to you tells you what gets 
built into the price; tells you what components make up the 
money that you are paying.
    It is kind of sadly ironic that, with an asset as important 
as someone's retirement account--and for many Americans, their 
defined-contribution account is their only retirement account--
that the law does not presently require that investors and 
workers be given the right to know what they are being charged 
for.
    I think most people would be astonished to hear this--that 
if they went to the people who are managing their retirement 
savings and said, ``I notice that you took $500 out of my 
$50,000 balance last year,''--or ``$750 out of my $50,000 
balance last year''--``What did I get for it?''--that, under 
the present law, they don't have the right to know that.
    The bill that the chairman has introduced changes that. And 
I believe it changes it in an effective and useful way for 
employers, and for employees. The consequences of not being 
able to make an intelligent choice about one's self-directed 
account are rather extreme. Research done by the General 
Accountability Office concluded that a 100-basis-point 
difference--that is to say the difference between a 1.5 percent 
fee and a 0.5 percent fee--over the course of someone's 
lifetime, could make a 20 percent difference in how much is in 
their retirement account.
    Let me say that again. The person who pays a fee of 0.5 
percent, versus a person who pays a fee of 1.5 percent--when 
she retires, may have 20 percent more--the person paying the 
0.5 percent may have 20 percent more than the person who paid 
1.5 percent.
    Now, in some cases, you should pay the point and a half, 
because it is the right thing for you. But the purpose of this 
bill, and a related discussion that the subcommittee has been 
having about qualified independent investment advice--a subject 
that we will be revisiting--the purpose of this bill is to be 
sure that the important material facts, the critical facts, 
that are necessary for someone to make an intelligent choice 
are in front of that person.
    The legislation accomplishes three tasks. It requires 
important material disclosure to both employers and employees 
about what the fees are, and what they are going for. It 
requires the disclosure of any conflicts of interest that may 
exist between the person collecting the fee, and any of the 
firms that are managing the money to which the accounts are 
given. And, finally, it requires that all Americans who are in 
defined-contribution plans be given the opportunity--
practically requires this--but be given the opportunity to 
choose a low-cost index-fund type option, as opposed to an 
actively managed option.
    No one has to do it. No one is required to do anything. But 
it says that people who wait on tables or teach school or drive 
buses or build houses for a living ought to have the same range 
of choices that wealthier people do, when it comes to how their 
money is managed.
    I think this is eminently reasonable, eminently workable 
and eminently fair. And so when those who believe in this 
system--and I do--say that the 401(k) system is about freedom 
and choice and personal responsibility, we agree completely. 
People should have the freedom to choose what is best for them. 
They should have qualified independent investment advice so 
they can evaluate what is best for them.
    They ought to know the material facts about what is being 
taken out of their account, and why, and by whom, so they can 
make the best choice among the options in front of them. And 
then, yes, they will take personal responsibility for the 
consequences of their choice.
    So the bill that is before the subcommittee, and will--
hopefully before the full committee shortly--I think furthers 
that agenda. We look forward to hearing from the witnesses this 
morning, and from our colleagues on the committee, as we 
explore these issues.
    By agreement, would the ranking member of the 
subcommittee--we are going to have statements from the full-
committee chairperson and ranking member as well. At this 
point, I would like to yield to whichever of my friends on the 
Republican side would like to speak first.
    Would that be you, John?
    [The statement of Mr. Andrews follows:]

Prepared Statement of Hon. Robert E. Andrews, Chairman, Subcommittee on 
                 Health, Employment, Labor and Pensions

    Good morning and welcome to the Health, Employment, Labor and 
Pensions Subcommittee hearing on the 401(k) Fair Disclosure for 
Retirement Security Act of 2009 (HR 1984), which is authored by my good 
friend and Chairman of the Full Committee, Congressman George Miller.
    Thanks to his leadership, American workers across the country will 
become more aware and better informed about what they should be getting 
out of their 401(k). I am honored to be an original co-sponsor of the 
bill as well as to working closely with the Chairman to craft what he 
and I strongly believe to be one of the most important measures before 
us today that will help restore worker trust and confidence in our 
retirement system.
    American workers across the nation have suffered tremendously due 
to last year's economic downturn; particularly, Americans who were laid 
off lost a significant amount of their retirement savings or both. At 
the end of 2008, a total of 2.8 million American jobs were lost and 
retirement accounts were reduced by $2 trillion dollars overall, 
shattering the financial goals of many hard-working Americans.
    Those most devastated by the market downturn were those workers 
nearing retirement who lost close to 30 or more percent of their 401(k) 
account. Disturbed over the market's unexpected effect over their 
retirement savings, workers who were impacted the most, as well as many 
others are further troubled by the lack of transparency of their 401(k) 
system. When a worker spends most of their lifetime investing their 
hard-earned dollars into an account for their retirement and later 
learn that they were being charged fees that contributed to a 
significant loss of their nest egg, they understandably lose trust and 
confidence the system. The lack of transparency in the 401(k) system is 
unacceptable and must end now.
    The Members of the HELP Subcommittee have before them today a bill 
that improves the 401(k) system and protects the worker by requiring 
transparency and disclosure of fees to the employers and employees. 
Under our current 401(k) system, there are a numerous instances where 
employers are not informed, prior to entering into an agreement with 
financial service provider, about the true cost of certain fees and 
services included in their ``bundled service arrangement'' plan. 
Equally important, HR 1984 requires disclosure of fees to workers that 
is both clear and understandable.
    When Jack Bogle, founder of Vanguard, testified before the full 
committee in February of this year, he made a compelling argument in 
favor of providing every worker with the option to invest his or her 
retirement savings in an index fund. Under HR 1984, we provide a strong 
incentive to employers to ensure an index fund option is offered to 
their employers.
    Chairman Miller and I strongly believe the 401(k) Fair Disclosure 
for Retirement Security Act of 2009 moves us in the right direction to 
improve the 401(k) system. You will hear from several of the witnesses 
on our panel today, who work on a day-to-day basis in the 401(k) world, 
echo our position.
    Another important solution, which I will address further during the 
hearing, is restoring the conflicted investment advice prohibition 
under ERISA, while allowing workers to receive investment advise that 
is independent and in the interest of their retirement goals.
    I look forward to hearing all the witness testimony and welcome you 
to the HELP subcommittee.
                                 ______
                                 
    Mr. Kline. Thank you, Mr. Chairman.
    Good morning to you all.
    I want to welcome the panel of distinguished witnesses this 
morning. Some of you have been with us before, and some of you 
are new. We are glad to have you all.
    Today, as the chairman indicated, we return to a debate 
that we started in the last Congress, specifically regarding 
the nature and transparency of fees charged to 401(k) plan 
participants, and how best to address that issue.
    The bill that we are discussing today was introduced 
yesterday. So we have not had much chance to look at it. But we 
have been assured on this side that it is the same as the bill 
was last year. Is that correct? Okay.
    That is the assumption that we are working on as we go----
    Chairman Andrews. If the gentleman would yield--my 
understanding is there are some very, very technical changes, 
like the captions. But, substantively, yes, the bill is 
identical to last year's.
    Mr. Kline. Okay. We will take that at face value, and go 
forward.
    I hope that as we go forward in the discussion today, and 
we listen to the testimony of our witnesses, and we engage in 
the discussion ourselves, that we are, in fact, guided by 
facts, and not by rhetoric. Clearly, the economy is in great 
trouble. We are in a recession. The value of people's savings, 
whether it is retirement or education, or anything that they 
have put away, has fallen dramatically.
    But I hope that we recognize that the tumbling economy is 
behind this loss in value, and not 0.5 percent or 1 percent or 
1.5 percent fee, which works out to, for most 401(k) holders, a 
medium amount of just over $300 a year. And we have had people 
who have lost thousands and tens of thousands of dollars. And, 
frankly, it is not because of fees.
    American workers are rightly concerned. And we have 
important work to do in this Congress, and in the government to 
address their concerns on how to strengthen their savings and 
give them more options. We have, for example, on our side of 
the aisle--we are introducing, today, legislation that will 
address some of those concerns, allowing people with 401(k)s to 
not be forced to withdraw their savings at 70\1/2\, and 
extending that for another couple of years--so we are not 
forcing people to withdraw savings when the market is 
perilously low.
    I think we have real issues out here. This is an important 
debate. I am look forward to hearing from the witnesses. I 
would just ask all of us to focus on the facts. We have got 
real experts here.
    And, Mr. Chairman, I ask unanimous consent that my 
statement be entered in its entirety.
    Chairman Andrews. Without objection.
    [The statement of Mr. Kline follows:]

   Prepared Statement of Hon. John Kline, Senior Republican Member, 
        Subcommittee on Health, Employment, Labor, and Pensions

    Good morning, and welcome to our distinguished panel of witnesses. 
Some of you are making a return appearance before the Committee, and we 
appreciate your efforts to continue to provide us with your expertise 
on issues of such national importance. Others are joining us for the 
first time, and we look forward to your new perspectives.
    We return today to a debate we started in the last Congress, 
specifically regarding the nature and transparency of fees charged to 
401(k) plan participants, and how best to address that issue. We have 
before us this morning a bill that was introduced yesterday--providing 
insufficient time for staff on our side--not to mention the witnesses 
before us this morning--to review in any sort of detail. Republican 
staff has been advised that the bill we are discussing is substantively 
identical to the fee disclosure legislation we voted to report out of 
this Committee in April of last year--an amended version of the bill 
originally introduced by Chairman Miller. On that point, Mr. Chairman, 
I take you and your staff at face value, and accept as a matter of 
faith that we are discussing materially the same bill that received a 
vote in Committee last year.
    As we take up this debate, let me say first that we must be guided 
this morning by facts--not rhetoric. In previous hearings, we've been 
painted a sinister picture of greedy financiers ``raiding'' employees' 
401(k) plans and robbing them blind through exorbitant pension fees.
    Mr. Chairman, I submit we stick to the data. When you run the 
numbers, an individual with an average 401(k) account balance would 
have paid a median total of pension fees of roughly $346 per year. 
Those with lower-than-average balances--such as lower-income workers--
would, obviously, pay even less. I welcome a fair debate about the 
appropriateness and transparency of pension fees--and I hope we can 
proceed today without hyperbole or fear-mongering--in either our 
language or our action.
    In the same vein, I would encourage my colleagues to avoid 
grandstanding and posturing here this morning. Specifically, I would 
hope none of us yields to the temptation to characterize the dramatic 
decline in many workers' 401(k) plans as simply an issue of ``fee 
disclosure.''
    American workers and retirees are justly upset and frightened by 
the dramatic effect the market downturn has had on retirement savings. 
But we do no one a service--indeed, we do a great disservice--to 
suggest the cataclysmic failure in our markets are no more than a 
function of so-called ``hidden'' fees or corporate raiders. The 
dramatic loss in retirement savings was not caused, nor would it have 
been avoided, by the difference of a fraction of a percent in an 
investment fee.
    Mr. Chairman, you may recall that debate on this bill last year 
generated substantial concerns from committee members on both sides of 
the aisle. I hope that as we start the process fresh this year we are 
both willing and able to work together to forge common ground on how we 
might improve pension fee disclosure under ERISA. As I said during our 
markup last year, I stand ready and willing to join you in this effort.
    Indeed, as we address our retirement system more broadly, I hope we 
explore genuine efforts to help Americans rebuild their 401(k) nest 
eggs, as packages brought forward by our Republican Leadership--
including the Savings Recovery Act, which is being introduced today--
are prepared to do. Among its provisions, our bill would enable seniors 
to keep more of their retirement savings by further suspending the 
mandatory withdrawal that requires a certain portion of retirement 
savings to be withdrawn after an individual turns 70\1/2\ or retires. 
This provision protects the investments of seniors and retirees at a 
time when the value of their accounts is low--and is just one of the 
many factors worthy of discussion as we consider how to help Americans 
rebuild their savings.
    That said, we have an excellent panel of witnesses here before us 
this morning, and we should hear from them directly. I thank the 
gentleman, and yield back my time.
                                 ______
                                 
    Chairman Andrews. I thank the gentleman from Minnesota.
    In 2006, long before the market had melted down, long 
before loss of retirement savings was an issue on the top of a 
lot of people's list, the chairman of the full committee--at 
that time, the ranking member of the full committee--had the 
foresight to ask the General Accountability Office to look at 
the issue surrounding fees in defined-contribution accounts.
    That request by Mr. Miller led to a series of reports, 
which, in turn, led to extensive hearings by our full committee 
and subcommittee, which, in turn, has led to the legislation in 
front of us today.
    So we are very honored that the chairman of our full 
committee, George Miller, is with us. And I would yield to him 
at this time.
    Mr. Miller. Thank you, Mr. Chairman, and thank you to the 
subcommittee, for holding this hearing. This is a continuation 
of an effort that, as you know, was started a couple of years 
ago, to make sure that we could keep the 401(k) safe and secure 
and sustainable, by strengthening the various aspects of the 
401(k), so that more people would participate, but they would 
participate with greater knowledge.
    As we have come through the various congressional hearings 
of this committee, we have found that the current law does not 
require disclosure of all fees levied by financial-service 
firms against the participants' accounts. And I think we will 
hear again from this panel not only a reaffirmation of that 
fact, but also some very, very good suggestions--as I read the 
testimony yesterday and today--some suggestions how even this 
bill--it is hard for me to believe it can be improved--but how 
even this bill can be improved on that--on that item--so that 
we will have a better-informed--it is one thing just to talk 
openly about choice. The choice itself is the value. But choice 
itself can be confusing if it is not accompanied with good 
information.
    And in this case, that information is very, very important 
to the retirement security of our citizens. As you pointed out, 
small differences, over a long period of time, can make a huge 
difference in terms of the resources that an individual or a 
family will have available to them for their retirement.
    You mentioned that we could see a 20 percent difference 
over the working life of that individual or that family. A 
couple of weeks ago, the founder of Vanguard, Jack Bogle, 
testified that the hidden turnover costs in many mutual funds 
could wipe out 75 percent of an individual's investments gains 
over a lifetime.
    The 401(k) account holder is the last person in the Wall 
Street food chain to get paid. As he said, ``If we can't get 
the croupiers out of this business, the participants are 
destined to lose.''
    And it is especially difficult time in this country that 
this hearing, and the previous hearings--is at a time when 
millions of Americans are out of work, struggling to make ends 
meet. The best-laid plans of families--we have all heard it 
from individuals in our districts--have gone up in smoke 
because of the financial scandals and meltdown that have taken 
place.
    And as they have seen a dramatic reduction in their 
retirement resources--we all have the anecdotal stories of 
people telling us they are going to work longer, they are going 
to go back to work, their spouse is not going to be able to 
retire, or, simply, that they now believe they will not have 
enough money for retirement. And the previous options of going 
back to work are not available to them.
    I think this is an important subject because, as we learn 
more and more about financial services in this country--there 
is more and more concern among the public.
    All of us have just returned from 2 weeks of being home in 
our districts. And the anger, the fear, is palatable for our 
constituents. I think when we understand that we see the 
manipulation of credit card interest rates without the 
knowledge or the understanding of people who are holding those 
cards--when we understand that almost half of the subprime 
loans made in California could have been prime loans, but there 
were incentives to getting higher interest rates for the 
securitization of those loans, so the subprime loans were 
issued instead.
    And we now see, again, in predatory lending, where bonuses 
are paid for higher interest rates put on the same people who 
could have had it at a lower interest rate, given their credit 
rating, and the rest of that.
    And that is to suggest that what we now need is 
transparency in the financial-services industry. And the 
401(k)s are deeply involved, because that is where they turn to 
try to build the security and the safety for their retirement.
    I believe that this legislation will provide workers with 
clear and complete information about the fees that they are 
paying. It simply requires financial-service firms to tell 
their account holders how much they charge for their services. 
The bill will also require service providers to inform 
employers of the cost that the employees will bear, and the 
potential conflicts of interest. Employers should, likewise, be 
armed with accurate data so that they can shop around.
    Next, the bill will require that in order for employers to 
receive limited liability against participant losses, that one 
low-cost index fund would be included in the menu of investment 
options. We have heard over and over again that nothing beats 
the performance fees or simplicity of the index fund. This bill 
will also strengthen the Department of Labor's oversight of 
401(k)s.
    I would hope that this bill would not be controversial. I 
think that, as we struggle in the Congress, on almost a daily 
basis, with financial services in this country, that we would 
now come to understand that transparency is the watchword. It 
is in every reform proposal, whether it is here or in Europe, 
or anywhere else in the world.
    And so that transparency, accompanied with proper 
oversight, I think, will give a better selection of choices and 
greater security and information to workers, as they join the 
401(k) savings proposal to try to provide for their retirement.
    Thank you, again, for holding this hearing.
    I look forward to the testimony of all of the witnesses. 
And I thank you for your time and your expertise that you are 
lending to the committee today.
    Chairman Andrews. Thank you, Mr. Chairman.
    Without objection, I would like to enter into the record 
a--a letter from the Secretary of Labor, Hilda Solis, with 
respect to this issue--without objection.
    [The information follows:]

                                    The Secretary of Labor,
                                    Washington, DC, April 22, 2009.
Hon. Robert E. Andrews, Chairman,
Health, Employment, Labor and Pensions Subcommittee, Committee on 
        Education and Labor, U.S. House of Representatives, Washington, 
        DC.
    Dear Chairman Andrews: Thank you for your leadership in protecting 
American workers' savings in section 401(k) plans. I commend you for 
focusing attention on this important issue by scheduling a hearing on 
the ``401(k) Fair Disclosure for Retirement Security Act of 2009'' and 
I very much look forward to
    working with you to formulate the best approach to protecting the 
hard earned retirement savings of America's workers.
    I share your belief that it is essential to provide workers with 
the information they need to make nformed investment choices and to 
provide plan fiduciaries with critical information necessary for them 
to determine that the fees that are charged in connection with their 
401(k) plans are reasonable. We want to work with you to provide 
practical solutions for workers and fiduciaries.
    While determining the optimal course will be difficult, our shared 
commitment to protecting the retirement security of all of America's 
workers will guide us. Your hearing is an important first step in 
gathering the information we will need to accomplish our common goal. 
At the same time, as you know, we are currently reexamining the 
proposed regulations affecting 401(k) plans developed during the prior 
Administration to be sure they strike the appropriate balance between 
protecting workers and requiring greater transparency and 
accountability from the service providers to 401(k) plans. We look 
forward to becoming better educated about the issues as this process 
proceeds and working with you to create a more effective and useful 
structure for disclosure of 401(k) plan fees.
    Again, I appreciate your decision to hold this hearing, and look 
forward to working with you and the members of the Committee on 
Education and Labor on issues critical to America's workers.
    The Office of Management and Budget has advised that there is no 
objection to the transmission of this letter from the standpoint of the 
Administration's program.
            Sincerely,
                                 Hilda L. Solis, Secretary,
                                          U.S. Department of Labor.
                                 ______
                                 
    Chairman Andrews. We are equally honored to have with us 
the senior Republican member of the full committee, Mr. McKeon, 
who guided this committee with such grace and skill during his 
tenure.
    Welcome, Mr. McKeon.
    Mr. McKeon. That long, long tenure.
    Chairman Andrews. All things must come to an end, huh?
    Mr. McKeon. Thank you, Mr. Chairman.
    That is what we are hoping.
    I thank the gentleman for yielding.
    We are here this morning to discuss Chairman Miller's 
legislation to change the way 401(k) retirement savings plans 
operate. Much of the focus has been on the bill's requirements 
for increased reporting and disclosure. So let me start there.
    Let me be perfectly clear: Republicans support sensible 
disclosure to make 401(k) plans more transparent and 
understandable to workers. We are approaching this issue--with 
a spirit of openness, and a hope that we can work with the 
majority to craft a proposal, or with their proposal, as 
crafted.
    Unfortunately, it seems that the drafting process ended 
before it even began. Instead, we are starting the process with 
a bill that largely mirrors the proposal that stalled last 
year, because of legitimate concerns from both sides of the 
aisle.
    I, for one, was not able to support last year's proposal 
because I saw the potential for harmful, unintended 
consequences that would limit options for workers. I hope, at 
the end of the day, with this process, to fix a 0.5 percent, or 
a 1 percent, or a 1.5 percent fee--we don't end up costing the 
workers a lot more.
    For instance, the bill's requirement that all plans offer 
an index fund is tantamount to a government seal of approval on 
a particular investment option. This could inadvertently steer 
savers in a direction that isn't best for them. The bill also 
requires the unbundling of services for the purposes of 
voluminous new reporting; this, despite the fact that experts 
have told us that unbundling could actually drive up costs for 
workers--the exact opposite outcome that we are trying to 
receive.
    I hope we can address these issues as the process moves 
forward. But I think a more open process would have allowed 
this debate before the legislation was introduced.
    I would also like to take a minute to clarify two separate 
and very serious issues facing America's workers. The fees the 
workers pay on their 401(k) accounts can significantly impact 
their long-term savings. Transparency in these fees is a real 
concern, and one that Republicans share.
    But to blame 401(k) fees for the substantial losses workers 
are seeing in their retirement accounts is to ignore the real 
culprit, a stock market that has plummeted in the face of a 
continuing recession.
    Again, this is a serious issue, and one that is deeply 
impacting Americans from all walks of life, whether they are 
new parents establishing a college fund, or workers preparing 
for retirement.
    Let me say it plainly: The downturn in the stock market 
should not--it must not--be used as an excuse to enact 
controversial policies on 401(k) reporting and disclosure. To 
do so would not only be disingenuous, but it threatens to do a 
disservice to the very people that we are seeking to help.
    401(k) transparency is an important topic in its own right, 
and one that deserves an honest and realistic debate.
    When it comes to the market downturn, unfortunately, 
solutions will be much harder to come by. But that isn't going 
to stop us from trying. That is why I am joining other 
Republicans today to introduce the Savings Recovery Act, a bill 
that takes important first steps to help Americans begin to 
rebuild the savings that they have lost.
    Our bill gives Americans flexibility and freedom to save, 
while eliminating penalties that would make it harder to 
rebuild what has been lost. We will raise the contribution 
limits on retirement accounts, and we will stabilize pensions 
with a glide path for recognizing losses, and additional time 
to boost funding.
    We will make it easier for families to save for college, 
and we will get capital flowing again by temporarily suspending 
the capital-gains tax on newly acquired assets. And we will 
allow more Americans to increase their income by doubling the 
Social Security earnings limit.
    The Savings Recovery Act is the product of a Republican 
solutions group that came together to address the very real 
concerns of Americans, who have seen their nest eggs evaporate.
    We know that savings can't be rebuilt overnight. But that 
is no excuse to ignore the challenges that families are facing.
    As for the bill before us today, the focus is much 
narrower. Rather than responding to the broader losses in 
American savings plans, this bill offers a specific 
prescription for 401(k) reporting requirements and investment 
options. And, so, recognizing the parameters of the bill, I 
look forward to a thorough examination of these issues.
    Members on both sides of the aisle recognize that Americans 
need to be able to save for retirement. I hope we can find 
similar agreement on what steps should be considered to enhance 
current savings opportunities, rather than stifling them.
    Again, thank you for the opportunity to provide a 
statement. And I yield back.
    [The statement of Mr. McKeon follows:]

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

    We're here this morning to discuss Chairman Miller's legislation to 
change the way 401(k) retirement savings plans operate.
    Much of the focus has been on the bill's requirements for increased 
reporting and disclosure, so let me start there, and let me be 
perfectly clear: Republicans support sensible disclosure to make 
401(k)s more transparent and understandable to workers.
    We're approaching this issue with a spirit of openness and a hope 
that we can work with the majority as a proposal is crafted.
    Unfortunately, it seems the drafting process has ended before it 
ever began. Instead, we're starting the process with a bill that 
largely mirrors the proposal that stalled last year because of 
legitimate concerns from Members on both sides of the aisle.
    I, for one, was not able to support last year's proposal because I 
saw the potential for harmful unintended consequences that would limit 
options for workers.
    For instance, the bill's requirement that all plans offer an index 
fund is tantamount to a government seal of approval on a particular 
investment option. This could inadvertently steer savers in a direction 
that isn't best for them.
    The bill also requires the ``unbundling'' of services for the 
purposes of voluminous new reporting. This, despite the fact that 
experts have told us ``unbundling'' could actually drive up costs for 
workers--the exact opposite outcome we're trying to achieve.
    I hope we can address these issues as the process moves forward. 
But I think a more open process would have allowed this debate before 
the legislation was introduced.
    I'd also like to take a minute to clarify two separate and very 
serious issues facing American workers.
    The fees that workers pay on their 401(k) accounts can 
significantly impact their long-term savings. Transparency in these 
fees is a real concern, and one that Republicans share.
    But to blame 401(k) fees for the substantial losses workers are 
seeing in their retirement accounts is to ignore the real culprit--a 
stock market that has plummeted in the face of a continuing recession.
    Again, this is a serious issue, and one that is deeply impacting 
Americans from all walks of life, whether they are new parents 
establishing a college fund or workers preparing for retirement.
    Let me say it plainly: The downturn in the stock market should 
not--it must not--be used as an excuse to enact controversial policies 
on 401(k) reporting and disclosure. To do so would not only be 
disingenuous, but it threatens to do a disservice to the very people we 
are seeking to help.
    401(k) transparency is an important topic in its own right, and one 
that deserves an honest and realistic debate.
    When it comes to the market downturn, unfortunately, solutions will 
be much harder to come by. But that isn't going to stop us from trying.
    That's why I'm joining other Republicans today to introduce the 
Savings Recovery Act, a bill that takes important first steps to help 
Americans begin to rebuild the savings they have lost.
    Our bill gives Americans flexibility and freedom to save, while 
eliminating penalties that would make it harder to rebuild what has 
been lost.
    We'll raise contribution limits on retirement accounts, and we'll 
stabilize pensions with a glide path for recognizing losses and 
additional time to boost funding.
    We'll make it easier for families to save for college, and we'll 
get capital flowing again by temporarily suspending the capital gains 
tax on newly acquired assets. And we'll allow more Americans to 
increase their income by doubling the Social Security earnings limit.
    The Savings Recovery Act is the product of a Republican Solutions 
Group that came together to address the very real concerns of Americans 
who have seen their nest eggs evaporate. We know that savings can't be 
rebuilt overnight, but that's no excuse to ignore the challenges that 
families are facing.
    As for the bill before us today, the focus is much narrower. Rather 
than responding to the broader losses in Americans' savings plans, this 
bill offers a specific prescription for 401(k) reporting requirements 
and investment options. And so, recognizing the parameters of the bill, 
I look forward to a thorough examination of these issues.
    Members on both sides of the aisle recognize that Americans need to 
be able to save for retirement. I hope we can find similar agreement on 
what steps should be considered to enhance current savings 
opportunities, rather than stifling them.
    Again, thank you for the opportunity to provide a statement. I 
yield back.
                                 ______
                                 
    Chairman Andrews. Thank you, Mr. McKeon. And we want to 
proceed with that open-and-honest debate on the 401(k) Fair 
Disclosure for Retirement Security Act of 2009.
    And we have assembled, I think, an excellent group of 
ladies and gentlemen, to help us do that.
    I am going to read the biographies of the witnesses. And 
then the written testimony of each of you will be accepted, 
without objection, into the record. And we would ask if each of 
you would, then, give us a 5-minute oral synopsis of your 
testimony.
    At that time, we will turn to questions from the members of 
the committee, and try to learn more about what you think.
    Mercer Bullard is an associate professor of law at the 
University of Mississippi School of Law, and founder and 
president of Fund Democracy, and non-profit advocacy group for 
mutual-fund shareholders, including 401(k) participants.
    Mr. Bullard is returning to the committee. He has a J.D. 
from the University of Virginia Law School, an M.A. from 
Georgetown University, and a B.A. from Yale College.
    Welcome back, Professor Bullard.
    Kristi Mitchem is a managing director, and head of U.S. 
Defined Contribution Plans for Barclays Global Investors, BGI. 
Prior to joining BGI, Ms. Mitchem ran the West Coast 
Derivatives Group, and U.S. transition services for Goldman 
Sachs.
    Ms. Mitchem received her MBA from the Stanford Graduate 
School of Business, and her B.A. in political science from 
Davidson College.
    Ms. Mitchem, welcome to the committee.
    Alison Borland is the strategy leader for Hewitt 
Consultants Retirement Consulting Business, which administers 
retirement benefits for more than 11 million participants. She 
is responsible for studying and developing solutions that 
improve retirement security for plan participants.
    Ms. Borland graduated summa cum laude from Vanderbilt 
University, with a bachelor's degree in mathematics, and a 
minor in French. Good combination.
    And welcome to the committee.
    Julian Onorato is the chairman, CEO and president of 
ExpertPlan, Inc., which provides retirement-plan solutions and 
services to employers. Mr. Onorato has 25 years of experience 
within the financial-services industry, including more than 20 
years in retirement-plan services.
    Mr. Onorato earned a B.S. in electrical engineering from 
Drexel University, and has completed an executive program at 
the Wharton School of the University of Pennsylvania, focused 
on reengineering the client-service process.
    Mr. Onorato, welcome. And you are one of my constituents, 
and my employer, so it is great to have you with us here today.
    Robert Chambers, welcome back.
    Mr. Chambers is the former chairman of the Board of the 
American Benefits Council, an employee-benefits lobbying firm, 
whose members either employ or administer employee plans. Mr. 
Chambers also serves as a partner in the McGuire Woods law 
firm, where he counsels employers in connection with tax-
qualified retirement plans.
    Mr. Chambers received his B.A. from Princeton University, 
and his J.D. from the Villanova University School of Law.
    Welcome back, Mr. Chambers--good to have you with us.
    And, finally, Larry Goldbrum--did I pronounce your name 
correctly?
    Okay. Well, what would it be correctly?
    Goldbrum, excuse me--is the executive vice president and 
general counsel of the Spark Institute, a trade association 
that represents retirement-plan service providers, including 
mutual-fund companies, banks, insurance companies, third-party 
administrators, and benefits consultants.
    He received his law degree from the Vanderbilt University 
School of Law, and a bachelor of business administration degree 
from the George Washington University.
    I know Mr. Kline will be pleased that we have a majority of 
lawyers on the panel this morning, so we are ready to go.
    Mr. Bullard, we would ask you to go first. You have been 
here before, but I will reiterate for our newcomers, when the 
yellow light appears, you have a minute or so to wrap up. And 
when the red light appears, we would ask you to summarize and 
stop, so we can get on to the questions. Welcome back.

  STATEMENT OF MERCER E. BULLARD, FOUNDER, FUND DEMOCRACY AND 
     ASSISTANT PROFESSOR OF LAW, UNIVERSITY OF MISSISSIPPI

    Mr. Bullard. Thank you very much. Thank you Chairman 
Andrews, Ranking Member Kline, Chairman Miller, and members of 
the subcommittee, for the opportunity to appear before you 
today to discuss the 401(k) Fair Disclosure for Retirement 
Security Act of 2009.
    It is an honor and a privilege to appear before you today.
    I am testifying, today, on behalf of Fund Democracy, an 
advocacy group for mutual-fund shareholders that I formed about 
9 years ago. But I would be remiss not to mention Barbara 
Roper, the director of investor protection at the Consumer 
Federation of America, with whom I have developed the positions 
that you see in my written testimony, over past testimony and 
comment letters.
    The 401(k) Fee Disclosure Act is--reforms are long overdue. 
Under current law, figuring out your 401(k) fees is like trying 
to find a needle in a haystack, except the needle has been 
broken into three parts, and they have been put into three 
different haystacks.
    The investment-management fees appear in prospectuses. The 
plan fees appear in something called a Form 5500. And any other 
account fees that specific to the participant appear in yet 
another document, their quarterly statement.
    The prospectus fees are provided as a percentage of assets. 
The Form 5500 fees, if any participant could actually find 
those, are provided as a dollar amount, and not even on a per-
account basis. So even if you were able to find all of these 
fees, you would still have to convert either the prospectus 
fees, of which there may be 15 or so different options, into 
dollars, or the 5500 fees, into a percentage based on the 
entire size of the plan, and then figure out what it would be 
on a per-participant basis. And then you would have to figure 
out what appears on your quarterly statement, and figure out 
that as a percentage of fees.
    And then, finally, you would have, for at least one period 
of time, some idea of what you are paying in 401(k) fees.
    If you have any doubt about the absurd patchwork of 
disclosure requirements under current law, I suggest you visit 
the Department of Labor's Web site, and review their own 
brochure, ``A Look at 401(k) Fees.''
    The section that explains how to find out what you are 
paying in fees would bring tears to the eyes of anyone who has 
any kind of commitment to fee transparency.
    The 401(k) Fee Disclosure Act solves this problem by 
requiring that all fees be disclosed in one place, in one 
format. The act is a breath of fresh air in a regulatory 
environment that continues to be unfriendly to investors.
    The SEC recently announced the suspension of reform of 12b-
1 fees, and appears to be preparing to lower fiduciary 
standards for investment advisors. The Department of Labor has 
proposed rules that effectively protect conflicted investment 
advice provided to plan participants.
    The act's requirement that fee disclosure also appear in 
participants' statement, which they are actually likely to 
review, is also a major step forward. It also requires that 
fees be provided in dollars, in the same place that they will 
see the value of their accounts in dollars.
    For the first time in retail financial-services history, 
the act will require that fees are provided in a comparative 
format so that investors can place their fees in context.
    Standing alone, fees mean nothing to the fee-insensitive 
investor. Also, for the first time, the act recognizes the 
importance of giving participants freedom of choice in deciding 
whether to invest in a passively managed fund, or an actively 
managed fund, that also will, inevitably, impose higher fees.
    Actively managed options, as a group, will, by definition, 
necessarily under-perform the market by the amount of their 
fees. This means that in the aggregate, active-management fees 
are a dead weight dragging down overall investment returns for 
401(k) plans.
    Participants who are required to invest in actively managed 
funds may significantly outperform the market, but they may 
also significantly under-perform the market, as many have.
    It is unclear how employers can, consistent with their 
fiduciary duty, force their employees to pay higher fees and 
assume active-management risk.
    The answer may be that financial-services industry has 
every incentive to steer participants into actively managed 
funds, which are more profitable than passively managed funds. 
This is the only way to explain the industry's Orwellian 
position that offering a passively managed investment option 
somehow limits choice.
    The industry argues that we should be focused on the 
employer's freedom of choice, not the employees'. But it is the 
employees' choice and financial security that should be our 
focus.
    The financial-services industry would leave the decision to 
the employer, and have us ignore the warning issued by the 
intellectual father of capitalism, Adam Smith, that ``Managers 
of other people's money rarely watch over it with the same 
anxious vigilance with which they watch over their own. They 
very easily give themselves a dispensation.''
    Jack Bogle reminded me of that piece of wisdom, in the 
``Opinion'' section of yesterday's Wall Street Journal.
    The employer stock option in 401(k) plans is another 
example of the incentives of managers of other people's money. 
Employers have every incentive to create and encourage a 
captive class of shareholders, as illustrated by the image of 
Enron executives exhorting their employees to buy more Enron 
stock.
    We offer tax deferral to workers in order to help them pay 
for retirement. Yet, we then permit the workers to use that tax 
benefit to gamble 100 percent of their retirement security, not 
just on the stock of a single company, but on the stock of the 
company on which they also depend for their income.
    I strongly encourage Congress to consider limiting 
employee's investment in employers' stock to 20 percent of 
their account balances.
    But even without such a provision, the 401(k) Fee 
Disclosure Act promises to enhance transparency, and promote 
competition in a way that I am confident will lead to lower 
fees for America's tens of millions of 401(k) participants.
    I am pleased to express my support for the act, and would 
be happy to answer questions that you might have.
    Thank you.
    [The statement of Mr. Bullard may be accessed at the 
following Internet address:]

         http://edlabor.house.gov/documents/111/pdf/testimony/
                   20090422MercerBullardTestimony.pdf

                                 ______
                                 
    Chairman Andrews. Mr. Bullard, thank you very much for your 
testimony.
    Ms. Mitchem, welcome to the committee.
    You need to turn your--there you go.

 STATEMENT OF KRISTI MITCHEM, MANAGING DIRECTOR, U.S. DEFINED 
         CONTRIBUTION PLANS, BARCLAYS GLOBAL INVESTORS

    Ms. Mitchem. On behalf of Barclays Global Investors, I 
appreciate the opportunity to testify today, regarding the 
401(k) Fair Disclosure for Retirement Security Act of 2009.
    Headquartered in San Francisco, BGI is one of the world's 
largest asset managers. We have approximately $1.5 trillion in 
assets under management, including hundreds of billions of 
ERISA plan assets.
    BGI services to its clients are focused on investment 
management. We do not provide other services, such as record-
keeping.
    Clearly, the events of 2008 were painful for all those 
investing in retirements. These events have some questioning 
whether defined-contribution plans can achieve their objective 
of providing security in retirement for the workers who 
contribute to them.
    Yet, for all the talk of the failures of the system, a 
closer look at the evolution of 401(k) plans over the past 
several years revealed significant progress. First, the Pension 
Protection Act of 2006 included a number of provisions to 
increase employee participation. And we have seen an increasing 
number of plan sponsors using these tools.
    Second, recent surveys show that despite the equity and 
market events of the past year, the vast majority of defined-
contribution plan participants are sticking with their plans, 
leaving their money in, and continuing to contribute--evidence 
that participants understand and value the benefit provided by 
their defined-contribution plans.
    However, the impact of the market turmoil on participant 
balances has added urgency to the debate on, ``What is the 
optimal design for defined-contribution plans, and how should 
they be structured to allow these vehicles to achieve their 
long-term objectives: Retirement Security for millions of 
Americans.''
    Providing plan fiduciaries and plan participants with 
additional, targeted information about fees and expenses will 
promote better investment decisions, and help 401(k) plans to 
better deliver retirement security to the American workforce.
    The legislation under discussion today addresses two of the 
largest issues for D.C. plans: First, for plan sponsors to have 
sufficient information about the fees and expenses to 
appropriately discharge their fiduciary responsibility in the 
selection of providers; and, second, the need for plan 
participants to have ready access to appropriate, easily 
understood information about the critical decisions that they 
need to make regarding investments.
    We believe that the appropriate elements of a disclosure 
regime for plan sponsors must rest on the unique fiduciary 
considerations that a plan sponsor encounters in choosing 
investment funds for the platform.
    Through the important and significant costs of providing 
plan-participant level administration and record-keeping, a 
plan sponsor must determine how to best provide and pay for 
these services. In addition, it is most often the case that the 
workers pay for all of the major costs of the plan: 
Administration, record-keeping and investment management.
    Plan sponsors are, thus, in the position of agreeing to the 
fees and expenses that workers will fund through deductions 
from their investment balances in the plan. As such, we believe 
it is important that plan sponsors receive sufficient 
information, in sufficient detail, to appropriately discharge 
their responsibility.
    Today, the information that a plan sponsor needs is 
sometimes difficult to obtain or difficult to compare. There 
are two reasons for this. First, the myriad of investment 
alternatives utilized on 401(k) plans, mutual funds, insurance 
products, bank collective trusts, separately managed accounts--
all of these structures have differing compensation mechanisms 
and differing terminology for what may be the same service.
    Second, it can be very difficult to evaluate fees and 
expenses, when fees for investment management are bundled with 
fees for administration, record-keeping and related services.
    I think we all agree that a worthwhile disclosure regime 
permits a comparison of like with like. BGI supports 
legislative efforts to require service providers to provide 
specific disclosures by fee category, so as to make plan 
sponsors' decision-making less burdensome.
    As to plan participants, the most fundamental decisions 
that they need to make are whether, and at what level, to 
participate in the plan; which of the plan investment options 
to choose; and whether and when to change their investment 
allocations. These decisions are critical to the future value 
of their account.
    BGI believes that plan participants need information 
communicated in a way that is easy to understand, and that 
facilitates a comparison across the full range of designated 
investment alternatives.
    While transparency as to fees and expenses is important for 
plan participants, any disclosure document needs to present 
this information in context, as too much focus on fees and 
expenses could promote a tendency among participants to opt for 
the lowest-cost option, or to opt out of the plan, to the 
detriment of their retirement income.
    It is worth noting, in conclusion, that in our experience, 
in the defined-benefit market, asset-management services and 
administrative services, such as trustee services, are 
generally disclosed separately. This transparency has 
contributed to the salutary effect of bringing both investment-
management fees and administrative costs down over the last 
decade.
    Increased transparency can, therefore, be an important 
catalyst for reducing the cost in D.C. plans, and improving the 
future income of all retirees. Thank you.
    [The statement of Ms. Mitchem follows:]

 Prepared Statement of Kristi Mitchem, Managing Director, Head of U.S. 
         Defined Contribution, Barclays Global Investors, N.A.

    On behalf of Barclays Global Investors (BGI), I appreciate the 
opportunity to testify today regarding the ``401(k) Fair Disclosure for 
Retirement Security Act of 2009''.
    Clearly the events of 2008 were painful for all those investing for 
retirement: global equities fell over 40 percent, and the average 
401(k) investor lost approximately 28% of their accumulated balances. 
These events have some questioning whether defined contribution (DC) 
plans can achieve their objective of providing security in retirement 
for the workers who contribute to them. Yet, for all the talk of the 
failures of the system, a closer look at the evolution of 401(k) and 
similar plans reveals significant progress over the last several years. 
First, the Pension Protection Act of 2006 included a number of 
provisions to increase employee participation, and we have seen an 
increasing number of employers.using these tools. Second, recent 
surveys show that despite the equity market events of the past year, 
the vast majority of DC plan participants are sticking with their 
plans, leaving their money in and continuing to contribute-evidence 
that participants understand and value the benefit provided by their DC 
plan.
    However, the impact of the market turmoil on participant balances 
has added urgency to the debate on what is the optimal design for 
defined contribution plans, and how should they be structured to allow 
these vehicles to achieve their long-term objective of retirement 
security for millions of Americans. Providing plan fiduciaries and 
individual plan participants with additional targeted information about 
fees and expenses, which the bill under discussion today will do, will 
promote better investment decisions and help 401(k) plans to better 
deliver retirement security for American workers.
Background on BGI
    BGI \1\ was founded in 1971 as part of Wells Fargo Bank in San 
Francisco, California. Today, we are owned by Barclays PLC, one of the 
world's leading diversified financial services companies. We are 
headquartered in San Francisco with approximately 1600 employees in 
California and elsewhere in the U.S. and another 1400 worldwide serving 
the needs of our global clients. BGI is one of the world's largest 
institutional asset managers, and is the largest provider of structured 
investment strategies, such as index, tactical asset allocation and 
quantitative active strategies. BGI pioneered the first institutional 
index fund strategy in 1971, and has continued a tradition of financial 
innovation ever since-including the development of target date 
retirement (lifecycle) funds in the early 1990's.
---------------------------------------------------------------------------
    \1\ BGI includes Barclays Global Investors, N.A. and its worldwide 
asset management affiliates.
---------------------------------------------------------------------------
Overview
    BGI is pleased to see the focus of this Committee, the Department 
of Labor and others on the ways in which services are provided to 
employee benefit plans and in the way service providers are 
compensated. Increased complexity has made it more difficult for plan 
sponsors and other plan fiduciaries to understand what the plan 
actually pays for specific services and where the potential exists for 
conflicts. This is particularly so for DC plans, where over the last 
decade the costs associated with managing and maintaining the plan have 
increasingly been shifted to plan participants--often through bundled 
fee arrangements where administration and investment management are 
offered by the same provider.
    Managers of defined benefit (DB) pension plans have well-
established tools that allow for savings and investment today in order 
to deliver retirement benefits for workers far in the future. Using a 
fully funded DB plan for comparison, we identify four dimensions of 
comparability for DC plans-contributions, investment quality, 
portability and lifetime income. Most of our testimony will focus on 
the second of these-investment quality--which necessarily includes the 
one of the largest determinating factor in long-term performance--which 
is fees and expenses.
    First, let me briefly address the other dimensions. In a DB plan, 
contributions are mandated as function of funded status. In a DC plan, 
it is the participant who must decide if they want to participate, and 
how much they want to contribute. The Pension Protection Act of 2006-
part of the progress in DC plans referenced above-provided plan 
sponsors with fiduciary protections in establishing auto-enrollment and 
auto-default savings rates. Data shows plans are adopting auto-
enrollment, with the number almost doubling from 2005. And, of the top 
1000 plans in the United States, over 53 percent now offer auto-
enrollment for new employees.\2\
---------------------------------------------------------------------------
    \2\ Hewitt Associates ``Trends and Experience in 401(k) Plans 
2007''.
---------------------------------------------------------------------------
    Studies have also shown that people tend to accept the terms of 
auto-enrollment as given. They are unlikely to opt out, and they are 
also likely to stay with the default savings rates-now generally set at 
3 percent.\3\ So inertia is working but it could work even better. 
Early results from researchers in the behavioral finance field indicate 
that even if you take the default savings rate up to 6, 7, 8 or 9 
percent, you won't see a meaningful number of participants opting out. 
So, although we don't have the level of funding that's required to 
support retirement adequacy today, we can get there by encouraging more 
and more plan sponsors to automatically enroll participants and by 
creating further incentives for employers to increase the default 
saving rate to 6 percent and higher. Another dimension of pension 
investing is portability, arguably the one area where DC plans outpace 
DB plans. Unlike the traditional DB plan where unvested balances are 
typically lost when an employee leaves, the DC plan system explicitedly 
recognizes the more transient nature of today's worker, where 
contributions actually follow an employee. The DC portability feature 
is not without its flaws. Moving balances from one employer to the next 
is difficult and requires a participant to take action. And we know 
that if exiting employees take a cash distribution, a significant 
amount of those funds leak out of the retirement system.
---------------------------------------------------------------------------
    \3\ The Importance of Default Options for Retirement Saving 
Outcomes: Evidence from the United States. Beshears, Choi, Laibson, 
Madrian (2007).
---------------------------------------------------------------------------
    Another comparable to DB plans is lifetime income. Every DB plan 
offers the opportunity for participants to choose income for life. But 
this critical component has yet to have been addressed in a meaningful 
way in the 401(k) system today. Important as it is to accumulate 
sufficient assets during a participants working years, it is also as 
important to have a strategy to fund consumption in retirement. Many 
financial services providers, including BGI, are engaged in designing 
products for the DC market to manage the twin risks of inflation and 
longevity. These products take two principal forms: guaranteed minimum 
payments for set periods and annuities. The market turmoil in 2008 has 
increased the interest of both plan sponsors and plan participants in 
these products.
    Now, moving closer to the subject of today's hearing, is the 
dimension of investment quality. DB plans tend to be well diversified, 
use institutional-quality managers and rebalance on a regular basis 
back to a strategic asset allocation. To mimic this in a 401(k) world, 
ideally the majority of plan participants would be invested in 
autorebalancing strategies that are constructed with institutional 
quality funds. Clearly these allocations would need to be age 
appropriate, provide acceptable outcomes across a range of different 
market environments, and be priced at levels that reflect the bulk 
buying power of 401(k) plan sponsors.
    More DC plans today offer pre-mixed portfolios that are well 
diversified and auto-rebalancing than ever before.\4\ And again, the 
PPA has moved things in the right direction, by providing a level of 
fiduciary relief for plan sponsors to default participants into just 
these types of investments. Congress should also consider changes that 
would allow employers to diversify participants out of heavy 
concentrations of company stock as they near retirement. The 
legislation under discussion today addresses two of the largest issues 
for DC plans: first, for plan sponsors to have sufficient information 
about fees and expenses to discharge their fiduciary responsibilities 
in the selection of service providers. And second, the need for plan 
participants to have ready access to appropriate, easily understood 
information about critical issues that affect their investment 
decisions.
---------------------------------------------------------------------------
    \4\ Cerruli, Retirement Markets 2007; Hewitt Associates ``Trends 
and Experience in 401(k) Plans 2007.
---------------------------------------------------------------------------
Elements of a Disclosure Regime for Plan Sponsors
    We believe the appropriate elements of a disclosure regime for plan 
sponsors must rest on the unique fiduciary considerations that a plan 
sponsor encounters in establishing designated investment alternatives 
under a DC plan and in choosing investment funds for the plans. Due to 
the importance and significant cost of providing plan participant level 
administration and recordkeeping, a plan sponsor must determine how 
best to provide and pay for these services. Recordkeeping expense is 
often-but need not be-funded on a ``bundled'' basis through the 
expenses charged against assets held by the investment funds in which 
the plan invests and/or through fees received by the investment 
manager. In addition, it is more often the case that plan participants 
fund all the major costs of the plan (administration, recordkeeping and 
investment management). Plan sponsors are thus often in the position of 
agreeing to the fees and expenses that participants will fund through 
direct or indirect deductions from their investment balances in the 
plan. As such, we believe it is important that plan sponsors receive 
sufficient information, in sufficient detail, to appropriately 
discharge this responsibility. Today, the information the plan sponsor 
needs is sometimes difficult to obtain or difficult to compare. There 
are two reasons for this. First, the myriad investment alternatives 
(mutual funds, insurance products, bank collective trusts, separately 
managed accounts) have differing compensation mechanisms and differing 
terminology for what may be the same service. Second, it can be more 
difficult to evaluate fees and expenses when fees for investment 
management are bundled with fees for administrative, recordkeeping and 
related services.
    It is not enough for plan sponsors and other plan fiduciaries to 
understand what fees and expenses are explicitly deducted from a 
participant's account or paid directly from plan assets or by the plan 
sponsor from its own funds. To fully evaluate potential investment 
options and service providers, and their appropriateness for its plan, 
plan sponsors must understand fully how each service provider is 
compensated, both directly and indirectly.\5\ BGI supports legislative 
efforts to require service providers to provide specific disclosures, 
by fee category, so as to make plan sponsors' decision-making less 
burdensome.
---------------------------------------------------------------------------
    \5\ The Department of Labor proposed service provider exemption 
under Section 408(b) (2) [citation] also seeks to provide plan sponsors 
with information necessary for the sponsor to determine that a contract 
or arrangement is reasonable. (See, Reasonable Contract or Arrangement 
Under Section 408 (b)(2)-Fee Disclosure 72 FR 70988). However, as 
proposed, service providers offering a bundle of services generally are 
not required to break down the aggregate compensation or fees among the 
individual services comprising the bundle, with two exceptions--if 
separate fees are charged against a plan's investment and reflected in 
the net asset value, and if compensation or fees are set on a 
transaction basis (even if paid from mutual fund management or similar 
fees). Further, we note that the mutual fund industry has questioned 
whether the Department's proposed regulation can require investment 
advisors to mutual funds to make disclosures to plan fiduciaries as 
contemplated under the proposal-even though these investment managers 
receive the major portion of plan fees if the plan sponsor chooses 
mutual funds as the designated investment alternative. See, Testimony 
of Paul Schott Stevens, President and CEO, Investment Company 
Institute, Department of Labor Hearing on 408 (b)(2) Proposal (April 1, 
2008). The legislation under discussion today addresses these 
deficiencies.
---------------------------------------------------------------------------
    A worthwhile disclosure regime permits a comparison of ``like with 
like''. The challenges faced by plan fiduciaries in making decisions 
among service providers for the same services is compounded by the 
inability to make comparisons. For example, a plan sponsor who is 
evaluating a proposal from (a) a bundled provider who offers a full 
range of affiliated investment options, (b) a proposal from an 
independent recordkeeper whose platform can accommodate most any 
investment option available in the DC market, and (c) a proposal from a 
bundled provider who permits the plan fiduciary to add unaffiliated 
investment options but is generally priced for a plan using affiliated 
investment options, will find it difficult to make effective comparison 
of relative costs. In the first proposal, the sponsor cannot determine 
the fee for plan level administration/recordkeeping, in the second the 
cost of administration and investment are separate and thus 
transparent, and in the third, the mix of investment options drives the 
overall cost to the plan and its participants but without knowledge of 
the underlying fees in administration/recordkeeping, the plan fiduciary 
may be unable to determine if any particular affiliated investment 
option is appropriately priced.
    Bundled service arrangements may be appropriate for some plans, 
particularly smaller ones.\6\ This is only appropriate if the fee 
components of both recordkeeping and asset management are separately 
and clearly disclosed. Clear, comparable and fully disclosed 
information about compensation will allow the plan sponsor to more 
easily and adequately meet its fiduciary responsibility under ERISA to 
determine that the fees and expenses are reasonable.
---------------------------------------------------------------------------
    \6\ Bundled services may provide the lowest cost alternative for 
small plans. It is not the bundling of services together that is of 
concern, but rather the plan fiduciary's need to be able to compare the 
costs of certain services as between potential service providers and in 
myriad configurations.
---------------------------------------------------------------------------
    It is worth noting that in our experience in the defined benefit 
market, asset management services and administrative services, such as 
trustee services, are generally disclosed separately. This transparency 
has contributed to the salutary effect of bringing both the investment 
management fees and administration costs down over the last decade.
Elements of a Disclosure Regime for Plan Participants
    The appropriate elements for a disclosure regime for plan 
participants must be grounded in an understanding of the two levels of 
investment decision being made in DC plans. The first, made by plan 
fiduciaries, is to decide what investment choices to make available to 
plan participants from the enormous array of potential investments and 
the second, the decision by plan participants regarding how to direct 
their funds among the options selected by the plan sponsor. The 
information necessary for a plan fiduciary to determine what investment 
options to offer (and which service providers to retain) differs from 
the information which plan participants need when choosing an 
appropriate investment from amongst those investment options.
    The most fundamental decisions that plan participants need to make 
are whether, and at what level, to participate in the plan; which 
investment options to choose; and whether and when to change their 
investment allocations. These decisions are critical to the future 
value of the account. Participants' decision making is influenced by 
many considerations including basic behavioral finance factors.
    BGI believes that participants need information communicated in a 
way that is easy to understand and facilitates comparison across the 
full range of designated investment alternatives, including automated 
asset allocation funds (i.e., target date funds and managed accounts). 
Funds should be organized around risk level, rather than by asset 
class, as participants do not necessarily understand asset class 
designations, but do understand risk levels such as ``conservative'', 
``moderate'', ``moderate aggressive'' and ``aggressive''. There should 
be a separate section called ``premixed asset allocation products'' for 
multi-asset class investments and indicate the the risk level is either 
static or a function of the investment horizon. This approach provides 
two benefits: it provides basic risk information without the necessity 
for a plan participant to review another document and eliminates the 
category of ``other'' which otherwise would include all designated 
investment alternatives that are not stock or bond funds.\7\ A fund 
description should be provided that communicates the investment 
objective succinctly and in `plain English'. We don't believe the mere 
identification of the management style of the fund as being `passive' 
or `active' provides useful information to most participants, who would 
not be familiar with this terminology. We note that unless asset based 
fees for administration/recordkeeping are disaggregated from management 
fees, the distinction between passive and active is not very 
meaningful-participants need to understand how much excess return 
(`alpha') they should be expecting vis-a-vis the fee to be paid. If 
certain investment options carry more administrative/recordkeeping fees 
than others (which is not uncommon), plan participants need to 
understand that higher fees are not necessarily due to high excess 
return expectations.
---------------------------------------------------------------------------
    \7\ Company stock, an investment option in a number of DC plans, 
will need to be addressed separately due to the particular nature of 
this investment option as compared to other investment strategies.
---------------------------------------------------------------------------
    Behavioral finance research shows that when confronted with too 
much information, or information that is not organized to be customer 
friendly, participants fail to participate or engage in decisions about 
their investment allocation. While transparency as to fees and expenses 
is important for plan participants, any disclosure document also needs 
to present this information in context, as too much focus on fees and 
expenses could promote a tendency among participants to opt for the 
lowest cost option, (most likely to be a money market fund or company 
stock) to the detriment of their retirement income. Failure to 
adequately diversify investments is one of the more common errors made 
by plan participants.
    A number of plans provide multiple investment options within the 
same general strategy (for example, several large cap domestic equity 
funds). When a plan does so, behavioral finance research suggests that 
plan participants would also benefit if the alternatives within the 
same strategy were either ranked by cost or the least cost alternative 
were highlighted in someway.
Other
    The bill also proposes that all DC plans provide an investment 
option that is an unmanaged or passively managed fund meeting certain 
criteria as to its securities portfolio and investment objectives 
(including the likelihood of meeting retirement income needs if funded 
at adequate levels. We believe one of the advantages of ERISA is that 
it permits plan sponsors and plan fiduciaries to make their own prudent 
decisions about what investments are appropriate for their plan 
participants and beneficiaries. However, the Committee may wish to 
consider the approach taken by the Federal Employee Retirement Security 
Act of 1986 (FERSA) which established the Federal Thrift Savings Plan. 
As amended, FERSA includes six categories of investment options, with a 
focus on index strategies across the investment spectrum (equity and 
fixed income) as well as lifecycle funds. While many plan sponsors do 
provide passive investment options in their plans, this Committee 
should consider how to further encourage this trend.
Conclusion
    Achieving financial security in retirement is a significant 
challenge for most Americans. Currently, many DC plans have challenges 
with three of the four major dimensions of retirement security: the 
contribution, or savings, component; the investment quality component; 
and the retirement distribution component. By promoting more effective 
disclosure of fees and expenses to plan sponsors and plan participants, 
the 401(k) Fair Disclosure for Retirement Security Act of 2009 would 
improve the second component. Increased transparency can be an 
important catalyst for making DC plans performs more like DB plans in 
the balance of costs and investment performance and thereby improving 
the future income of all retirees.
Additional Background on BGI
    At December 31, 2008, BGI managed over $1.5 trillion, of which 
approximately $200 billion represents defined contribution plan assets. 
For both its defined contribution and defined benefit plan clients, BGI 
acts solely as an investment manager. Neither BGI nor any of its 
affiliates currently act as master trustee or provide recordkeeping 
services. It does act as a collective fund trustee and as a named 
custodian with custody operations, fund accounting and related services 
provided by third parties. Since its founding, BGI has remained true to 
a single global investment philosophy, which we call Total Performance 
Management. BGI manages performance through the core disciplines of 
risk, return, and cost management. The success of our indexing 
methodology results from our focus on delivering superior investment 
returns over time while minimizing trading and other implementation 
costs and rigorously controlling investment and operational risks. It 
has been the foundation for the way we've managed money for over 30 
years and we believed it has served our clients very well. BGI's 
clients are ``institutional'', by which we mean defined benefit and 
defined contribution pension plans sponsored by corporations or public 
agencies, and endowments, foundations and other similar pools of 
capital. BGI's services to its clients are completely focused on 
investment management; we do not provide other services, such as 
recordkeeping. Among those institutions we have been honored to serve 
is the Federal Thrift Savings Plan (TSP). BGI was first appointed a 
manager for the TSP in 1988, and we have successfully retained and 
grown this relationship in regular, highly competitive bidding 
processes since that time.
                                 ______
                                 
    Chairman Andrews. Thank you very much, Ms. Mitchem.
    Ms. Borland, welcome. We look forward to your testimony.

  STATEMENT OF ALISON T. BORLAND, RETIREMENT STRATEGY LEADER, 
                     HEWITT ASSOCIATES, LLC

    Ms. Borland. Thank you.
    Chairman Andrews, Chairman Miller, Ranking Member Kline, 
and members of the subcommittee, I am honored to be here today, 
representing Hewitt Associates, to discus our support of the 
401(k) Fair Disclosure for Retirement Security Act of 2009.
    We have a unique perspective, as the largest independent 
provider of retirement-plan administration services, serving 
more than 11 million retirement-plan participants. We are not 
affiliated with any investment-management firm.
    Now, more than ever, employees need to accumulate the 
greatest retirement savings possible for every dollar saved. 
Our experience shows that increased fee transparency leads to 
lower fees. Because the vast majority of these fees are paid by 
participants, lower fees lead to higher retirement benefits for 
participants.
    Plan fiduciaries cannot fulfill their obligations without 
clear fee disclosures from service providers that break out fee 
details for various services--most importantly, investment-
management and administration fees, which, together comprise 
more than 90 percent of total fees in 401(k) plans.
    This breakout of these fees, for these services, on a 
consistent basis, enables ready comparisons of various service 
providers and their structures, so that fiduciaries can make 
the best decisions, based on complete information.
    In addition to evaluating the fees and their 
reasonableness, at the time of the initial contract, 
fiduciaries need to evaluate them on an ongoing basis. Only by 
understanding administrative fees separately from asset-based 
fees, do plan fiduciaries have the information needed to 
effectively understand how these fees could fluctuate over 
time, and deem those changes reasonable.
    The best way to illustrate the importance of transparency 
is through an example. Hewitt recently worked with a client 
that wanted to evaluate combining the services for two separate 
large 401(k) plans. Administration fees had not been broken out 
for one of the plans in the past. The impact of this was clear: 
One plan was charged $50 per participant for administration, 
while the second plan was charged more than $100 for 
administration, even though the second plan was significantly 
larger.
    Unbundling the administrative fees from the investment-
management fees provided the company with the ability to look 
closely at the investment choices offered in their plan, based 
on their own merit, and also evaluate the administration 
services in greater depth. This resulted in a selection of 
lower-priced, non-mutual-fund vehicles, as well as a 
significant reduction in the administrative fees.
    The combined fee structure across both plans decreased by 
nearly half. Administrative fees were reduced to just over $40 
per participant. Total fees decreased by about $7 million, all 
of it directly accruing to plan-participant accounts. This is 
just one example of a scenario we see on a regular basis.
    The end result may or may not result in the actual 
unbundling of services. But the unbundled transparency almost 
always leads to lower prices and, therefore, increased benefits 
to plan participants.
    Second, I would like to say a few words about the need for 
disclosure of additional revenue sources and conflicts of 
interest. Service providers often generate revenue streams by 
providing services to 401(k) plan participants that are 
unrelated to the 401(k) plan, like offering retail IRA 
rollovers, or other financial products.
    It is critical that all sources of revenue generated as a 
result of the 401(k) relationship are disclosed, so that the 
plan sponsor can identify and manage conflicts of interest that 
may affect plan participants.
    The third issue I would like to address is participant fee 
disclosure. We believe that comprehensive information should be 
readily and easily accessible to participants. Mandatory 
disclosures should help participants understand fees on their 
account balances, as well as provide other important 
information to facilitate investment decisions, such as risk 
level and the importance of diversification.
    We have to acknowledge that many participants lack the 
basic financial acumen to understand these issues. But unbiased 
investment advice, education and certain plan-design features 
can make a difference there.
    In summary, we support Chairman Miller's bill because it 
is, quite simply--its provisions enhance the retirement 
security of Americans through much-needed clarification on the 
level of disclosure required. The bill does not allow service-
provider exemptions that get in the way of full transparency.
    Knowledge is power. And by arming plan sponsors with 
complete, consistent and comparable information, they will be 
better equipped to negotiate and provide high-quality plans for 
their participants at reasonable costs. Hewitt would be pleased 
to offer our data analysis, our experience, and our consulting 
and administration expertise to help the subcommittee complete 
its work on this issue. Thank you.
    [The statement of Ms. Borland follows:]

    Statement of Alison Borland, Retirement Strategy Leader, Hewitt 
                            Associates, LLC

    Mr. Chairman and Members of the Subcommittee: Thank you for the 
opportunity to testify at this important hearing on 401(k) Fair 
Disclosure for Retirement Security Act of 2009. My name is Alison 
Borland, and I am the Retirement Strategy Leader for Hewitt Associates. 
As requested, I will focus my remarks today on the experience of mid- 
to large-sized employers in their role as 401(k) plan fiduciaries.
    Hewitt Associates is a global human resources outsourcing and 
consulting company providing services to major employers in more than 
30 countries. We employ 23,000 associates worldwide. Headquartered in 
Lincolnshire, Illinois, we serve more than 2,000 U.S. employers from 
offices in 30 states, including many of the states represented by the 
members of this distinguished Subcommittee.
    As one of the world's premier human resources services companies, 
Hewitt Associates has extensive experience in both designing and 
administering 401(k) plans for mid- to large-sized employers, including 
helping employers to communicate with their participants about this 
increasingly important benefit. We are the largest independent provider 
of administration services for retirement plans, serving more than 11 
million plan participants. We do not manage funds and have no 
affiliations with any investment management firms.
    The focus of our testimony today is to make a case for much greater 
transparency in the disclosure of fees by service providers to plan 
fiduciaries, a position that we believe Chairman Miller's bill 
addresses well. Now more than ever, employees need to accumulate the 
greatest retirement savings possible for every dollar saved. Our 
experience shows that increased fee transparency increases fiduciaries' 
understanding and their negotiating power, ultimately leading to lower 
fees and higher retirement benefits for participants. We will provide 
several real-world examples that illustrate how full transparency can 
benefit both fiduciaries and participants. We will also discuss the 
need for full disclosure of potential conflicts of interest by service 
providers, the advantages of providing mandatory fee disclosure to plan 
participants and the need for unbiased investment advice and financial 
education to help participants adequately prepare for retirement.
Plan Fiduciaries Must Understand All Fees
    As the Subcommittee is well aware, 401(k) plans play a vital role 
in retirement income security for the majority of Americans. In a 
recent Hewitt survey, 65 percent of the 302 employers surveyed 
indicated that 401(k) plans were the primary retirement vehicle for 
their workforce.\1\ This dependence, coupled with the negative impact 
of the economic downturn on 401(k) account balances, gives even greater 
urgency to taking the necessary steps to prepare employees to be 
financially secure when it comes time to retire.
    Since most plan fees are paid by participants out of their 
accounts, these fees can significantly affect the overall income that 
plan participants earn and, consequently, affect their overall 
retirement security. To protect the interests of their participants and 
beneficiaries, plan fiduciaries must increasingly act as experts in 
plan fee arrangements.
    Plan fiduciaries need a complete understanding of all fees under a 
contract to ensure that the charges constitute reasonable compensation. 
This is necessary before any contract can be covered by the prohibited 
transaction exemption under section 408(b)(2) of ERISA. Equally as 
important, understanding plan costs is necessary for fiduciaries to act 
prudently and solely in the interest of plan participants and 
beneficiaries when selecting a service provider, as required by section 
404(a) of ERISA.
    Plan fiduciaries cannot fulfill their obligations without clear and 
concise fee disclosures from service providers. Further, these fees 
must be disclosed in a manner that allows for ready and consistent 
comparisons. Without a uniform basis of disclosure, plan fiduciaries 
cannot make the best decisions. The disclosures required under current 
law are both unclear and insufficient, and the 2008 Department of 
Labor's proposed regulations on 408(b)(2) also fall short.
Service Providers Must Fully Disclose Fee Details
    To fully meet their obligations, fiduciaries must understand the 
most significant fee components of their plans and the services covered 
by these costs. A recent study highlighted that there is significant 
variation in how fees are charged for defined contribution plan 
services.\2\ Uniform disclosure rules that permit meaningful fee 
comparisons will help fiduciaries better evaluate the costs of services 
among competing service providers, even when different packaging and 
pricing methods are used. It is especially important that plan sponsors 
understand the embedded cost of services that a service provider may 
wrap into a single price and represent as ``free.'' In addition to 
evaluating fees at the time of contract signing, fiduciaries need to 
consider the impact of fees on an ongoing basis to understand how they 
may change over time. Full disclosure by service providers is essential 
if plan fiduciaries are to act in the best interest of plan 
participants.
Breaking Out Fees Increases Knowledge and Negotiating Power
    Typical plans have investment management, administrative, trustee, 
and other miscellaneous fees.
    Investment management and administrative fees generally account for 
more than 90 percent of individual account plan costs. Investment 
management fees are based on the value of the assets. Administrative 
fees include costs for recordkeeping, communication, compliance, and 
education, which are generally based on the number of participants 
served by the plan. Rather than charge a separate fee based on the 
number of participants in the plan, many providers who manage funds in 
addition to providing administration services will embed the 
administrative fees within the asset based fees that also cover 
investment management. By obtaining a breakout of these administrative 
fees from the asset-based fees, fiduciaries gain improved negotiating 
power by having the information needed to more effectively model how 
these fees may fluctuate over time with changing asset values and 
participant size. More details about the two primary sources of fees in 
401(k) plans and the importance of separating them are described below.
Investment Management Costs
    Investment management expenses are the largest plan cost, making up 
approximately three-quarters of total plan fees. These fees are 
reflected in the expense ratios of the funds represented in the plan.
    Research has proven that fees are a critical--if not the most 
important--factor when selecting funds. In fact, studies have shown 
that lower-cost funds consistently and substantially outpace higher-
cost funds over time.\3\ Understanding a fund's investment costs helps 
plan fiduciaries select investment alternatives with strong relative 
historical returns and the lowest possible fees. For instance, 401(k) 
plans for mid- to large-sized employers with substantial assets might 
secure a tiered fee schedule that guarantees a decrease in expense 
ratios as the assets grow. This is accomplished by using fund vehicles 
available only to institutional investors, such as separate accounts 
and collective trusts. These fund vehicles have been common in defined 
benefit plans and are gaining popularity in 401(k) plans because of the 
clear cost advantages.
Administrative Costs
    Administrative costs are the second largest source of fees in 
401(k) plans. On average, administrative fees represent an additional 
20 percent of total plan fees. These fees are often embedded within the 
expense ratio of the mutual funds within the plan. If a plan sponsor 
does not understand that it is paying administrative fees through the 
investment management fees, it may believe administration services are 
``free.'' This might lead the plan sponsor to inadvertently choose 
investment options or administrative services that do not maximize 
participant savings.
    According to Hewitt survey data, 75 percent of plans require plan 
participants to pay some or all fees associated with administrative 
services.\4\ Unlike investment management costs, which logically vary 
based on the amount of assets in the plan, the actual cost of 
administrative services is more dependent on the number of participants 
served. Because many service providers charge administrative fees as a 
percentage of assets embedded within the investment management fee, 
administrative fees fluctuate as plan asset values change over time. 
Under normal market conditions, this means that the administrative fees 
will often increase over time, even if participant counts remain the 
same. This practice is most common with bundled providers that combine 
investment management services and administrative services in one 
bundled price.
    There is no reasonable explanation why administrative costs should 
fluctuate based on asset size. If administrative fees are broken out 
separately from investment management fees and understood in dollars 
per participant (even if charged in basis points), responsible 
fiduciaries will have the ability to accurately compare all plan fees 
and make the optimal investment and administrative choices. Scrutiny of 
the initial contract is a necessity, but periodic review over the life 
of the contract is also very important to ensure fees remain 
reasonable.
Real-World Examples of the Benefits of Uniform and Detailed Fee 
        Comparisons
    In our work with large employers, Hewitt finds that detailed and 
uniform fee comparisons across different types of service providers 
often results in lower negotiated fees. Armed with disclosure of fee 
components, the plan fiduciary can consider alternate providers, 
evaluate lower-cost fund options, and/or negotiate lower fees with the 
current provider. Lower fees directly benefit plan participants by 
increasing their account balances and compounding this savings 
throughout their working years. Several real-life examples illustrate 
the point.
    Company X Company X wanted to evaluate the benefits of combining 
the two separate 401(k) plans it sponsored through two different 
service providers. The combined plans had nearly $5 billion in assets 
and served 45,000 participants. Total fees for the plans were 0.30 
percent, with embedded administrative fees of just over $50 per 
participant for one plan to more than $100 per participant for the 
second plan, with an average of $85 per participant. Administrative 
fees had not been broken out for the more expensive plan in the past, 
explaining the wide differential in per participant fees.
    Consolidating the two plans, including investment options and 
administration services, created significant savings on investment 
management and administrative costs. Further, unbundling the 
administrative fees from the investment management fees provided the 
company with the ability to look more closely at the investment choices 
and evaluate the administration services in greater depth. This 
resulted in the selection of institutional funds (non-mutual fund 
vehicles) and a significant reduction in administrative costs through 
the negotiation of per participant fees. The combined fee structure 
across both plans dropped by nearly one-half to only 0.16 percent, 
including administrative fees of just over $40 per participant.
    The approximately $2 million of annual savings in administrative 
fees accrued directly and entirely to participants. Total fees 
decreased nearly $7 million per year.
    Company Y Company Y sponsored a plan using a bundled fee structure 
with total fees of 0.63 percent of plan assets, which included an 
estimated $242 per participant in embedded administrative charges. The 
firm had 3,000 participants and $250 million in assets. Although 
satisfied with the services, as a responsible fiduciary, Company Y 
hired a consultant to help them better understand their fees and fee 
structure. Following the analysis, Company Y was able to negotiate with 
their same service provider for a drop in total fees from 0.63 percent 
to 0.46 percent, with a reduction of administrative fees from $242 per 
participant to $155 per participant. Further, Company Y negotiated 
additional services for participants as part of the same administrative 
fee structure. All $290,000 of annual savings accrued entirely to 
participants.
    Company Z Company Z used a bundled provider for a plan that was 
predominantly invested in mutual funds. The firm had over 50,000 
participants and in excess of $4 billion in assets. Total fees were 
just over 0.50 percent, with embedded administrative fees estimated at 
nearly $100 per participant. After disclosing and evaluating the fee 
structure, the current service provider offered to substantially reduce 
fees and offered alternative institutional (non-mutual fund) products. 
With this new opportunity, fees could decline to approximately 0.30 
percent, with estimated administrative fees reduced to just under $50 
per participant. Plan participants would realize the annual savings on 
administrative fees of nearly $4 million per year. In addition, under 
the new fee structure, as assets grow over time, participants' savings 
will grow.

                                                BEFORE AND AFTER PRICING SUMMARY FOR REAL-WORLD EXAMPLES
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                      Admin/
                    Example                        Assets     Participant  Total fees  Total fees  trustee fees          Admin/trustee fees after
                                                                 count       before       after       before
--------------------------------------------------------------------------------------------------------------------------------------------------------
Company X......................................        $5B        45,000       0.30%       0.16%       $85/ppt   Just over $50 per participant
                                                                                                                 15% to 60% reduction
                                                                                                                 Over $2 million in annual savings
--------------------------------------------------------------------------------------------------------------------------------------------------------
Company Y......................................      $250M         3,000       0.63%       0.46%      $242/ppt   $155 per participant
                                                                                                                 36% reduction
                                                                                                                 $290,000 in annual savings
--------------------------------------------------------------------------------------------------------------------------------------------------------
Company Z......................................       >$4B       >50,000       0.50%       0.30%      $100/ppt   Less than $50 per participant
                                                                                                                 More than a 50% reduction
                                                                                                                 Nearly $4 million in annual savings
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The resulting savings in these examples were possible once plan 
sponsors understood that a significant portion of plan costs was not 
dependent on asset size but rather on number of participants. This 
allowed them to quantify the fees on that basis. When all costs are 
bundled into an aggregate asset-based fee, fiduciaries must be able to 
model how fees will change over time and how reasonable they are when 
considering changes in asset size and participant counts.
Plan Sponsors Need Unbiased Information About Revenue Sources
    Service providers often generate revenue streams by providing 
services to 401(k) plan participants that are unrelated to the 401(k) 
plan. It is critical that all potential sources of revenue generated 
from servicing the plan are disclosed so that the plan sponsor can 
identify and control conflicts of interest that may affect plan 
participants.
    A useful example is when a 401(k) service provider offers 
participants the ability to roll over their 401(k) account balances 
into the provider's own retail individual retirement accounts (IRAs) 
upon termination of employment. Many administrative providers actively 
market their IRA solution, because encouraging these rollovers can lead 
to very lucrative add-on revenue. So in essence, some providers may do 
the administration work on a 401(k) plan with the ultimate goal of 
obtaining a high percentage of participant rollovers at termination or 
retirement, given that high dollar balances, along with the often 
higher investment fees in an IRA environment, are generally more 
profitable than providing the 401(k) services.
    These cross-selling practices may be detrimental to participant 
retirement security. Hewitt's research shows that it is usually better 
from a cost perspective to either leave the accounts in the existing 
mid- to large-sized 401(k) plan, or to move those funds into another 
mid- to large-sized employer sponsored 401(k) plan if available through 
a new employer. The marketing of rollover products often does not 
adequately explain the trade-offs and potential benefits between 
alternatives. In addition, the provider servicing the 401(k) plan may 
not have the best IRA solution or pricing. Participants may be 
encouraged to use a sub-optimal product when it is promoted in 
conjunction with plan services, believing the employer has selected the 
provider through the fiduciary process.
    Consider an example of a participant with access to a 401(k) plan 
with institutionally priced investment options. Using conservative 
assumptions and typical account balances, our modeling shows that a 35-
year-old who is an average saver and moves her $33,000 balance from her 
company plan to a retail IRA could lose $37,681, or 9 percent (or 
more), compared to what she would have if she remains invested in the 
401(k) plan until she receives required distributions at age 70\1/2\. 
If she is an active saver who contributes 8 percent per year over the 
course of her career and then moves her $101,808 balance to an IRA at 
age 35, she could lose $116,250 or more. If we consider the greater fee 
savings she typically would experience in a large 401(k) plan, the IRA 
loss increases to $244,078, representing a loss of 18 percent of the 
total accumulated balance.\5\ Plan sponsors must understand the 
incentives that may exist for service providers to encourage 
participant behaviors that may not be in their best interest because 
they do not contribute to greater retirement security. Service 
providers may directly market products like retail IRAs, other retail 
investment products, or life insurance products to this captive 
audience. Plan fiduciaries need to understand how these potential 
revenue streams may affect services received and administrative fees 
paid. They also need to carefully consider the potential consequences 
for participants. Identifying these potential conflicts of interest 
requires more detailed disclosure than is available today.
Participants Need Better Fee Disclosure
    Plan participants will also benefit from improved disclosure of 
fees. While Hewitt believes that comprehensive fee information should 
be readily accessible when requested, mandatory disclosures should be 
concise and provide information that is truly meaningful for the vast 
majority of participants. Fee disclosures to participants must be 
understandable without overloading the average participant with so much 
technical detail that the information is likely to be ignored or 
discarded. The worst-case scenario is that the disclosure actually 
discourages savings.
    Plan participants' needs for expense disclosure are very different 
from their employers' (or other plan fiduciaries) requirements. Before 
participants choose to contribute to the plan, the plan fiduciary has 
already selected service providers and investment funds for the plan. 
This means that most plan costs are determined before the participant 
is ever involved; thus the importance of full fee transparency for plan 
fiduciaries. It is also the plan fiduciary, and not the participant, 
that must regularly monitor and evaluate service providers, including 
investment managers and administrators. Service provider fee disclosure 
is of primary importance to enable plan fiduciaries to keep plan costs 
low and maximize retirement income for participants.
    Hewitt believes that participants should be informed if and how 
administrative fees are paid by the plan, regardless of how fees are 
charged, whether bundled or unbundled. As with disclosures to plan 
fiduciaries, fee disclosures from all service providers to plan 
participants should be available on a uniform basis to allow for 
meaningful comparisons.
    Mandatory disclosure to plan participants should aid them in 
understanding fees on their account balances, but not confuse their 
decision making or overwhelm them with information they cannot control. 
For example, if participants simply move their portfolios toward the 
lowest-cost funds solely based on the fee information provided, this 
may decrease their retirement readiness. Many participants do not have 
the basic financial acumen to understand the importance of diversifying 
their portfolio and changing that asset allocation over time based on 
their changing personal circumstances. Greater disclosure will not 
solve these critical awareness issues. This is when investment advice, 
education, and certain plan design features can make a real 
difference.\6\ Objective advice can aid participants in maximizing 
their investment returns and achieving a level of risk that is 
acceptable to the individual participants, given their unique 
circumstances. However, the regulatory oversight provided in the DOL 
investment advice regulations currently under review is not sufficient. 
Unlike fee disclosure to plan fiduciaries, greater disclosure under the 
investment advice rules without greater regulatory scrutiny may not do 
enough to protect plan participants. Hewitt believes that all but the 
most sophisticated plan participants could benefit from more investment 
advice and that unbiased investment advice should be readily available.
The 401(k) Fair Disclosure for Retirement Security Act of 2009 Can Help
    Hewitt supports Chairman Miller's bill because its provisions 
enhance the retirement security of Americans. The bill addresses the 
key disclosure gaps from both a plan sponsor and a plan participant 
perspective and does not allow service provider exemptions that get in 
the way of full transparency.
            Full Fee Disclosure
    The 401(k) Disclosure for Retirement Security Act of 2009 would 
require service providers to break out total costs into the main fee 
categories: investment management, administrative/recordkeeping, 
transactional, and other. The bill would also require disclosure of all 
fees paid to affiliates and subcontractors in a bundled fee 
arrangement. This will allow plan sponsors to readily compare the 
services of different types of providers in a uniform manner leading to 
better control and management of fees. By comparison, the Department of 
Labor's 2008 proposed service provider fee regulations permit bundled 
providers to report all fee types in the aggregate. Under the proposed 
regulations, fiduciaries would not be able to uniformly evaluate 
services offered by different providers, severely impairing their 
ability to negotiate lower fees for plan participants.
            Potential Conflicts of Interest
    The 401(k) Disclosure for Retirement Security Act of 2009 would 
also requires disclosure of any material personal, business, or 
financial relationship with the plan sponsor, plan, or other service 
provider (or affiliate) that benefits the service provider. The service 
provider must also disclose the extent to which it uses its own 
proprietary investment products. These provisions would go far to arm 
plan sponsors with the information they need to identify any potential 
conflicts of interest that could disadvantage their plan participants 
over time.
            Meaningful Participant Disclosures
    The 401(k) Disclosure for Retirement Security Act of 2009 would 
provide for uniform and transparent disclosure of fees to participants, 
regardless of how plan services are provided (e.g., bundled or 
unbundled). This is a good starting point, although we believe that the 
mechanics of participant fee disclosure merit further review and 
discussion. On the other hand, the proposed DOL regulations on 
participant fee disclosure appear to treat disclosure very differently, 
depending on how plan services are packaged. Under these rules, it is 
quite likely that plan participants in a plan with bundled services may 
never realize that they are paying for plan administration or how much. 
In contrast, plans with independent plan recordkeepers would be 
required to provide a special quarterly disclosure of administrative 
fees. Such different disclosure standards are inconsistent, misleading, 
and lack the transparency that participants deserve and increasingly 
demand.
Conclusion
    In closing, Mr. Chairman and Members of the Subcommittee, Hewitt 
believes that complete fee transparency is a key factor in maintaining 
a strong defined contribution retirement plan system.
    Knowledge is power, and by arming plan sponsors with complete and 
comparable information, they will be better equipped to negotiate and 
provide high-quality plans for their participants at reasonable costs. 
The current economic and financial environment makes it even more 
important to provide uniform fee transparency in 2009. Hewitt would be 
pleased to offer our data analysis, our experience, and our consulting 
and administration expertise in helping the Committee complete its work 
on this issue.
    Thank you.
                                endnotes
    \1\ Hewitt Associates, Trends and Experience in 401(k) Plans (2007)
    \2\ Deloitte, Defined Contribution 401(k) Fee Study (Spring 2009), 
conducted for the Investment Company Institute
    \3\ For example, Christine Benz, director of personal finance at 
Morningstar Inc., stated that ``In almost every study we've run, 
expenses show up as a very significant predictor of future 
performance.'' In other words, lower costs are an indicator of high 
performance. http://online.wsj.com/article/
SB122099798601116727.html?mod=googlenews--wsj; See also, Haslam, John, 
Baker, H. Kent, and Smith, David M., Performance and Characteristics of 
Actively Managed Retail Mutual Funds with Diverse Expense Ratios, 
Financial Services Review, Vol. 17, No. 1, 2008 http://papers.ssrn.com/
sol3/papers.cfm?abstract--id=1155776
    \4\ Hewitt Associates, Trends and Experience in 401(k) Plans (2007)
    \5\ Hewitt's Statement for the Record to the U.S. Senate Special 
Committee on Aging Hearing on ``Saving Smartly for Retirement: Are 
Americans Being Encouraged to Break Open the Piggy Bank,'' July 16, 
2008
    \6\ Hewitt Associates, Building the Ideal 401(k) Plan: Providing 
Optimal Accumulation and Effective Distribution (October 2008)
                                 ______
                                 
    Chairman Andrews. Ms. Borland, thank you for your 
contribution to this debate, and to our committee's 
consideration.
    Mr. Onorato, welcome. It is nice to have you with us.

  STATEMENT OF JULIAN ONORATO, CEO AND CHAIRMAN OF THE BOARD, 
                        EXPERTPLAN, INC.

    Mr. Onorato. Thank you.
    Good morning. My name is Julian Onorato. I am the chief 
executive of ExpertPlan, based in East Windsor, New Jersey. My 
firm is a national leader in the small-business 401(k)-plan 
market, providing retirement-plan services for thousands of 
businesses and their employees throughout the country.
    I am here today on behalf of the Council of the Independent 
401(k) Recordkeepers, which is an organization of the 
Independent Retirement Plan Service Providers. CIKR is a sister 
organization of the American Society of Pension Professionals 
and Actuaries, which has thousands of members nationwide. I am 
also speaking on behalf of the National Association of 
Independent Retirement Plan Advisors, a national organization 
of firms that provide independent investment advice to 
retirement plans and participants.
    In order to make informed decisions, we believe that plans 
and plan participants should be provided with all the 
information that they need about fees and expenses in their 
401(k) plans, in a form that is clear, uniform and useful. 
Therefore, we strongly support the 401(k) Fair Disclosure for 
Retirement Security Act of 2009.
    And we thank you, Mr. Chairman, and members of the 
committee, for your leadership on this important issue. The 
bill will go a long way toward addressing some legitimate 
concerns about the system, and make 401(k) plans work better 
for American workers who depend on them.
    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.''
    Bundled providers are large financial-services companies 
whose primary business is manufacturing and selling 
investments. They bundle their proprietary investment products, 
with 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 
investment alternatives, whether a firm is a bundled investment 
firm, or an unbundled independent, this full scope of services 
offered to plans and their participants is the same.
    In other words, the only real difference to the plan 
sponsor is whether the services are provided by just one firm, 
or more than one firm. Under ERISA, the business owner, as a 
plan fiduciary, must follow prudent practices, when choosing 
retirement-plan service providers. 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.
    In addition, if the breakdown of fees is not disclosed, 
plan sponsors will not be able to evaluate the reasonableness 
of fees as 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 remained the same.
    The bundled providers want to be exempt from uniform 
disclosure rules. Simply put, they want to be able to tell 
business owners that they can offer retirement-plan services 
for free. Of course, there is no free lunch. And there is no 
such thing as a free 401(k) plan.
    In reality, the cost of these free plan services are being 
shifted to participants through the investment-management fees, 
charged on the proprietary investments; in many cases, without 
their knowledge.
    As provided in the bill, by breaking down plan fees into 
only three simple categories--investment management, record-
keeping and administration, and selling costs--we believe 
business owners will have he information they need to satisfy 
their ERISA duties.
    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.
    We commend Chairman Miller and Andrews for the uniform 
application of new disclosure rules to all 401(k)-plan service 
providers, in their bill. The last topic I want to touch on is 
independent investment advice, which this committee examined at 
a hearing last month.
    With the growth of 401(k) plans, the importance of 
investment advice to participants of retirement plans, has 
become increasingly clear. The majority of Americans are not 
experts on how to appropriately invest their retirement 
savings.
    We believe that working Americans are best served by 
independent investment advice, provided by qualified advisors; 
not conflicted investment advice, where the advisor has a 
financial interest in what investment choices to recommend.
    In my over two decades of experience in this industry, I 
can absolutely testify that participant rates of return are 
better when served by independent advisors.
    We commend Chairman Andrews for his recent legislation, 
promoting independent advice for retirement plans and 
participants.
    Thank you again, and I welcome your questions.
    [The statement of Mr. Onorato follows:]

Prepared Statement of Julian Onorato, CEO, ExpertPlan, Inc., on Behalf 
                       of CIKR, ASPPA and NAIRPA

    Thank you, Mr. Chairman and members of the subcommittee. My name is 
Julian Onorato and I am the CEO of ExpertPlan, Inc. based in East 
Windsor, New Jersey. ExpertPlan was founded as a technology innovator 
in the administration of retirement programs. With continued investment 
in operating efficiencies and client service, ExpertPlan is a leader in 
the defined contribution market, providing retirement services for 
thousands of companies and organizations with billions of dollars in 
retirement assets.
    I am here today on behalf of the Council of Independent 401(k) 
Recordkeepers (CIKR), the American Society of Pension Professionals & 
Actuaries (ASPPA), and the National Association of Independent 
Retirement Plan Advisors (NAIRPA) to testify on important issues 
relating to 401(k) plan fee disclosure addressed in Chairmen Miller and 
Andrews' legislation, the 401(k) Fair Disclosure for Retirement 
Security Act of 2009. CIKR, ASPPA and NAIRPA strongly support the 
premise that plans and plan participants should be provided with 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. Accordingly, CIKR, 
ASPPA and NAIRPA strongly support the 401(k) Fair Disclosure for 
Retirement Security Act of 2009.
    CIKR, ASPPA and NAIRPA also believe that working Americans should 
not have their retirement assets exposed to conflicted investment 
advice where the adviser has a financial interest in what investment 
choices to recommend to the plan and participants. Instead, American 
workers should have access to independent investment advice provided by 
qualified advisers. This issue was addressed by this Committee at a 
hearing on March 24. CIKR, ASPPA and NAIRPA strongly support 
legislation recently introduced by Chairman Andrews that would promote 
the provision of independent advice to plans and participants.
    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. ASPPA is a national organization of more than 
6,500 members 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, investment professionals, administrators, actuaries, 
accountants and attorneys. Our large and broad-based membership gives 
ASPPA a unique insight into current practical applications of 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 employer-sponsored retirement plan 
system. NAIRPA is a national organization of firms, not affiliated with 
financial services companies, which provide independent investment 
advice to retirement plans and participants. NAIRPA's members are 
registered investment advisors whose fees for investment advisory 
services do not vary with the investment options selected by the plan 
or participants. In addition, NAIRPA members commit to disclosing 
expected fees in advance of an engagement, reporting fees annually 
thereafter and agreeing to serve as a plan fiduciary with respect to 
all plans for which it serves as a retirement plan advisor. Background 
on 4011(k) Plan Fee Disclosure Legislation CIKR, ASPPA and NAIRPA 
strongly support the House Education and Labor 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 particularly pleased with the reintroduction of the 401(k) Fair 
Disclosure for Retirement Security Act of 2009. This bill will shine 
much needed light on 401(k) fees.
    We also are encouraged by the introduction of two other pieces of 
legislation by Congress on the fee disclosure issue. On February 9, 
2009, Senators Tom Harkin (D-IA) and Herb Kohl (D-WI) reintroduced 
their 401(k) plan fees legislation, S. 401, the ``Defined Contribution 
Fee Disclosure Act of 2009.'' In addition, H.R. 3765, the ``Defined 
Contribution of Plan Fee Transparency Act,'' was introduced on October 
4, 2007 and sponsored by House Ways and Means Committee Subcommittee on 
Select Revenue Measures Chairman Richard Neal (D-MA) and co-sponsored 
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. 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.
Department of Labor Regulations
    The Department of Labor (DOL) has finalized one 401(k) fee 
disclosure project, a revised Form 5500, including a revised Schedule 
C, which was effective beginning on January 1, 2009. In December 2007, 
DOL issued proposed regulations under ERISA Sec. 408(b)(2) which would 
have provided sweeping changes on what constitutes a reasonable 
contract or arrangement between service providers and plan fiduciaries. 
The proposed rules would have required enhanced disclosures for service 
providers to 401(k) plan fiduciaries. However, the proposed regulations 
would have required only an aggregate disclosure of compensation and 
fees from bundled service providers, with narrow exceptions, and would 
not have required a separate, uniform disclosure of the fees 
attributable to each part of the bundled service arrangement.
    In July 2008, DOL also issued proposed regulations under ERISA 
Sec. 404(a) setting forth a set of new participant fee disclosure 
requirements. The proposed rules would have required the disclosure to 
plan participants and beneficiaries of identifying information, 
performance data, benchmarks and fee and expense information of plan 
investment options in a comparative chart format, plus additional 
information upon request. However, no information on investment fees 
actually incurred with respect to a participant's account would have to 
be disclosed. Further, administration charges embedded in investment-
related fees would not have to be separately disclosed. On January 20, 
Rahm Emanuel, assistant to President Obama and White House Chief of 
Staff, signed an order requiring the withdraw from the Office of the 
Federal Register (OFR) of all proposed or final regulations that had 
not been published in the Federal Register so that they could be 
reviewed and approved by a department or agency head. The proposed 
ERISA Sec.  408 (b)(2) and participant fee disclosure regulations were 
sent to the Office of Management and Budget (OMB) in final rule form 
for review and approval. However, the regulations had not yet been 
released by OMB or sent to the OFR as of January 20. Therefore, the 
regulations have been stopped by the Emanuel order. 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 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 
Miller, House Education and Labor Subcommittee Chairman Andrews, Senate 
HELP Committee Chairman Kennedy (D-MA), Special Aging Committee 
Chairman Herb Kohl (D-WI) and Senate HELP Committee Member Tom Harkin 
(D-IA) 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.
---------------------------------------------------------------------------
    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 have required enhanced disclosures 
for service providers to 401(k) plan fiduciaries, the proposed 
regulation would have required only an aggregate disclosure of 
compensation and fees from bundled service providers, with narrow 
exceptions, and would not have required a separate, uniform disclosure 
of the fees attributable to each part of the bundled service 
arrangement. Although we appreciated 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. We commend Chairmen Miller and 
Andrews for the even-handed application of new disclosure rules to all 
401(k) plan service providers in the 401(k) Fair Disclosure for 
Retirement Security Act of 2009. Uniform disclosure of fees, as 
provided by the Miller-Andrews legislation, will allow plan sponsors to 
make informed decisions and satisfy their ERISA duties. The breakdown 
of fees required in the legislation also will allow plan sponsors to 
assess the reasonableness of fees by making ``apples to apples'' 
comparison of other providers and will allow fiduciaries to determine 
whether certain services are needed, leading to potentially even lower 
fees.
    The level of detail in the information needed by 401(k) plan 
participants differs considerably 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.
---------------------------------------------------------------------------
    CIKR, ASPPA and NAIRPA urge that any new disclosure requirements to 
plan participants also be uniform, regardless of whether the service 
provider is bundled or unbundled. In July 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 would have been 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 proposed requirement to disclose 
administrative expenses except to the extent included in investment-
related expenses would have imposed 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, CIKR, ASPPA and NAIRPA recommend that the disclosure 
of administrative and investment information be provided on a uniform 
basis in any legislation considered by Congress. 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 also 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, CIKR and NAIRPA 
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.'
    The 401(k) Fair Disclosure for Retirement Security Act of 2009 
requires two participant disclosure requirements: a ``before-the-fact'' 
notice of investment options and a revised quarterly statement 
requirement. The notice of investment options requires specific 
information be provided with respect to each available investment 
option, such as the investment option's risk level. The notice also 
must include a plan fee comparison chart that includes a comparison of 
actual service and investment charges that will or could be assessed 
against the participant's account. The chart must set fees into four 
categories: (1) fees depending on a specific investment option selected 
by the participant (including expense ratio and investment-specific 
asset based fees); (2) fees assessed as a percentage of total assets; 
(3) administrative and transaction based fees; and (4) any other 
charges deducted not described in the first three categories. The 
legislation also would amend the existing quarterly benefit statement 
requirement to mandate inclusion of specific information attributable 
to each participant's account, including starting balances and 
investment earnings or losses.
    We are very pleased that the disclosure requirements for plan 
participants in the 401(k) Fair Disclosure for Retirement Security Act 
of 2009 are uniform, regardless of whether the service provider is 
bundled or unbundled. This will provide participants with a complete 
picture of total costs and avoid confusion. We also commend Chairmen 
Miller and Andrews for the legislation's plan fee comparison chart 
requirement. This chart is similar to the sample participant fee menu 
that is attached to this testimony. It will provide participants with 
an easy to understand summary of fees which will allow them to make 
informed decisions about how to invest their retirement saving plan 
contributions. However, we ask the Committee to reconsider the level of 
detail required for participants. It is important that participant 
disclosures be concise, meaningful and readily understandable--
especially, since any new disclosure requirements will carry costs for 
participant disclosures. We also ask that the Committee consider 
defining ``small plan'', for purposes of permitting annual statements, 
as ``fewer than 100'' participants and beneficiaries, as in H.R. 3185 
passed by the Committee in the last Congress. Many small employers with 
more than 25 participants are struggling in the current economy, and 
the additional cost of more frequent reporting may discourage them from 
maintaining the company's 401(k) program.
    ERISA and the Internal Revenue Code generally prohibit plan 
fiduciaries from rendering any investment advice to plan participants 
and beneficiaries that would result in the payment of additional fees 
to the fiduciaries or their affiliates. The Pension Protection Act of 
2006 (PPA) Sec. 601 provided a statutory prohibited transaction 
exemption to the rule [codified at ERISA Sec. Sec.  408 (b)(14) and 
408(g) and IRC Sec. Sec.  4975(d)(17) and 4975(f)(8)] for certain 
transactions that may occur in connection with the provision of 
``eligible investment advice'' by a ``fiduciary adviser,'' subject to 
specific requirements. In particular, the final PPA investment advice 
provision allowed two specific permissible investment advice 
exceptions: (1) certain ``fee-leveling'' arrangements; or (2) certified 
computer model arrangements.
    On August 22, 2008, the Department of Labor (DOL) issued proposed 
investment advice regulations interpreting PPA Sec. 601. On the same 
date, the DOL issued a separate prohibited transaction class exemption 
(Class Exemption) that provided relief for certain transactions that 
went beyond the scope of relief contemplated in the statutory language. 
DOL issued final investment advice regulations (Final Regulation) on 
January 21, 2009, that incorporated the separate Class Exemption. into 
the Final Regulation. However, the status of these regulations is 
unclear at this point. In response to Rahm Emanuel's memorandum 
directing Agency Heads to consider extending for 60 days the effective 
date of regulations that had been published in the Federal Register but 
not yet taken effect, on February 4, 2009 the DOL proposed extending 
the effective date for the investment advice rules from March 23 until 
May 22, 2009 to allow the public to comment on whether the rules raise 
significant policy and legal issues. ASPPA and CIKR submitted comments 
in support of the extended effective date due to the uncertainty 
surrounding the final disposition of the regulations. On March 19, the 
DOL issued a final rule delaying the effective date to May 22. The 
Final Regulation's interpretation of the statutory exemption in PPA 
will make it more likely that participants and beneficiaries may obtain 
assistance in diversifying investments and appropriately reflecting 
their own risk tolerances and investment horizons in asset allocations. 
However, the portion of the Final Regulation which implements the non-
statutory Class Exemption (i.e., the portion that does not relate to 
the statutory exemption from the prohibited transaction rule enacted in 
PPA) may expose participants and beneficiaries to conflicted investment 
advice without sufficient protection from the effects of an adviser's 
conflicts of interest. Furthermore, this exemption is contrary to 
Congressional intent.
    Accordingly, ASPPA, CIKR and NAIRPA recommend that the DOL withdraw 
the Class Exemption portion of the Final Regulation. The enactment of 
ERISA Sec. Sec.  408(b)(14) and 408(g) reflect Congressional desire to 
provide very limited relief for providing conflicted investment advice. 
The Final Regulation expands this relief in a manner that does not 
provide adequate protection to participants and beneficiaries.
    With the growth of participant-directed individual account plans, 
the importance of investment advice to participants and beneficiaries 
of retirement plans has become increasingly clear. The majority of 
Americans are not experts on how to appropriately invest their 
retirement savings. However, due to the shift from defined benefit to 
defined contribution plans, many Americans are required to do just 
that.
    CIKR, ASPPA and NAIRPA believe that working Americans are best 
served by independent investment advice provided by qualified advisers, 
not conflicted investment advice where the adviser has a financial 
interest in what investment choices to recommend. We believe that 
participants' rates of return are better when served by an independent 
adviser. We commend Chairmen Andrews for his recent legislation 
promoting independent advice for retirement plans and participants.
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 supporting plan sponsors through uniform disclosure of fees 
and services and by encouraging plan sponsors to provide independent 
investment advice to participants, American workers will have a better 
chance at building retirement assets and living the American dream.
    CIKR, ASPPA and NAIRPA applaud the House Education and Labor 
Committee's leadership in exploring issues related to 401(k) plan fee 
disclosure and independent investment advice and in introducing the 
401(k) Fair Disclosure for Retirement Security Act of 2009. The 
Committee's consistent focus on retirement issues over the years has 
advanced improvements in the employersponsored pension system and led 
to an increased concern about the retirement security of our nation's 
workers. CIKR, ASPPA and NAIRPA look forward to working with Congress 
and the Administration on these important issues.
        attachments: sample fee disclosure form (plan sponsors)

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                 ______
                                 
    Chairman Andrews. Thank you very much, Mr. Onorato, for 
your contribution.
    Mr. Chambers, welcome back. We always appreciate your 
valued and constructive input in anything we do. Good to have 
you with us.

STATEMENT OF ROBERT G. CHAMBERS, FORMER CHAIRMAN OF THE BOARD, 
      AMERICAN BENEFITS COUNCIL AND PARTNER, MCGUIRE WOODS

    Mr. Chambers. Thank you. It has been a pleasure so far--
remains to be seen.
    And thank you to all of the members of the subcommittee, 
and the interlopers from the full committee, for the 
invitation.
    My name is Robert Chambers, and I am a partner in the 
international law firm of McGuire Woods.
    I hate to admit it, but I have advised clients with respect 
to 401(k) plan issues, since section 401(k) was added to the 
Internal Revenue code in 1978. I am also, as you noted, the 
past chair of the board of directors of the American Benefits 
Council, a trade association, on whose behalf I am testifying 
today.
    In a nutshell, the council's goal for 401(k) plans is an 
effective system that functions in a transparent manner, and 
provides meaningful benefits at a fair price. To accomplish 
this, we support further improvement of the rules relating to 
plan-fee disclosure.
    We very much appreciate the open and constructive approach 
that the committee used in amending H.R. 3185, prior to its 
adoption--or approval, rather--by the committee, last year. And 
we especially appreciate the openness to our ideas on the part 
of Chairman Miller and Mr. McKeon, Mr. Andrews, and Mr. Kline.
    We are equally enthusiastic about the current bill, in that 
it includes a number of improvements to the proposed 
legislation, many of which are listed in our written testimony.
    While our members continue to develop measures to ensure 
that fee levels are fair and reasonable for participants, there 
is room for improvement.
    First, I am going to address liability issues, then suggest 
a few--Mr. Miller, I was going to use the word, ``tweaks''--
perhaps, ``adjustments''--to the bill--and, finally, make a 
request regarding the minimum-investment option.
    The principal concern of many plan sponsors in this area 
relates to proliferating litigation, and the potential 
liability of plan sponsors and fiduciaries.
    Over the past few years, we have seen significant growth in 
plan-fee litigation involving defined-contribution plans. Plan 
sponsors cannot afford to take legal compliance lightly. All 
litigation--even litigation where there has been no 
wrongdoing--is extremely costly.
    Plan sponsors are especially frustrated by so-called 
``strike suits.'' These are suits in which litigation is filed 
ostensibly for the purpose of surviving a motion to dismiss, 
causing the sponsor to consider a large settlement, in lieu of, 
perhaps, paying even larger litigation expenses in defending 
the action to its conclusion.
    The effect of this litigation on plan sponsors has been 
very dramatic. It is a drain on resources and time. It 
interferes with sound business planning. And, frankly, it 
undermines retirement security by reducing sponsors' commitment 
to providing retirement programs.
    And, equally important, we want to correct the 
misimpression of those who view litigation as a positive means 
to vindicate employee rights, and to transfer value to 
employees.
    Fee litigation largely transfers value to the legal system, 
and results in the transfer of remarkably little value to 
employees. It leads to lower employer contributions, higher 
fees, reduced account balances, and less-comprehensive services 
for all participants.
    So here are four of our members' specific liability 
concerns, in areas covered by the bill.
    First, there should be no liability where an employee 
discloses to participants fee information that has been 
provided by a service provider, and that turns out to be 
incorrect.
    Second, handling unbundled information can be confusing. 
The bill would require a bundled service provider to disclose 
separate fees for administrative and investment services, even 
though the bundled service provider does not actually offer 
those services separately.
    Since the only commercially reasonable action for plan 
sponsors is to compare the total cost of bundled and unbundled 
services, plan sponsors need clarification that their taking 
this action will satisfy their fiduciary duties. And, of 
course, further, the bill needs to provide similar protection 
when sponsors pass this unbundled information on to 
participants.
    Third, the bill needs to make clear that if the fiduciary 
obtains and discloses the information as required by ERISA, it 
will have satisfied those fiduciary duties. And, finally, minor 
inadvertent errors--for example, in disclosing the fees 
associated with an investment option--should not provide 
participants with a cause of action.
    Therefore, we ask that you add these protections to the fee 
legislation, as you consider it.
    I will now turn to fee-disclosure issues within the bill. 
While participants need a clear, simple short disclosures that 
will, effectively, communicate key points on whether to 
participate and how to invest, fiduciaries need more detailed 
information, since it is their duty to understand fully the 
options available, and to make prudent choices on behalf of all 
participants.
    Despite the many improvements to the current bill, the 
council does believe that additional changes would be helpful. 
And here are three of them that are described at greater length 
in our written testimony.
    First, the rules should be flexible enough to accommodate 
the full range of possible investment options, including self-
directed brokerage accounts. Second, payments from one service 
provider to its affiliated service provider are not really 
revenue sharing, and should not be required to be disclosed 
without the fiduciary protection that I described earlier. And, 
finally, plan sponsors that pay fees should not be subject to 
any of the disclosure rules.
    One last point with regard to the minimum-investment 
option: We note that it is considerably different than the 
option described in H.R. 3185, and we have developed several 
questions regarding the revised concept in the very brief 
period that we have had to review the draft language. 
Therefore, we request another opportunity to meet with members 
of the subcommittee, in order to obtain a better understanding 
of what the option entails and, of course, to discuss our 
questions.
    So that is all. We thank you for this opportunity to share 
our views on the bill. And we look forward to continuing our 
very constructive dialogue on plan-fee disclosure, with both 
this subcommittee and the full committee. Thank you.
    [The statement of Mr. Chambers follows:]

  Prepared Statement of Robert G. Chambers, on Behalf of the American 
                            Benefits Council

    My name is Robert G. Chambers, and I am a partner in the 
international law firm of McGuireWoods LLP. I have advised clients with 
respect to 401(k) plan issues since 401(k) was added to the Internal 
Revenue Code in 1978. In that regard, my clients have included both 
large and small employers that sponsor 401(k) plans as well as many 
financial institutions that provide services to 401(k) plans. I am also 
a past chair of the Board of Directors of the American Benefits Council 
(``Council''), on whose behalf I am testifying today. The Council is a 
public policy organization representing plan sponsors, 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 Council appreciates the opportunity to present testimony with 
respect to 401(k) plan fees. 401(k) plans have become a primary 
retirement plan for millions of Americans. Accordingly, it is more 
important than ever for all of us to take appropriate steps to ensure 
that 401(k) plans provide those Americans with retirement security. We 
recognize that the common goal is an effective 401(k) system that 
functions in a transparent manner and provides meaningful benefits at a 
fair price in terms of fees. We want to be as helpful to that process 
as possible. The Council Supports Enhanced Disclosure Requirements
    The Council supports improvement to the rules regarding plan fee 
disclosure. Effective plan fee disclosure to participants can enable 
them to understand their options and to choose those investments that 
are best suited to their personal circumstances. Disclosure to plan 
fiduciaries enables them to evaluate the reasonableness of the fees 
that are charged by their current provider(s) and to shop for and 
negotiate services and fees from other providers.
    While plan fiduciaries are receiving extensive information 
regarding various plan services and related fees and are using that 
information to negotiate effectively for lower fees, we believe more 
can and should be done to make that process even more effective. And 
while service providers are providing fiduciaries with tools that 
enable them to analyze fee levels and to provide meaningful information 
to participants, we believe more can be done to improve that exchange 
as well. Chairman Miller previously introduced H.R. 3185, a bill that 
addressed two key disclosure points:
     The disclosure of plan fees by a service provider to a 
plan administrator, and
     The disclosure of plan fees by a plan administrator to 
participants. We very much appreciate the open and constructive 
approach that the Committee used in amending H.R. 3185 prior to its 
approval by the Committee last year. We especially appreciate the 
openness to our ideas on the part of Chairman Miller, Ranking Member 
McKeon, Subcommittee Chairman Andrews, and Subcommittee Ranking Member 
Kline. The revised bill included many significant improvements to the 
proposed legislation, including:
     Facilitating the use of electronic communication.
     Reducing the extent of unbundling and number of categories 
required.
     Permitting the use of estimated dollar amounts.
     The recognition that investment options with a guaranteed 
rate of return need separate treatment.
     A helpful delay in the effective date.
     Outside the context of investment options, eliminating the 
need to disclose all subcontractors and payments to subcontractors.
     Recognition of the liability issue with respect to service 
providers (reasonable reliance by service providers on information from 
unaffiliated service providers).
    These important improvements to H.R. 3185, considered in the 
previous Congress, are integral to making the disclosure of fees more 
effective. There are some specific proposals that we believe could be 
helpful in further improving the version of the 401(k) Fair Disclosure 
for Retirement Security Act of 2009 that will be considered in the 
current Congress.
Protecting the Voluntary System
    Before discussing the proposals in the bill that we believe would 
benefit from further discussion and improvement, we would like to 
discuss what has become a top concern for many plan sponsors: plan 
sponsor and fiduciary liability. Over the past few years, we have seen 
significant growth in litigation involving defined contribution plans, 
much of which is directly related to plan fees. So, as this 
Subcommittee and the full Committee consider fee legislation, we urge 
you to also consider the nature of the fee-related litigation that has 
been filed and pay special attention to areas that could inadvertently 
increase litigation.
    Plan sponsors cannot afford, either financially or from a 
participant-relations standpoint, to take legal compliance lightly. All 
litigation, even litigation when there has been no wrongdoing, is very 
costly. Plan sponsors are especially frustrated by socalled ``strike 
suits''--litigation filed only for the purpose of surviving a motion to 
dismiss, causing the sponsor to consider a large settlement in lieu of 
incurring the even greater litigation expenses that defending the 
action would require.
    The effect of the fee and other defined contribution plan-related 
litigation on plan sponsors has been very significant.
     Litigation is a drain on resources, time, and money.
     It interferes with sound business planning.
     It undermines retirement security by reducing the 
sponsor's commitment to providing retirement programs.
    Equally important, we want to correct the misimpression of those 
who view substantial increases in litigation as a positive means to 
vindicate employee rights and to transfer value to employees. 
Realistically, litigation results in remarkably little transfer of 
value to employees.
     The increased risk of litigation becomes factored into the 
cost of benefit plans through lower employer contributions and higher 
fees, resulting in reduced account balances.
     The sponsor's value is reduced, adversely affecting the 
accounts of participants in other plans whose accounts are directly or 
indirectly invested in the sponsor.
     Services become less comprehensive.
    More litigation leads to increasingly reduced benefits for all 
participants.
    Here are a few of our members' concerns regarding the 401(k) Fair 
Disclosure for Retirement Security Act of 2009, along with suggested 
solutions:
     What happens if an employer discloses to participants fee 
information that has been provided by a service provider and that turns 
out to be incorrect? To have a workable system, a plan sponsor that 
reasonably relies on service provider information should not have any 
liability.
     What is a plan sponsor required to do with ``unbundled'' 
information? The bill would require a bundled service provider to 
disclose separate fees for administrative and investment services. 
However, the bundled service provider does not offer such services 
separately. It is unclear how plan sponsors should use the information 
to compare services. They cannot compare it directly to actual 
unbundled fee structures, since the plan sponsors cannot purchase the 
services separately from the bundled service provider for the disclosed 
fee. The commercially reasonable action would be to compare the total 
cost of the bundled and unbundled services. Plan sponsors need 
clarification that this action will satisfy their fiduciary duties in 
this regard.
     The bill should make clear that, by obtaining and 
disclosing the information required by ERISA, plan fiduciaries will 
have satisfied their fiduciary duties in this regard.
     Minor, inadvertent errors, for example, in disclosing the 
fees associated with an investment option, should not provide 
participants with a cause of action.
Disclosure by Plan Fiduciaries to Plan Participants
    I will now turn to fee disclosure issues in the bill. It is 
critical to emphasize that the disclosure rules should take into 
account the sharply different circumstances of participants and plan 
fiduciaries. Participants value clear, simple, short disclosures that 
effectively communicate the key points that they need to know to decide 
whether to participate and, if so, how to invest. Plan fiduciaries need 
more detailed information since it is their duty to understand fully 
the options available and to make prudent choices on behalf of all of 
plan participants. Despite the many improvements to the current bill, 
the Council does believe that some additional changes could be made. 
These include:
     The rules must be flexible enough to accommodate the full 
range of possible investment options, including brokerage windows.
     Disclosure of revenue sharing between two or more 
unrelated service providers should be required. Payments from one 
service provider to its affiliated service provider are not viewed as 
revenue sharing and should not be required to be disclosed.
     Fees paid by plan sponsors should not be subject to any of 
the disclosure rules. Where plan assets are not involved, ERISA's rules 
are not implicated.
     Fees charged to service providers by their own service 
providers have no relevance to plans and should not be required to be 
disclosed.
     Unbundling for disclosure purposes requires the production 
of data that is not commercially useable raising questions about its 
value.
Minimum Investment Option
    The decision to include a minimum investment option in the bill 
raises policies and questions that are distinct from those relating to 
fee disclosure. The minimum investment option in the bill is 
considerably different than the option described in H.R. 3185, and we 
have developed a number of questions regarding the new concept in the 
brief period that we have had to review the draft language.
    We look forward to meeting with members of the Subcommittee to 
obtain a better understanding of what the option entails and to discuss 
our concerns.
Coordination of the Legislative and Regulatory Process
    In the effort to improve the fee disclosure rules, we believe that 
it is very important that the legislative and regulatory processes be 
coordinated to avoid unnecessary costs and confusion resulting from 
having to change systems multiple times.
    For example, it would be very harmful for the retirement system if 
one set of rules is created to be in effect for a year or two, only to 
be supplanted by a different set of rules. It is simply too confusing 
and too costly and not the best use of resources. Accordingly, we urge 
both Congress and the Department of Labor to consider how best to 
coordinate their efforts to avoid any adverse consequences.
Effective Date
    Any revisions to the fee disclosure rules will require:
     Interpretation and implementation by the Department of 
Labor,
     Extensive systems changes, and
     Development of effective communication methods.
    Accordingly, it is critical that legislation not be effective prior 
to plan years beginning at least 12 months after the publication of 
final regulations interpreting the legislation and that the Department 
of Labor be given a reasonable period of time to develop them.
    We welcome this opportunity to share our views on the bill. We look 
forward to continuing our very constructive dialogue on plan fee 
disclosure--the bill and any new amendments that will be considered--
with this Subcommittee and the full Committee.
                                 ______
                                 
    Chairman Andrews. Thank you, Mr. Chambers. Your testimony 
was characteristically constructive and helpful. We appreciate 
it very, very much.
    Mr. Chambers. Thank you.
    Chairman Andrews. Mr. Goldbrum, welcome to the committee.

 STATEMENT OF LARRY H. GOLDBRUM, EXECUTIVE VICE PRESIDENT AND 
              GENERAL COUNSEL, THE SPARK INSTITUTE

    Mr. Goldbrum. Thank you.
    Chairman Andrews, Ranking Member Kline, honorable members 
of the committee, my name is Larry Goldbrum, and I am general 
counsel of the Spark Institute, an association that represents 
a broad cross-section of the retirement-plan industry.
    Our members collectively service more than 62 million plan 
participants. I am here to tell you that every one of my 
members believes that fee transparency will benefit plan 
participants, plan sponsors and, ultimately, the entire 
industry. We commend the committee for its efforts.
    Our goal today, and, hopefully, in future collaborative 
efforts, is to ensure that the approach taken in any 
legislation has a meaningful impact on plan participants, and 
sponsors' ability to understand 401(k) fees, and does not 
unintentionally increase them.
    We believe that the 401(k) plan system is a fundamentally 
sound, competitive and innovative system that provides the best 
way for Americans to save and invest for retirement, and 
provides good value for the fees that are charged.
    We believe that the best approach to fee disclosure will be 
one that is flexible, concept-based, and allows disclosure 
materials to be tailored with comparable information for all of 
the investment options that are available.
    Many misperceptions have emerged in the discussions about 
plan fees, which are addressed in a series of white papers we 
just released. Some of the misconceptions are that 401(k) plan 
fees are not a good value for American workers; plan fees do 
little more than erode retirement savings; service providers 
make too much money by raiding 401(k) plans; and fees are not 
understood because information is not disclosed.
    Although time will not allow me to go into detail, I would 
like to note that, prior to 2008, the industry's average pre-
tax profit margin was approximately 21 percent. It is expected 
to be 10 percent for 2008, and in negative territory for 2009. 
In the last 5 years, approximately 80 vendors have exited the 
business. Additionally, the vast majority of service providers 
provide substantial, detailed and understandable information 
about fees, above and beyond what current law requires, because 
doing so makes good business sense.
    Service providers are already regulated by multiple 
agencies, including the IRS, DOL, SEC, OCC, FINRA and state 
insurance and securities regulators. Multiple disclosure 
standards make compliance expensive. We support a coordinated 
approach to fee disclosure.
    The proposal requires service providers to make detailed 
disclosure about fees in predetermined categories. We urge the 
committee to reconsider whether requiring disclosure to a one-
size-fits-all solution is appropriate. Not all fees fit into 
categories. And no single form can adequately address the 
diversity of products and service structures, without favoring 
one segment of the industry over others.
    A statutory framework must be flexible for the vast array 
of investment products and service structures, and be able to 
accommodate the ever-changing retirement and investment 
industries.
    Much has been made about the debate over bundled versus 
unbundled fee disclosure. Unbundled providers argue that their 
services may seem more expensive, when compared to services 
offered by bundled providers. Bundled providers argue that they 
may not offer component services on an unbundled basis, do not 
have unbundled pricing information available, and unbundled 
pricing information can be arbitrary and potentially 
misleading.
    We view this debate as a distraction from the real issue: 
The need for useful fee disclosure to plan sponsors, so they 
can make sound fiduciary decisions. Plan sponsors will have 
preferences towards bundled or unbundled providers, and can ask 
for unbundled pricing information.
    Similarly, providers should be able to structure and price 
their products on an unbundled or on a bundled basis, as they 
choose. When a bundled provider is asked for unbundled pricing 
information, it may choose to comply in order to retain 
existing, or win new business. Market forces, industry best 
practices and the threat of litigation and regulatory 
enforcement should drive behavior.
    Ultimately, the bundled-versus-unbundled debate is more 
about providers with different product and pricing structures 
arguing about business competition, rather than an alleged 
defect in fee disclosure. New laws should not attempt to 
resolve this business debate.
    Plan service providers are ready to assist plan sponsors to 
provide plan-fee information to participants. We support a 
flexible concept-based legislative framework. However, the 
proposal mandates an omnibus notice and chart that many 
participants may find will not provide more useful or 
understandable information.
    Categorizing fees by the way they are charged, which may 
have nothing to do with what they are for, may not increase 
participants' understanding. Participants should be provided 
with total investment-fee information such as expense ratios. 
Many participants may not find the additional underlying 
details to be useful in making better decisions.
    We are concerned that the proposal requires participants' 
statements to include dollar-basis disclosures of fees that are 
embedded in investment products, such as most investment-
management fees. While rate disclosure is possible, the 
information that would be needed for dollar disclosures on 
statements is simply not available on the plan record-keeping 
systems.
    We are concerned that the index-fund requirement as the 
condition for 404(c) fiduciary protection is effectively a 
mandate, which is unprecedented under ERISA. We are also 
concerned about the subjective nature of the requirement, 
because reasonable investment experts are likely to disagree on 
what funds will satisfy the requirement. And we have all been 
painfully reminded: Past performance is no guarantee of future 
results.
    We are concerned that this subjective requirement will 
expose plan sponsors to increase litigation risk, and that 
mandating the use of index fund as a way to reduce plan costs 
relies on a misconception that it will change the economics of 
plan-administration fees.
    I thank you for the opportunity to express my----
    [The statement of Mr. Goldbrum follows:]

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

    Chairman Andrews, Ranking Member Kline, honorable members of the 
Committee, my name is Larry Goldbrum and I am General Counsel of The 
SPARK Institute, an industry association that represents the interests 
of a broad based cross section of retirement plan service providers, 
including record keepers and investment managers who will be affected 
by the proposed 401(k) Fair Disclosure for Retirement Security Act of 
2009 (the ``Bill''). Our members include most of the largest service 
providers in the retirement plan industry and collectively they service 
more than 62 million defined contribution plan participants. It is an 
honor for me to share our organization's views on the proposed 
legislation. I welcome the opportunity to respond to your questions 
after my opening statement.
Introduction
    The SPARK Institute supports and encourages fee transparency that 
helps plan sponsors and participants understand the fees and expenses 
that they pay for plan and investment services, and make decisions on a 
fully informed basis. We commend the Committee for its efforts in this 
area. Our goal today and hopefully in future collaborative efforts is 
to ensure that the approach taken in any legislation has a meaningful 
impact on plan participants and sponsors ability to understand 401(k) 
fees and does not unintentionally drive those fees up.
    The SPARK Institute believes that America's employer-sponsored 
retirement plan system is a fundamentally proven, sound, competitive 
and innovative system that:
     Provides the best way for American workers to save and 
invest to reach their retirement goals, and
     Provides valuable services and good value for the cost.
    Fee disclosure should be a part of an overall assessment made by 
plan sponsors and participants about the value they receive for the 
cost. In addition to fees, plan sponsors and participants must evaluate 
investment performance and the quality and utility of the services 
provided. Ultimately, the best approach to fee disclosure will be one 
that is flexible, concept-based and allows service providers and plan 
sponsors to tailor disclosures with comparable information for each 
plan investment option. This measured approach will avoid overwhelming 
participants with extensive detail and will help them understand the 
fees they are paying and the services they are receiving in return. If 
we are not careful, however, requirements intended to help participants 
could instead increase costs and create potential fertile ground for 
lawsuits against plan sponsors without helping participants make 
informed choices.
    Many misperceptions and misunderstandings have emerged in the 
discussions about plan fees and their disclosure. I would like to try 
to correct some of those misperceptions today. In addition, while we 
have not had sufficient time in advance of this hearing to review the 
specifics of the proposed legislation, we would like to address certain 
provisions that we anticipated may be included.
Misperceptions About the Retirement Plan Industry
    The SPARK Institute recently completed a series of white papers 
entitled ``The Case for EmployerSponsored Retirement Plans'' analyzing 
certain aspects of the retirement plan industry including ``Fees and 
Expenses'', ``Benefits and Accomplishments'' and ``Coverage, 
Participation and Retirement Security.'' These reports identify some 
important facts and dispel many myths about employersponsored 
retirement plans, particularly 401(k) plans.
    Some common misconceptions are that 401(k) plans are not a ``good 
value'' for workers trying to save for retirement, and that the fees 
for plan and investment services do little more than erode workers' 
retirement savings. These criticism do not take into account all of the 
services that are provided to the plan sponsor and participants, 
including investment management. In fact, the data shows that plan 
participants receive more services and support and have more 
flexibility when investing through their 401(k) plans than they would 
if saving through retail IRAs. In addition, 401(k) plan participants 
may also benefit from sponsor-paid services, matching and profit-
sharing contributions, and group pricing. And finally, recent studies 
show that on average, expenses for 401(k) participants are lower than 
the expenses paid by retail mutual fund investors.
    There is also a misperception that service providers make too much 
money at the expense of American workers. Providing 401(k) plan 
services is capital and labor intensive and involves substantial start-
up and maintenance expenses, especially in light of the ever-changing 
employee benefit legislative and regulatory environment. In fact, cost 
pressures are significant because competition is fierce. The industry 
has been consolidating over the past ten years as many providers were 
unable to maintain profitability. SPARK Institute data indicates that 
more than 60 companies have sold their businesses in the past five 
years, and more than 20 additional firms exited the record keeping side 
of the business during that period by outsourcing that function to 
third party service providers. The industry's pre-tax profit margin 
averaged 21% from 2005 through 2007, a period when the Dow Jones 
Industrial average was between approximately 10,800 and 13,400. 
However, the 2008 average pre-tax profit margin is estimated to be 
approximately 10%, and in negative territory for 2009, because of the 
market collapse. Another myth is that plan sponsors and workers do not 
understand the fees and expenses associated with their retirement plans 
because the information is not being adequately disclosed, or is not 
available. The vast majority of retirement plan and investment 
providers provide substantial, detailed and understandable information 
about plan fees and expenses to plan sponsors and participants above 
and beyond what is already required by law because they recognize that 
it makes good business sense to do so. It also helps them avoid 
potential misunderstandings and claims from plan sponsors, plan 
participants and regulators. In fact, a strong case can be made that it 
is a combination of simple human nature and the ``do it for me'' 
preferences of a significant number of American workers when it comes 
to retirement saving and investing--rather than the lack of 
information--that is at the root of any lack of understanding. As these 
issues are considered, it is crucial that we all understand that plan 
sponsors and participants already receive and have access to a lot of 
information about plan fees, and that additional disclosures must be 
more useful, not just more information.
Discussion of Specific Proposals
    Before I begin my comments about the specifics of the proposed 
Bill, I want to note that retirement plan and investment providers are 
already regulated by various agencies including the IRS, DOL, SEC, OCC, 
FINRA, and state insurance and securities regulators. Having multiple 
disclosure standards makes compliance very expensive and adds to the 
fees paid by plans and participants. The SPARK Institute supports a 
coordinated approach to regulating fee disclosure for retirement plans.
    The proposed Bill requires that all service providers make detailed 
disclosures about plan fees and expenses in four categories. The SPARK 
Institute strongly urges the Committee to reconsider whether requiring 
disclosure to be made through a ``one size fits all'' solution using 
pre-determined categories is appropriate. Not all fees fit neatly into 
categories and no single form or methodology can adequately address the 
diversity of products and service structures without favoring one 
segment of the industry over others. Any statutory framework must be 
flexible and adaptable to the broad array of investment products and 
service structures, and must be able to accommodate the competitive and 
ever changing nature of the retirement plan and investment industries.
            A. Disclosure to Plan Sponsors
    With regard to disclosures to plan sponsors, service providers 
should not be required to calculate the actual dollar amount of fees 
and expenses, particularly those that are embedded in the expense 
ratios of plan investment options. Providing expense ratio or rate 
information, instead of dollar estimates, will provide enough 
information. Service providers can, upon request, provide simple 
estimates of the aggregate amounts of such fees and expenses based on 
certain assumptions and average account data. Much has been made of the 
debate over disclosure of fees in ``bundled'' vs. ``unbundled'' service 
structures. Unbundled providers argue that their products and services 
may appear to be more expensive to plan sponsors when compared to the 
same or comparable services that are offered through a bundled service 
provider. Bundled service providers argue that they may not offer 
component services on an unbundled basis, and do not have unbundled 
pricing or cost information available. Bundled providers add that any 
such unbundled pricing information is inherently arbitrary, 
hypothetical, unreliable, and potentially misleading. The SPARK 
Institute views this debate as a distraction from the real issue--the 
need to provide useful and relevant disclosures to enable plan sponsors 
to make sound fiduciary decisions. Plan sponsors will have their own 
preferences toward either bundled or unbundled product offerings, and 
have the ability and right to request information that they deem 
necessary in order to evaluate service providers. Similarly, service 
providers should have the ability to structure their products and 
services on an unbundled or bundled basis and price their products and 
services as they choose. Plan sponsors have the ability to request 
information from service providers and service providers have the 
option to comply with such requests in the hopes of winning new or 
retaining existing business. Market forces, industry best practices, 
the threat of litigation, and the threat of regulatory enforcement 
actions should drive industry behavior instead of legislative mandates. 
The SPARK Institute believes that ultimately the bundled versus 
unbundled disclosure debate is more about companies with different 
product structures, service models, product and service capabilities, 
and pricing structures debating about market forces and competition 
than alleged defects in disclosure of employer-sponsored retirement 
plan fees. The SPARK Institute does not believe that new laws and 
regulations should attempt to resolve this business debate.
            B. Disclosure to Plan Participants
    SPARK Institute members stand ready to assist plan sponsors in 
providing fee information to plan participants. As with service 
provider disclosure to plan sponsors, The SPARK Institute urges the 
Committee to seek a flexible and concept based framework, as workers 
will ultimately bear the costs of additional disclosures.
    Instead of creating such a framework, the Bill anticipates an 
omnibus notice and fee chart addressing all the plan's investment 
options. The Bill's requirement that the fee chart categorize charges 
relating to plan investment options has the unintended effect of 
increasing burdens and costs without providing new or more useful data 
to participants. Categorizing fees by the way they are charged, which 
may have nothing to do with what they are for, will not help 
participants better understand them. With respect to a plan's 
investment options, participants should instead be provided with 
information regarding the total investment fees (e.g., the expense 
ratio) and the transaction related fees (e.g., redemption fees). 
Providing participants with extra detail about how fees are broken down 
will likely confuse or overwhelm them instead of enlightening them.
    The Bill also obligates the plan sponsor to provide dollar basis 
disclosures or estimates of indirect charges, such as fees that are 
embedded in investment products, for each participant on quarterly 
benefits statements. These charges, by definition, are embedded in the 
funds and the information needed for the calculations and estimates 
does not exist on the record keeping systems that produce the 
statements. Moreover, since the fund and account information is 
reported net of the embedded fees, adding this information to the 
statements will result in information that does not add up or make 
sense.
            C. Other Requirements
    It is our understanding that the proposal also includes a 
requirement that conditions ERISA 404(c) fiduciary liability protection 
on the inclusion of an index fund that meets certain subjective 
requirements. In our opinion, this precondition is effectively the same 
as a mandate, which is unprecedented under ERISA. The Bill's 
objective--increased transparency--does not warrant a specific fund 
requirement. We are also very concerned about the subjective nature of 
the fund description which requires the use of ``an appropriate broad-
based securities market index fund and which offers a combination of 
historical returns, risk and fees that is likely to meet the retirement 
income needs at adequate levels of contribution.'' Reasonable 
investment experts are likely to disagree on which funds satisfy such 
requirements. Additionally, as we have all been painfully reminded in 
recent months, past performance is no guarantee of future results. The 
subjective nature of the requirement makes it untenable and exposes 
plan sponsors to unnecessarily increased litigation risk. And finally, 
mandating the use of index funds as a potential ``low cost'' investment 
option as a way of reducing plan costs relies on the misconception that 
doing so will change the economics of servicing a plan. Regardless of 
which funds are used in a plan, plan service providers must have a 
source of revenue for the total package of services they provide.
Conclusion
    On behalf of The SPARK Institute, I thank the panel for the 
opportunity to share our views on these important issues, and I welcome 
your questions.
                                 ______
                                 
    [Additional submissions of Mr. Goldbrum follow:]
    [``The Case for Employer Sponsored Retirement Plans: 
Benefits and Accomplishments,'' may be accessed at the 
following Internet address:]

           http://www.sparkinstitute.org/content-files/File/
     Benefits%20and%20Accomplishments%20FINAL%20April-09%281%29.pdf

                                 ______
                                 
    [``The Case for Employer Sponsored Retirement Plans: 
Coverage, Participation and Retirement Security,'' may be 
accessed at the following Internet address:]

           http://www.sparkinstitute.org/content-files/File/
     Coverage%20Participation%20and%20Security%20FINAL%205-4-09.pdf

                                 ______
                                 
    [``The Case for Employer Sponsored Retirement Plans: Fees 
and Expenses,'' may be accessed at the following Internet 
address:]

           http://www.sparkinstitute.org/content-files/File/
             Fees%20and%20Expenses%20May%202009%20FINAL.pdf

                                 ______
                                 
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
                                 
                                ------                                

    Chairman Andrews. Well, thank you, Mr. Goldbrum. We are 
happy to have you with us.
    And I would like to thank each of the witnesses for 
excellent contributions to the committee's understanding of the 
issues.
    We are going to begin with questioning--with Chairman 
Miller--for 5 minutes.
    Mr. Miller. Thank you very much.
    And thank you for your testimony.
    This hearing and, I believe, this subject matter, is 
absolutely critical. And I think your testimony validates that 
point of view.
    The financial-services industry likes to remind us that 
American households own a piece of the market; that more people 
own stock today than at any other time. The vast majority of 
them own less than $10,000 worth of stock, and they own it 
primarily through their 401(k) plans or a related plan.
    That nexus to the stock market is a great deal with the 
stock market is going up. Nobody on this committee is 
suggesting that, somehow, this money was lost because, solely, 
of these fees. But what it pointed out is that, in a volatile 
market, with unprecedented events taking place--that you need 
to be able to hold on to every dollar possible.
    And when we see how fees can erode the savings of 
individuals, I think it is very important that we see that we 
can secure for them every dollar possible, since they are 
working very hard, after paying all of their bills, to set 
aside money to save for their retirement.
    And if you talk to individuals, you will see--in one market 
drop that was engineered by financial scandals, we see that 
people could lose their health savings account, their kids' 
education, and their retirement--all in one drop from the 
market.
    And so the question of, ``What are they left with?'' and 
``What is the net that is provided to them after they make 
these investments?'' is very, very important.
    I know we can all talk about how complicated it is, and, 
``They won't need it,'' and, ``They won't like it,'' and, 
``They won't understand it.'' But the fact of the matter is the 
effort hasn't been made to give it to them today, so we don't 
know that.
    And if I go to Mr. Bullard--if I understand what you are 
saying on pages 14, 15, and, I believe, 16, in your opening 
statement--is this information is available. It is just not in 
a place where it is very useable to the individual, or maybe 
even the plan sponsor, in this case, because of the manner in 
which it is scattered about in the various reports that are 
required today, under the law?
    Mr. Bullard. Right. That is correct. And it is a very 
important point.
    Most of the table has been focusing on the bundled-
unbundled issue. But there is a--a prior issue of just being 
able to give participants a number so they can know what their 
total, all-in costs are, and, I would hope, also provide that 
as a dollar amount so, as the ranking member pointed out, they 
can evaluate that $300 for themselves, and decide whether that 
is something worth paying.
    Mr. Miller. And you believe that that is information that 
they can absorb, and make a decision based upon?
    Mr. Bullard. Ideally, what you would do is you would have 
an all-in expense ratio. And, then, to amend the bill's 
comparative-fee components--to provide that, next to that, 
there be a representative fee for that size 401(k) plan. By 
putting the fee in context, then you are really allowing basic 
capitalist principles of competition to work in this 
marketplace, and let them evaluate whether it is worth paying 
more, if that is the case, than the average fee.
    The ICI just released a study which shows that it seems to 
be comfortable with there being representative fee amounts out 
there that it characterizes as ``average'' for different size 
plans. I see no reason why that shouldn't be placed alongside 
that very simple one expense ratio that are provided to 
participants.
    Mr. Miller. Thank you very much.
    Ms. Mitchem, you raised a point that has been raised 
somewhat in this committee, but a little bit more on the Senate 
side. And on page seven, when you discuss organizing funds 
around risk levels, as opposed to sort of consumer names, with 
the life cycle, safe and secure--what is the other one they 
were looking--had another one in the Senate that they had a 
problem with--target funds? What we find out is, when they 
looked at these funds that are advertised under the same 
consumer heading, they are, in fact, very different in terms of 
risk.
    And there is very--apparently--somewhat difficulty in 
consumers determining how that risk is managed. Do you want to 
speak to that?
    Your mic, please?
    Ms. Mitchem, if you could turn your microphone on--thank 
you.
    Ms. Mitchem. I think it is important to recognize the 
challenges that participants face in really becoming their own 
chief investment officers. Most of them don't have a background 
in finance, and have an extraordinarily difficult time deciding 
how to allocate their funds in the most appropriate manner.
    So I think what we have to do is to make it easy for them; 
to make investing in their 401(k) plan not a difficult 
challenge. And one of the ways that we can do that is by 
demystifying the vocabulary.
    So, instead of talking, you know, about small-cap equity 
and large-cap equity and high-yield bonds, we could actually 
put these funds on a risk spectrum between ``conservative,'' 
``moderate,'' and ``aggressive.'' And those are words that the 
average participant can----
    Mr. Miller. But you have to admit, you started out by 
saying that the whole marketing ploy here is that, somehow, you 
can beat the Street. So if you don't use the language of the 
Street, how could you possibly beat the Street?
    So if you don't understand large-caps, small-caps and all 
the rest of that--I mean, it is a fallacy of the plan. 85 
percent of the trained traders on the Street can't beat the 
Street. So--but we are convincing Americans that they can.
    But I think you--I have a limited time--you--I am about out 
of my time. I am out of my time. But I am chairman of the 
committee, so I am going to take another minute.
    I think this is a very important point that you are 
raising, about how these--again, this is marketed to 
individuals.
    But I want to, quickly, go to Ms. Borland.
    One of the concerns I also have is what happens when people 
exit these plans--a lot of discussion here about getting them 
in and automatic enrollment, and all the rest of that. What 
happens when they exit?
    We went through a huge scandal here with lenders in the 
student-loan program, who used that program to develop a market 
for people for private--``private''--student loans. They were 
just simply credit cards.
    And the arrangements that they--you know, people started 
putting their trust in those individuals, and then they got 
marketed off into very high-interest loans.
    You are suggesting here that there is a financial advantage 
in some of the affinity arrangements between these funds and 
their other products.
    You want to take 30 seconds? And I will get back to you 
``off the air,'' as they say.
    Ms. Borland. Okay. Yes, it is something that is very 
important.
    When individual investors within a 401(k) plan have the 
purchasing power of 1,000 or 10,000 or 20,000 investors, they 
can expect lower fees. When they roll over into that retail 
environment, they have the purchasing power of one individual.
    We are not suggesting that rollovers are a bad thing. And, 
in many cases, they may be a very smart decision; certainly, 
significantly better than cashing out.
    However, there could be a significant fee differential. And 
there is no requirement that those be effectively disclosed. So 
when a service provider for a 401(k) plan has incentives to 
encourage rollovers into retail products, we think the plan 
sponsor needs to be adequately aware of that potential conflict 
of interest, and be aware of the marketing that may be taking 
place by the service provider, directly to plan participants, 
and ensure the appropriate disclosure is in place.
    Mr. Miller. Thank you.
    Thank you, Mr. Chairman.
    Chairman Andrews. Thank you, Mr. Chairman.
    The gentleman from Minnesota, Mr. Kline, is recognized.
    Mr. Kline. Thank you, Mr. Chairman.
    We have had a number of off-line, sidebar discussions, 
here, about the importance of lawyers and the legal profession.
    We differ, often, on the importance of that. But I think it 
is important that, when we are looking at legislation--that the 
principal purpose not be just to grow the legal profession; to 
make things complicated; to write legislation in such a way 
that you are bringing about more causes of action, more 
lawsuits. And I suppose, as I mentioned before, in some 
districts, we can expand law schools. But that shouldn't be 
what our principal purpose is.
    So, Mr. Chambers, I want to turn to you. You, in your 
testimony, had a great deal to say about fiduciary-liability 
issues. And, as you know, when we took this bill up in the last 
Congress, I offered an amendment that, in effect, said, ``If a 
plan sponsor did what the bill says it was supposed to do, it 
would be shielded from a lawsuit.''
    It turns out I withdrew the amendment on the understanding 
that, as the legislation went forward, we would continue to 
discuss that. The legislation didn't go forward. And so we 
didn't proceed with that.
    Can you just take some of my time here, or--now, I am 
making it your time to tell us what sort of protection needs to 
be included in this bill? And how can we go about making sure 
that that is taken care of?
    Mr. Chambers. Thank you.
    Mr. Kline. And I understand I am asking lawyers, so there 
is some risk here. But----
    Mr. Chambers. Well, I was going to point out that lawyers 
have 401(k) plans, too. So there has to be something to go into 
that.
    I am sorry?
    Chairman Andrews. We have nothing in them.
    Mr. Chambers. Absolutely.
    As I said, the American Benefits Council and, I think, most 
employer organizations, are fully in favor of increasing the 
transparency of plan fees, and of the operation of plans. There 
is no question about that.
    The concern here is that as additional responsibilities are 
being placed on employers to collect information, and then 
disseminate information, we are concerned that that itself is 
going to increase their potential for liability.
    So one of the things that we have suggested, as I 
mentioned, both in the written testimony, and in my oral 
testimony, is that in several different situations, we think 
that it is appropriate to provide those employers who act in 
good faith and--whether there are small mistakes in terms of, 
you know, 27 basis points being charged, as opposed to 32, or 
whether they are given information that, ultimately, is 
incorrect, by a service provider--that the legislation should 
provide those employers with coverage--in other words, with 
limited or no liability.
    Mr. Kline. And that would--excuse me, if I can. You have 
seen the legislation, at least as it was last time. And you are 
suggesting that we do need to put language into it--we do need 
to amend Mr. Miller's bill to make sure that there is that 
protection.
    Mr. Chambers. That is correct.
    Mr. Kline. Okay.
    You also talked about strike suits. Tell us a little bit 
more about what those are--defining the term. What is their 
purpose, and how do we need to address that in the legislation?
    Mr. Chambers. Well, I don't know that the term ``strike 
suit'' is something that you are going to find in Webster's 
Dictionary, but----
    Mr. Kline. We will take your definition.
    Mr. Chambers. Oh, thank you.
    Actually, it is the definition of some of the litigators at 
our firm, because I asked them if there is a more appropriate 
term, and they said, ``No.''
    A strike suit is a suit which is difficult to describe in 
saying, ``Well, this was clearly a strike suit, as opposed to 
that one,'' because it is a matter of intention.
    A strike suit is----
    Mr. Kline. What is the purpose of a strike suit?
    Mr. Chambers. Well, the purpose is, essentially, to try to 
get a settlement in connection with a cause of action. And the 
way that a lot of class actions and other suits that are 
brought in connection with employee benefit plans are operated 
is that, you know, a complaint is filed, and then there is a 
motion to dismiss by the defendants.
    And a lot of defendants--typically, employers and service 
providers--recognize that if a class gets passed in motion to 
dismiss part of the program, then, in fact, there is going to 
be a lot of additional expense.
    And so these are cases in which the theory is, if we can 
get past--if the plaintiffs can get past the motion to dismiss, 
at that point in time, there is a very good opportunity for 
settlement, without actually having to take the case to its 
regular conclusion, through the court system.
    And, of course, those are cases, as I mentioned in my oral 
testimony, which lead to, again, feathering not only 
plaintiff's lawyers--I mean, you know the----
    Mr. Kline. Both sides get paid.
    Mr. Chambers. Both sides are represented.
    And----
    Mr. Kline. Twice as many law schools.
    Mr. Chambers. And an awful lot of the money goes into 
lawyers' pockets, and that is unfortunate, because--and it has 
an adverse impact on the amount of contributions made to the 
plan, services, et cetera.
    Mr. Kline. All right. Thank you. I see my time has expired.
    I yield back.
    Chairman Andrews. I thank my friend.
    I thank the witnesses for very edifying testimony. And I 
want to kind of walk through some of the concerns that we have 
heard about the underlying bill.
    One objection, or issue, raised by the minority side, was 
that maybe this isn't that big of a deal. Well, small amounts 
of money, compounded over time are a very big deal. And if 
someone is overpaying for fees over a 30-, 40-, 50-year period 
in their life, it metastasizes. It becomes a lot of money.
    The second concern--Mr. Chambers, I think we have the same 
goal. The purpose of this bill and the investment-advice bill 
is not to expand employer liability. It is to expand protection 
for consumers and investors and retirees. So we are interested 
in hearing from you on a continued basis, of how the bill might 
be improved, in conjunction with the minority, on these issues. 
I think you have raised some significant questions this 
morning.
    Mr. Chambers. Thank you.
    Chairman Andrews. I heard some concerns--and I am 
paraphrasing--but that bundling is too much of a problem for 
providers.
    Ms. Mitchem, Barclays is a pretty large provider, isn't it?
    Ms. Mitchem. Yes.
    Chairman Andrews. Do you have any difficulty unbundling any 
fees that you would charge to a client?
    Ms. Mitchem. Well, I think, importantly, we are not a 
record-keeper. So we are an asset manager only. So we don't 
provide what would be called the tradition bundle, where we 
bundle administrative fees with investment-management fees.
    Chairman Andrews. Right.
    Ms. Mitchem. But I would say that if you look across the 
401(k) industry, there are very few providers that offer only a 
completely bundled package. So what you will find is that in 
the ``bundled'' category, the majority of those players are 
what you might consider ``partially bundled.'' So they offer a 
couple of outside options, but the majority of it is a 
proprietary----
    Chairman Andrews. Would you agree or disagree with the 
statement that the unbundling requirements in the bill are 
punitive or too burdensome for a provider?
    Ms. Mitchem. You know, I don't think they are punitive, 
because I think, when you ask a question, and you dig deep, I 
think plan sponsors do get the answer. And I think that, 
obviously, the work of Hewitt would support that. So we find 
that when plan sponsors go out for bid, when they actually 
press the provider to get that information, they both get that 
information and end up, in many cases, lowering the overall 
fees of the plan.
    Chairman Andrews. The Adam Smith idea, as Mr. Bullard 
talked about--more competition--it tends to work.
    Ms. Mitchem. Also, just making it easier for plan sponsors 
to get that information. I mean, they shouldn't have to perform 
a forensic exam to get the information that they need to make 
the most appropriate fiduciary decision.
    Chairman Andrews. Mr. Onorato, another criticism that we 
have heard is that the information that would be presented 
under this bill is too complicated for either employers, or 
employees, or both to understand. Do you agree with that 
concern?
    Mr. Onorato. Mr. Chairman, absolutely not.
    The independent providers have been disclosing plan fees 
and participant fees for the last 20 years. It may not be in 
the template recommended by the bill, but we exist because we 
can provide cheaper service, and better availability of 
investment direction, and we disclose our fees.
    It is absolutely not true to suggest that a small 15-
employee company would have the leverage to go into a bundled 
investment firm and ask for full disclosure of record-keeping 
fees.
    The testimony given was, ``This is provided when client 
retention is an issue.''
    The plumbing contractor at Ford Trucks cannot go in to a 
big, bundled provider and say, ``I would like to know what I am 
paying for the call center or the ad men and the plan setup.''
    Chairman Andrews. Right.
    Mr. Onorato. Not going to happen.
    Chairman Andrews. Mr. Goldbrum, and I will just conclude 
with you, because my time is about to expire. You graciously 
put the light on several minutes after I began, but I am not 
going to--I will play by the rules everyone else does.
    No, that is right. Well, my dear friends would not let that 
happen.
    Mr. Goldbrum, if a employee--if that plumbing contractor--
Joe the Plumber, let us call him--goes to his or her financial-
services firm that has set up the 401(k) and says, ``Why are 
you guys taking a point and a half a year out of people's 
accounts, and what is it for?''--do you think he has the right 
to know the answer to that question?
    Mr. Goldbrum. Yes, I do think that----
    Chairman Andrews. Do you think that we have to provide it 
by statute, or do you think the market is providing him with an 
answer now?
    Mr. Goldbrum. Well, I think that the vast majority of 
service providers are already providing a significant amount of 
information to employers to help them evaluate the fees that 
are being paid for their plans, and to help them satisfy their 
fiduciary requirements.
    So where you have a provider that is providing a full suite 
of services, and the fees are being paid, for example, through 
the investment fund, the simple answer is that the fees are the 
total expense ratios of the fund. What are the total costs of 
the funds?
    Chairman Andrews. You are aware, though, of the market 
research of--both among small employers and employees that say 
most people have no idea what these fees are being paid for. 
Why is that?
    Mr. Goldbrum. Well, I think that it is important to 
separate what employers, as plan fiduciaries, need to know, and 
the decision process that they go through in picking the funds 
and setting up the plan--versus what the participants need to 
know in making their investment decisions.
    Chairman Andrews. Shouldn't participants have the right to 
know whatever they want to know, because it is their money?
    Mr. Goldbrum. Again, the vast majority of service providers 
are providing substantial information----
    Chairman Andrews. But, no; that wasn't my question. If Joe 
is an employee of the fund, as well as the owner, shouldn't he 
have the right to know where every dollar of his pension money 
is going?
    Mr. Goldbrum. Absolutely.
    Chairman Andrews. Okay.
    Mr. Goldbrum. We are not against fee disclosure. Our issues 
are really in the manner and the approach----
    Chairman Andrews. Okay.
    Mr. Goldbrum [continuing]. And the specific details of 
how--approached.
    Chairman Andrews. I appreciate that. Thank you very much.
    Mr. McKeon is not here, so it would be Dr. Roe?
    Dr. Roe. Thanks, Chairman Andrews.
    First of all, obviously, Vanderbilt is very well 
represented here today. And I am pleased to say, 2 weeks from 
Friday, my son gets his MBA from Vanderbilt. So I am--
halleluiah. That is the last one, I think.
    Ms. Borland. Congratulations.
    Chairman Andrews. Yes, but how is their football team?
    Dr. Roe. Well, not bad. Not bad.
    Chairman Andrews. He didn't go to law school?
    Dr. Roe. No. No, he did not go to law school.
    Chairman Andrews. Okay. All right.
    Dr. Roe. I appreciate you all being here, and trying to 
work through this. In the medical group I practiced in, we had 
70 providers and about 350 employees. And I had the fortune, in 
good years, to be on the pension committee, and, this last 
year, the misfortune of being on the pension committee when 
prices--I mean, the assets were going down.
    And I think fee transparency is extremely important. It is 
very hard, sometimes, even in my position on the pension 
committee, to figure out how much money we will pay in to have 
the plan administered.
    However, in my own personal account, I will use a bundled 
approach many times. I do, currently, because I think you have 
aligned incentives. I could look at my account and say, ``I 
made or lost this much.'' I can certainly compare that to the 
market, and make a decision.
    I know exactly how much I am paying each year. And I 
think--I forgot who gave the example--if it goes from $1 
million to $2 million--okay--that you paid more money. That is 
correct. But if that beats the market average, I have no 
problem with paying for that advice.
    And if it is good advice, and my return, net of fees, is 
higher than the market average, I am happy with that. I don't 
mind paying for that at all.
    And I will stop, and then get your comment on that. I had 
forgotten you had made that statement.
    Mr. Onorato. Thank you. That is a very good point, 
Congressman.
    It comes down to freedom of choice. You choose not to be 
interested in more than the all-in fee. That is what you have 
said. If you are a firm that wrote software for call centers, 
or provided call-center services, or you were a CPA firm, you 
would be fully qualified to produce your own 5500 and file it. 
Or you may elect to choose to support the call centers of your 
participants.
    Those firms need the choice. They need to sit down with the 
bundled provider and say, ``I want to know, out of that 125 
bits, how much that administrative unit charge is, because I 
might be able to do it cheaper.''
    We exist because, over time, we have proven we can do it 
cheaper by disclosing fees. Fees generate innovation. It 
generates better service for the ultimate participant. It comes 
down to freedom of choice.
    Dr. Roe. Okay. Thank you.
    I know that we spend a lot of time and money on, certainly, 
complying with ERISA. And I would just like a comment from any 
of the panel--do you think this will add any costs by doing 
this? Will this make this harder to comply with, or less hard 
to comply with?
    Mr. Onorato. Are you asking me again?
    Dr. Roe. Just anyone on the panel.
    Mr. Goldbrum. Yes, I would like to make a comment about 
that. I think that you run the risk that if you don't take a 
measured approach, and you simply provide a lot of additional 
information and more detail, simply for the sake of providing 
that information, it will, ultimately, increase the cost. And 
those costs will, ultimately, be passed on to the participants.
    So I think you need to do a cost-benefit analysis here, in 
terms of what information is truly targeted and truly 
beneficial, and will help participants make more informed 
decisions, and what will it cost to provide that information, 
and weigh that.
    And that is, ultimately, where we have concerns with the 
proposal, not in making fees transparent. We do support that; 
but more specifically, the approach that it is taken in how 
those fees are mandated to be disclosed.
    Dr. Roe. Well, then go ahead and--with Chairman Andrews--
just to have his question a minute ago--certainly, at the end 
of a year, when you look at your report, or a quarterly report, 
it would be simple for the people in my office, for instance, 
to just look and say, ``I paid $400 this year to have my plan 
administered, and I made such and such percentage of gain.'' I 
think that is what his point was.
    And that is really easy to look at. It is difficult to look 
at--I mean, I have got through organic chemistry. And figuring 
some of these fees out is difficult to do. And so I think just 
having it transparent is important. Any comments from that?
    Mr. Goldbrum. Yes, again, we agree that transparency is 
important. Again, it is the manner in which you go about doing 
it. So part of what we say is that participants should be given 
the right information. They should be able to have the total 
cost of what it is to use a particular investment option, so 
that they can make those comparisons.
    And, absolutely, that information is available, and can be 
provided. And the vast majority of service providers and plan 
sponsors already provide that information through fund fact 
sheets, through the Internet, through call centers. The 
participants can get that information.
    And granted, a fund summary would be better. And the vast 
majority of service providers, as I said, recognize that, and 
do provide that.
    Dr. Roe. Thank you, Mr. Chairman.
    Mr. Bullard. Could I add something to that?
    Chairman Andrews. Sure. I just want to make one point, and 
then we will let that happen.
    I appreciate the doctor's line of questions. I would invite 
you, Mr. Goldbrum, if you would--the committee would like to 
see your organization's proposal as to what would work for fee 
disclosure. We would welcome you to submit that, so we could 
consider it.
    Mr. Goldbrum. I thank you for that opportunity.
    Chairman Andrews. Thank you.
    Mr. Bullard, did you want to----
    Mr. Bullard. I would just like to add just two points. One 
is that the purpose of disclosure should be to drive 
competition and force down fees that way. And I think it 
would--the more that you get that at the level of the 
participant, the more you will have that effect, because that 
is where you have got the market, and that is where you have 
got the competition going on.
    But I would also like the committee to keep in mind just 
the inevitable cost of 401(k)s, no matter what kind of 
legislation you adopt. And I was at a meeting of my child's 
very small school in Oxford, on Monday, where we were presented 
with the costs for a startup plan. And even at very, very low 
costs, that was going to run about 2.3 percent for those 
teachers, who are not making much money in the first place.
    And if they expect to get a return of maybe 7 percent or 8 
percent over their lifetime, essentially what they are coughing 
up to fees is a quarter of that. As an alternative, they could 
simply do a payroll deduction, go into a low-cost index fund at 
0.18 percent, for example, and pay about less than one-tenth of 
the fees, and get, generally the same tax-deferred benefits you 
can get in the 401(k) plan.
    So we have a much broader question here, which is----
    Chairman Andrews. Thank you.
    Mr. Bullard [continuing]. Extremely costly 401(k) 
structure.
    Chairman Andrews. Thank you very much for the questions, 
and also the answers.
    Mr. Hare is recognized for 5 minutes.
    Mr. Hare. Thank you, Mr. Chairman.
    Mr. Bullard, just a couple of questions for you. How do we 
reestablish, in your opinion, the integrity of our retirement 
structure? Can disclosures and the elimination of hidden fees 
do it alone, or--or--or what else do we need to do here?
    Mr. Bullard. I could interpret that pretty broadly. And 
when you ask a professor a pretty broad question, you are 
certainly taking a risk.
    It kind of goes to the point I just made at one level, 
which is that we currently have a Social Security system that 
is not actuarially going to survive. And we have a private 
defined-contribution plan that continues to grow and, 
essentially, squeeze out Social Security as being anything 
other than, ultimately, a welfare program.
    So, in that light, if you look at that leg being in the 
private defined-contribution model, what we should be moving to 
is to eliminate the requirement that you have to do that 
through an employer altogether, and have one account where 
persons put their tax-deferred savings on their own, through 
payroll deduction.
    If you want to exercise control over what they do that, 
because of the tax benefit they are getting, you do it through 
that one standardized account. A huge amount of the costs that 
are associated with our defined-contribution system, be it 
401(k), 403(B), or other, is that we have these tax filings.
    We have got the Form 5500. And it is all because it is done 
through an employer who is, really, a completely unnecessary 
intermediary. So the first step would be to have, let us say, 
lifetime savings accounts that not only are covering all of the 
tax-deferred options for which you can invest and not pay 
immediate taxes, but also see them as a vehicle through which, 
with payroll deduction, you could slash 401(k) fees to a tenth 
of what they currently are--not something the financial-
services industry would like to hear, especially 401(k) 
providers. But that is, ultimately, where you would want to go 
if you wanted to save some real money.
    Within the 401(k) context, what I discussed before is 
really, I think, the major step that we need to take. Whether 
our fees are unbundled or not, we should be able to give market 
participants a number, and then a context within which to place 
it, so if they don't like it, they can demand to get it 
reduced.
    Mr. Hare. Well, what options do plan participants have when 
they find out that they have been hit with these hidden fees?
    Mr. Bullard. Well, one option is to go outside the 401(k) 
plan. And there are lots of 401(k) plans that, even with the 
tax deferral, they would be much better off not investing. Now, 
that is putting aside the match.
    Whenever there is an employer match, you are virtually 
always better off. But if you ignore the match, because of the 
current cost structure of a lot of these plans, you are better 
off not even investing in one, and going with either a tax-
managed or a passively managed fund outside in an IRA or a Roth 
IRA.
    Mr. Hare. Thank you.
    This is for Ms. Borland and Mr. Onorato.
    We heard last year, when we were taking up this bill, that 
several employers' financial services argued that participants 
would--you know, I know Mr. Miller talked about this. The 
chairman talked about--``too much information to plan 
participants.'' And it could even stop participations.
    Based upon what you hear from the clients--you know, I know 
this may be repetitious, but I wanted to make sure I got this 
straight--is this really a concern? Or do you believe that the 
sponsors and the participants, A, want the information; and, B, 
how do you determine how much information the participants can 
absorb for the disclosure to be useful for them?
    Mr. Onorato. Ms. Borland, be my guest.
    Ms. Borland. Okay.
    Based on conversations with clients, clients would 
appreciate guidance with respect to what works and what is 
effective. I think they sense that their employees do want more 
information. And they are looking for help, and the best ways 
to provide that information in a way that is understandable, 
and a way that works.
    It may have been you, Mr. Andrews, who said this earlier--
we haven't actually done this before in a consistent way. So, 
today, we don't know exactly what is going to work, but we need 
to try something.
    We are in the process of doing some research to get some 
more ideas and guidance about what is most effective to 
employees. Once we have that, we would be absolutely pleased to 
share it.
    But more information is clearly needed. I think our clients 
are open to providing more information, but they are looking 
for help and clarity with respect to what that information 
needs to be.
    Mr. Onorato. Congressman, I would add that I believe what 
has been proposed in this bill is just three buckets, is all we 
need to do.
    There has been a lot of commenting about, as the size of a 
plan goes down, the expense goes up. But it is always a 
mathematical formula associated with the assets in the plan. 70 
percent of the 2,000 plans a year that I acquire as a business 
manager are startup plans. They have 15 employees--20,000 
people a year did not have a company-sponsored pension, may 
have no pension of any type.
    The charge for that startup plan--a Safe Harbor plan--in my 
company is $600 plan fee, and $36 per participant. We disclose 
it to the sponsor, and we disclose it to the participants.
    If we divide that by zero assets, it is a pretty high 
basis-point calculation. They contribute an average of $4,000 a 
year. One hundred thousand people with no pension plans started 
pension plans with my company in the last 5 years--$600, and 
$36 a participant. It is not expensive.
    Mr. Hare. Thank you, Mr. Chairman.
    Chairman Andrews. Thank you, Mr. Hare.
    The gentleman from Connecticut, Mr. Courtney is recognized.
    Mr. Courtney. I thank Mr. Chairman. And thank you for 
holding this hearing, which, I think Ms. Mitchem's comment, and 
her testimony that people still are sticking with defined-
contribution plans--that demonstrates why we have to get this 
right.
    Because, for better or worse--and it has been worse lately, 
obviously--but, you know, we have got to have a system that 
people have confidence in, which, you now, some people have 
made allusions to the fact that we certainly can't blame fees 
for the downturn in plan value. But on the other hand, if we 
are going to recover confidence in the system, which I think 
everyone understands is really, fundamentally, what we have to 
do with this economy, then we have to have a system that is 
credible, and that people believe in.
    Get to the question of cost, which Mr. Goldbrum raised--
sort of a, you know, possible concern that what we are doing is 
actually going to raise costs.
    Ms. Borland, your testimony, which you had to summarize, 
actually did a nice job of showing specific examples of company 
X, Y and Z--of how better disclosure actually drives down 
costs. And, again, for the benefit of those who don't have your 
testimony, you showed how companies could save millions, 
actually, because of the benefit of disclosure.
    And I guess what I want to be clear about is, in your 
opinion, does this bill sort of enable companies to really have 
tools to negotiate better prices?
    Ms. Borland. Absolutely. This bill enables the apples-to-
apples consistent comparison across different types of 
arrangements, in order to make better decisions.
    Mr. Courtney. And, again, the companies that you cited as 
examples--to get to the point where they could negotiate 
intelligently with their providers--I mean they actually had to 
hire consultants, in some instances.
    Ms. Borland. They did. And that is one of the challenges. 
Right now, it is so hard to get there, you--large companies 
have the sort of buying power to push and force providers to 
provide that information. Absent that buying power, companies 
don't have the ability to do that.
    And in addition, even the most sophisticated companies 
generally need outside help to figure out all of the 
information, to pull it together.
    It is not always the provider is giving it welcomingly. 
There is implied fees that have to be discovered within those 
structures to be--the bill would provide the consistency and 
the clarity needed, with respect to the information that should 
be disclosed.
    Mr. Courtney. So, for the small business that has got four 
or five employees, like my old law firm, a couple years ago, 
you know, rather than having to go out and incur the expense of 
a consultant--actually having it by operation of law, that 
these fees would be disclosed--then you would be able to decide 
whether or not, ``Hey, you know, I am not getting a good deal, 
here. It is time to shop around.''
    Ms. Borland. Exactly. It would facilitate better 
comparison.
    Mr. Courtney. There is another issue, which has been raised 
with prior questions--is the issue of exposure to litigation. 
And I am sure everyone believes that no one should be the 
target of frivolous litigation.
    I guess the question I have, though--because I was sort of 
flipping through the bill again, just to sort of see whether or 
not this legislation somehow adds to exposure to employers.
    Mr. Bullard, I don't know if you have any comment in terms 
of whether or not--again, just this statute, or this proposed 
legislation, by itself--somehow aggravates that problem or--
because it seems like the obligations it is creating is on 
investment plans, not on employers.
    Am I reading it right or wrong?
    Mr. Bullard. Yes, ultimately, it will go, to some extent, 
to the selection of the options. And any informational 
requirements will go to their responsibility to select options 
prudently.
    In litigation contexts, as was discussed, that is a 
question of whether you can get past a motion to dismiss. And 
the issue of the motion to dismiss is whether the Safe Harbor, 
under ERISA, is going to be available to the employer, with 
respect to the decision they made.
    About 6 months ago, it was fairly clear--at least I think--
that the decision made by the employer would include these 
kinds of factors. The law is now in flux because a couple of 
appeals courts have suggested that once the employer has 
picked, essentially, reasonably allocated options--that there 
is no more fiduciary duty.
    I think that will eventually be reversed by the majority of 
courts.
    But that is going to be the issue.
    So, essentially, the legislation, as currently written, 
fits into the Safe Harbor structure. Where there is a liability 
issue is going to be the clarity with which the Department of 
Labor explains exactly what employers have to do within that 
Safe Harbor. And that is what causes the strike suits.
    It is the lack of clarity in the law. And it allows 
frivolous litigation to find its way in with justifiable 
litigation, because of the lack of clarity in the guidance.
    But, ultimately, you have to leave that to a more detail-
oriented body. I think that, as the legislation is written, you 
have got your Safe Harbor.
    I, really, have no objection to Mr. Chambers' lists of 
requests. I think none of those really raise any significant 
issues from a participant's point of view. But, ultimately, on 
your question, it is going to be the Department of Labor's 
guidance under that Safe Harbor that is going to drive how much 
frivolous litigation there is.
    Mr. Courtney. All right. Thank you, Mr. Chairman.
    Chairman Andrews. Thank you.
    I think, Mr. Chambers, you wanted to weigh in on that. 
Would you maybe like to do that?
    Mr. Chambers. Well, I wanted to weigh in until Mr. Bullard 
was so complimentary of all the things that I had suggested.
    Chairman Andrews. So you can just say, ``As a matter of 
law, he was right.''
    Mr. Chambers. But, if I could--I think, Mr. Courtney, the--
he went beyond, in his response, the real answer to your 
question, which is, you know, ``What does this bill mean to 
employers?''
    And I must say, you know, employers are largely above the 
fray in connection with the bundled versus the unbundled.
    Chairman Andrews. Right.
    Mr. Chambers. Yes, they have responsibilities that are a 
result of that, but, by and large, as Mr. Goldbrum suggested, I 
think that is a business decision.
    And as Mr. Onorato suggested, the one thing--well, 
actually, one thing he didn't suggest is that if, in fact, a 
bundled provider makes available an opportunity to say, ``Yes, 
this is how we whack up the fee that we charge you,'' the next 
question is, ``Well, if we can get the 5500 for a cheaper price 
elsewhere, how much does that reduce our bundled fee?''
    And the question, often, is, ``It doesn't.'' All right? It 
is a bundled fee. We provide this set of this package, these 
services. Here is the list of services. I don't know that, 
necessarily, you are going to wind up being able to use that 
information to do the apples-to-apples analysis that we were 
talking about before.
    But I do think that the employer needs to be protected. 
This is where we were going. What this bill needs to do is that 
as it adds additional responsibilities to employers to assemble 
information, distribute that information both to the government 
and to participants, and to analyze its own fiduciary 
responsibilities, it needs protection in connection with a 
good-faith effort to fulfill those responsibilities.
    Chairman Andrews. Thank you, Mr. Chambers.
    Thank you, Mr. Courtney. We appreciate that.
    We are going to turn to Mr. Kline, for any concluding 
remarks he may have.
    Mr. Kline. Thank you, Mr. Chairman. And I will be brief.
    I just want to say thank you. This is a terrific panel of 
experts. Even though many of you are lawyers, it is, really, a 
terrific--it is a terrific panel. And we thank you very much 
for your testimony and for the answers to the questions.
    And I thank you, Mr. Chairman. I yield back.
    Chairman Andrews. I thank my friend from Minnesota.
    I would like to thank both the majority and minority staff 
for their work in assembling this panel. I concur with my 
friend's evaluation of the quality of your input this morning.
    The subcommittee will be considering your testimony in 
conjunction with the full committee, and moving forward with 
our discussion both of fee disclosure and qualified independent 
investment advice.
    And just to reiterate a couple of cleanup items--without 
objection, I would ask that the letter from the American 
Association of Retired Persons, dated April 22, 2009, be 
entered into the record.
    [The information follows:]

                                                    April 22, 2009.
Hon. Robert E. Andrews, Chairman,
Subcommittee on Health, Employment, Labor, and Pensions, Committee on 
        Education and Labor, U.S. House of Representatives, Washington, 
        DC.
Re: 401(k) Fair Disclosure for Retirement Security Act of 2009
    Dear Chairman Andrews: AARP commends you and the other members of 
the Subcommittee on Health, Employment, Labor and Pensions for holding 
this important hearing on the need for comprehensive, informative and 
timely disclosure of fee and expense information to 401(k) 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 supports the enactment of the 401(k) Fair Disclosure for 
Retirement Security Act of 2009 (401(k) Fair Disclosure Act) and urges 
the Subcommittee to approve this measure.
    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 builds on 
Social Security's solid foundation. For those who participate in a 
401(k) plan, better and easier to understand information is essential 
to help them make prudent investment decisions.
    There were approximately 50 million active participants in 401(k) 
plans in 2007, and overall, 401(k) plans held more than $3.0 trillion 
dollars 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. Never has this issue been more important than in these 
difficult economic times, when retirement savings have been greatly 
diminished, and every dollar counts.
    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) plan 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 entitled, ``401(k) Participants' Awareness and 
Understanding of Fees'', July 2007, for the consideration of the 
members of the Subcommittee.
    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.'' The report suggested that a 
disclosure form that contains participant-specific information and 
actual dollar figures may improve participants' comprehension of the 
information. The report also suggested other modifications in the DOL 
form that would make it more helpful to 401(k) plan participants. AARP 
provided a copy of this report 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.
    AARP's Public Policy Institute also published the attached paper 
entitled, ``Determining Whether 401(k) Plan Fees are Reasonable: Are 
Disclosure Requirements Adequate?'' 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 
discusses the need for reform of the current regulatory framework to 
provide participants with the clear and basic information.
    AARP supports the enactment of the 401(k) Fair Disclosure Act. 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 the 401(k) Fair Disclosure Act 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 Subcommittee for your commitment to 
preserve and enhance retirement security. We look forward to working 
with you and the other members of your Subcommittee 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 me, or please have your staff contact Cristina Martin 
Firvida of our Government Relations staff at 202-434-6194.
            Sincerely,
                    David P. Sloane, Senior Vice President,
                                 Government Relations and Advocacy.
                                 ______
                                 
    Chairman Andrews. And I would ask them to stop sending 
these monthly reminders to me that I am 50 now, if they would. 
I will put it in despite the annoying reminders that they are 
sending me.
    Just to reiterate a couple of other pieces of business, Mr. 
Goldbrum, we invite you to submit your ideas as to how we could 
solve this problem.
    Mr. Chambers and Mr. Bullard, in particular, I think we 
would like to engage both of you in a discussion about this 
employer-liability issue, along with the minority, obviously.
    Thank you. You really have helped us get this discussion 
moving along, and identifying answers and questions, which is 
what we are here to do. We appreciate your contribution, and we 
appreciate the participation of the members.
    The subcommittee will be meeting tomorrow at 10:30 for the 
issue of how to control health-care costs in the United States. 
We try to take the small questions each day. We will be meeting 
tomorrow to do that.
    As previously ordered, members will have 14 days to submit 
additional materials for the hearing record. Any member who 
wishes to submit follow-up questions in writing to the 
witnesses should coordinate with majority staff within 14 days. 
Without objection, the hearing is adjourned.
    [Additional submissions of Mr. Miller follow:]

                                                    April 24, 2009.
Hon. George Miller, Chairman,
House Education and Labor Committee, U.S. House of Representatives, 
        Washington, DC.
    Dear Chairman Miller: On behalf of the American Society of Pension 
Professionals & Actuaries (ASPPA), the Council of Independent 401(k) 
Recordkeepers (CIKR), and the National Association of Independent 
Retirement Plan Advisors (NAIRPA), we hereby express our support for 
401(k) fee disclosure legislation (H.R. 1984) which was recently 
reintroduced in the 111th Congress.
    ASPPA is a national organization of more than 6,500 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. The 
large and broad-based ASPPA membership gives it unusual insight into 
current practical problems with the Employee Retirement Income Security 
Act and qualified retirement plans with a particular focus on the 
issues faced by small- to medium-sized employers. ASPPA membership is 
diverse and 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 financial services 
companies who primarily are in the business of selling investments. The 
independent members of CIKR offer plan sponsors and participants a wide 
variety of investment options from various financial services companies 
without an inherent conflict 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 
68,000 plans covering 2.8 million participants and holding in excess of 
$120 billion in assets.
    NAIRPA is a national organization of firms which provide 
independent investment advice to retirement plans and participants. 
NAIRPA's members are registered investment advisors whose fees for 
investment advisory services do not vary with the investment options 
selected by the plan or participants. In addition, NAIRPA members 
commit to disclosing expected fees in advance of an engagement, 
reporting fees annually thereafter and agreeing to serve as a plan 
fiduciary with respect to all plans for which it serves as a retirement 
plan advisor.
    ASPPA, CIRK and NAIRPA applaud the bill's uniform application of 
its disclosure rules to all services providers, regardless of their 
business structure. Rather than mandating a particular business model, 
the amended legislation treats all business models equally and fairly.
    ASPPA, CIKR and NAIRPA particularly support the bill's requirement 
that all 401(k) service providers issue a fee disclosure statement to 
the plan administrator in advance of entering into a contract for 
services. Specifically, the bill would require that all plan fees be 
allocated into four uniform categories: (1) plan administrative and 
recordkeeping charges; (2) transaction-based charges; (3) investment 
management charges; and (4) other charges as may be specified by the 
Secretary of Labor. These categories will permit plan fiduciaries to 
assess the reasonableness of fees by allowing an ``apples-to-apples'' 
comparison to other providers, and will allow plan fiduciaries to 
determine whether or not certain services are needed, leading to 
potentially even lower fees.
    ASPPA, CIKR and NAIRPA commend Chairman Miller for his leadership 
in enhancing the disclosure of fees to retirement plan fiduciaries and 
participants, which is critical to securing a dignified retirement for 
American workers. The Committee's consistent focus on retirement issues 
over the years has effectively increased attention on the retirement 
security of our nation's workers.
    Again, ASPPA, CIKR and NAIRPA applaud your proposal, 
enthusiastically support it, and stand ready to assist you in your 
effort to enact it.
            Sincerely,
                                 Brian H. Graff, Esq., APM,
                                      ASPPA Executive Director/CEO.
                                 ______
                                 

      Prepared Statement of the Investment Company Institute (ICI)

    The Investment Company Institute\1\ appreciates the opportunity to 
file this statement for the record in connection with the 
Subcommittee's hearing on April 22, 2009, on the ``401(k) Fair 
Disclosure for Retirement Security Act'' (H.R. 1984). The Institute 
appreciates the willingness of the Subcommittee and the full Committee 
to listen to our views as it considers H.R. 1984. We agree with the 
approach taken by the bill to ensure that participants receive key 
information on all investment products. Disclosure that is focused and 
useful to participants serves an important role in helping workers be 
better savers and better investors. However, the Institute believes 
H.R. 1984 is flawed in several respects, and we cannot support it in 
its current form. Below we reiterate our support for an effective 
disclosure regime that provides useful information to employers and 
plan participants. Then we address our concerns with H.R. 1984.
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    \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 $9.71 trillion and serve over 93 million shareholders.
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Improving Disclosure
    The Institute has consistently supported meaningful and effective 
disclosure to 401(k) participants and employers. In 1976--at the very 
dawn of the ERISA era--the Institute advocated ``complete, up-to-date 
information about plan investment options'' for all participants in 
self-directed plans.\2\ We also have consistently supported disclosure 
by service providers to employers about service and fee 
arrangements.\3\ Disclosure reform should address gaps in the current 
401(k) disclosure rules. The Department of Labor's current participant 
disclosure rules cover only those plans relying on an ERISA safe harbor 
(section 404(c)); no rule requires that participants in other self-
directed plans receive investment-related information. In plans 
operating under the safe harbor, the information participants receive 
depends on the investment product, resulting in uneven and difficult to 
compare disclosure. Disclosure reform also should clarify the 
information that service providers must disclose to an employer on 
services and fees to allow the employer to determine the arrangement is 
reasonable and provides reasonable compensation. Where the service 
provider's services include access to a menu of investment options, 
employers should receive from that provider information about the 
plan's investments, including information about fees.
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    \2\ Letter from Matthew P. Fink, Associate Counsel, Investment 
Company Institute, to Morton Klevan, Acting Counsel, Plan Benefit 
Security Division, Department of Labor (June 21, 1976).
    \3\ See Statement of Investment Company Institute on Disclosure to 
Plan Sponsors and Participants Before the ERISA Advisory Council 
Working Group on Disclosure, September 21, 2004, available at http://
www.ici.org/statements/tmny/04--dol--krentzman--tmny.html.
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    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. Participant disclosure should 
focus on key information about each investment option--including its 
objectives, risks, fees, and performance--and information about any 
other plan-level fees assessed against the participant's account. 
Voluminous and detailed information about the components of plan 
investment 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.
    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 a 
variety of service arrangements to defray the expenses of plan 
administration. Requiring a service provider to disclose to plan 
sponsors information about compensation it receives from other parties 
in connection with providing services to the plan 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 payments from other 
parties in connection with the plan's services or investments, for 
example, where a plan consultant receives compensation from a plan 
recordkeeper.
Concerns with H.R. 1984
    H.R. 1984 is intended to close the gaps in current law by setting 
out the rules for disclosure of service provider compensation and 
ensuring that participants in all participant-directed defined 
contribution plans have information on the investments available to 
them, regardless of type. However, many of the details of the bill need 
improvement, and in some cases the bill includes unprecedented and 
unnecessary provisions that are not related to improving disclosure.
    It is difficult for affected parties to read the bill and know what 
information about investment products must be disclosed and who must 
disclose it. The bill uses imprecise language and undefined terms that 
service providers will have to interpret broadly in order to avoid the 
bill's penalties, resulting in disclosure that is confusing to plan 
fiduciaries and participants and unnecessarily costly to prepare. Lack 
of certainty on the disclosure requirements also could lead to less 
standardized disclosure, which makes comparisons more difficult.
    Many of our concerns with the bill arise because the bill confuses 
a 401(k) plan's services with its investments. Plan sponsors and 
participants need disclosure about both. But without some important 
clarifications, the bill will force investment disclosure into a 
service provider box, which will add unnecessary costs that will be 
borne by participants.
    A disclosure regime needs to recognize the central role that 
recordkeepers play in providing investment information on plan 
investments. When a plan contracts with a recordkeeper to receive 
administrative services and access to investment products, the plan 
fiduciary needs to know the services to be provided, the direct and 
indirect compensation the recordkeeper receives and the fees and other 
key information about the investment products used by the plan. As is 
routine best practice now, plan recordkeepers consolidate information 
on plan investments into a single and useful form, as they have a 
direct relationship and contract with the plan. Recordkeepers, through 
their contracts with mutual fund firms, insurance companies, and other 
investment providers, ensure they have the information they need to 
provide disclosure on plan investments. Recordkeepers rely on the 
information provided to them, since for many products it typically 
comes from disclosure that investment products make under other laws (a 
point the bill recognizes).
    Unfortunately H.R. 1984 does not recognize this central role played 
by recordkeepers. It defines a contract that requires individualized 
disclosure 10 days in advance to include ``the offering of any 
investment option.'' In addition, it defines ``service'' to include ``a 
service provided directly or indirectly in connection with a financial 
product in which plan assets are to be invested.''
    The Institute also is concerned that the bill contains an 
unprecedented mandate that 401(k) plans offer an index fund of a 
specific type and requires full service recordkeepers to disclose 
separate charges for recordkeeping even when there are no separate 
charges.
    Below we detail the Institute's primary concerns with the bill. The 
bill has other technical and substantive problems about which we will 
provide comments separately to Committee staff.
            A. Index fund mandate
     As a condition of section 404(c) liability relief for the 
investment decisions of plan participants, the bill imposes a new 
condition that the plan sponsor select an index fund. (p. 27, line 13). 
The requirement is inappropriate and sets a dangerous precedent for the 
government to pick the investment options for private 401(k) plans.
     It is not clear what fund would satisfy the requirement to 
match the performance of the entire United States equity or bond market 
and in addition is ``likely to meet retirement income needs at adequate 
levels of contribution'' for any participant. This requirement includes 
both an objective and a subjective standard. An S&P 500 index fund, 
which is the most common index used in equity index funds, would not 
appear to meet the objective standard. In addition, it is not clear 
what fund would meet the subjective standard, because no one index fund 
is a single investment solution for all retirement savers in all 
markets. Accordingly, although 70 percent of plans currently offer a 
domestic equity indexed investment,\4\ it appears that very few plans 
could satisfy this provision now. In addition, the subjective standard 
exposes plan fiduciaries to significant new liability in selecting 
index funds for plans.
---------------------------------------------------------------------------
    \4\ Profit Sharing/401k Council of America, 51st Annual Survey of 
Profit Sharing and 401(k) Plans (2008).
---------------------------------------------------------------------------
            B. Service provider disclosure
Section 111(a)(1)--General requirements
     The bill apparently would make a mutual fund that offers 
an investment option to a plan a service provider, because anyone 
offering an investment is treated as offering a contract for services. 
(p. 2, line 21-22). The apparent result is that a plan must receive a 
separate and individualized disclosure from each investment product, 
rather than (as we expect was intended) the plan receive a single 
disclosure that lists the fees of all of the plan investments. An 
investment product like a mutual fund would not have the data necessary 
to estimate how much of the plan's assets will be invested in that 
fund. In any event, mutual funds are prohibited by federal law from 
negotiating with individual shareholders over the fees to be paid for a 
particular share class of the fund.
     The bill also appears to make a person that provides 
services to a mutual fund a service provider for purposes of the new 
disclosure requirements. This is done through the expansive new 
definitions of ``service'' and ``service provider'' under section 
111(e)(2) and (4)--which confuse the important distinction between the 
investments a plan makes with the service providers it engages. (p. 19, 
lines 13 and 23). These provisions indicate that anyone providing 
services to an investment option in which a plan invests is treated as 
providing services that are subject to the new disclosure requirements 
and is an ERISA plan service provider. For example, mutual funds have 
virtually no employees so, along with the fund's investment adviser, 
funds engage numerous accountants, lawyers, printers, brokers, and 
others to provide services to the mutual fund. The definition of 
service and service provider in the bill would indicate that ERISA plan 
fiduciaries must receive a disclosure concerning all of the services 
and ``charges'' paid by a mutual fund to any mutual fund service 
providers and to fund directors. Relevant information about all the 
payments a mutual fund makes to its service providers is disclosed in 
SEC required documents. H.R. 1984 would go beyond that without 
justification. This provision cannot be reconciled with the provisions 
in ERISA that exclude service providers to mutual funds from being 
treated as ERISA plan service providers. See ERISA Sec.  3(21). This 
provision is unworkable since a mutual fund may have hundreds of 
service providers, including scores of brokers. Of course, ICI believes 
that revenue sharing and other payments received by recordkeepers from 
mutual funds, investment advisers or other entities should be disclosed 
by the recordkeeper and that plan fiduciaries should receive basic 
information on the expenses associated with investing in the fund.
Section 111(a)(2)--Unbundling and transaction fees
     Requiring unbundling of recordkeeping charges even when 
there are no separate charges for the services will result in 
inaccurate and misleading numbers that favor one business model over 
another. (p. 3, line 16). Since the estimates required under the bill 
will not be based on market transactions, service providers face 
significant liability risk even for reasonable attempts to comply with 
the requirement.
     There is no definition of ``transaction-based charges.'' 
(p. 3, line 24). We expect this is intended to cover items like the 
sales charge (load) on investments, and the costs for accessing 
individual plan services like plan loans. (A similar provision in the 
participant disclosure portion of the bill is clearer on this point.) 
Because of the expansive definition of ``service,'' however, this could 
be read to require disclosure of internal commissions and transaction 
costs within a pooled investment product. These are not operating 
expenses or fees but part of the capital cost of acquiring and selling 
securities. Mutual funds are required to disclose the fund's portfolio 
turnover rate, the best measure of the cost of portfolio trading (and 
which allows comparisons among funds). In addition, funds make 
available in the Statement of Additional Information a host of 
information about commissions, including aggregate brokerage 
commissions paid during the last three years and information about the 
fund's trading policies.
Section 111(a)(3)--Total dollar amounts
     Requiring disclosure of total dollar amounts when a 
particular fee is charged on another basis (like percentages or basis 
points, or as a charge per usage) requires a service provider to make a 
number of assumptions. (p. 4, line 6). For example, the service 
provider will need to predict to which investments participants will 
direct their accounts, and how often participants will use a particular 
plan feature like loans. The estimate is only as good as the underlying 
assumptions. This is why a service provider often provides dollar 
estimates when it believes that it can make reasonably accurate 
assumptions (long-standing plan which has a consistent history of 
participant behavior) and may not provide a dollar estimate when it 
cannot (brand new plan starting with zero plan assets). For example, 
assume a plan without a loan feature adds one that will require a $20 
loan fee for each new loan. How is the service provider to estimate how 
many loans will be taken out?
Section 111(a)(6)--Financial relationships
     The disclosure of financial relationships is potentially 
very broad and vague. It is unclear what it means to disclose ``the 
amount representing the value of any services.'' (p. 5, line 16). It is 
also unclear whether this requires a service provider to disclose the 
services and value of the services (even without actual payments) that 
are made between the service provider and its affiliates. Plan 
fiduciaries need to know total compensation paid under an arrangement 
and actual payments. Requiring disclosure of the value of services 
provided by affiliates does not apprise the fiduciary of any conflicts 
that are not otherwise apparent and could require disclosure of amounts 
that are not actually paid between affiliates.
     In fact, we believe that the disclosure of direct and 
indirect compensation as well as compensation earned by an affiliate in 
connection with plan services--already required by the bill--will be 
more effective than requiring a service provider who is not a fiduciary 
to determine that it may have a material financial relationship 
triggering disclosure. ERISA's prohibited transaction rules already 
prohibit transactions between the plan and parties-in-interest and 
prohibit fiduciaries from self-dealing.
     If this provision is applied within a mutual fund, it will 
require extensive information of little value. For example, it could 
require a disclosure that various entities within an integrated fund 
complex purchase joint insurance and other common practices involving 
mutual fund affiliated transactions, all of which occur only in 
compliance with stringent safeguards under the Investment Company Act 
of 1940 and SEC regulations.
     The requirement to disclose any personal, business or 
financial relationship with the plan sponsor, the plan and any plan 
service provider or affiliate thereof will be nearly impossible to 
satisfy. (p. 6, line 9). For example, this provision would be triggered 
if the plan's accounting firm happens to switch its 401(k) recordkeeper 
to the same recordkeeper that services the employer's plan. It will be 
impossible for one service provider to monitor constantly whether it is 
doing business with another plan service provider or its affiliate.
            C. Participant disclosure
Section 111(b)(3)
     The bill requires that fees be disclosed to participants 
in the actual dollar amount rather than on a percentage basis. (p. 15, 
line 5). Service providers currently do not collect or provide fee 
information on this basis and it will be extremely expensive to create 
the systems to report the actual dollar amount of fees associated with 
each participant account. While it would be possible to provide a fee 
estimate based on a snapshot of a participant's account (e.g. based on 
the asset allocation and balances in a participant's account on a 
particular date), this disclosure will undermine a participant's 
ability to compare costs of different investment options. For example, 
if a participant has 90% of his or her account invested in a fund with 
a 0.40% (40 basis point) expense ratio and 10% invested in a fund with 
a 1.00% (100 basis point) expense ratio, the participant might think 
the first fund is relatively expensive and the second is cheaper. 
Comparability is best measured through use of percentages or basis 
points or through a representative example (such as the dollar amount 
of fees for each investment for each $1,000 invested). This is why the 
SEC, which has looked at this repeatedly over the years, requires 
mutual funds to disclose the expense ratio up front and a 
representative example in the front of the prospectus and in 
shareholder reports.
Section 111(c)--Electronic disclosure
     The bill does not sufficiently promote electronic 
disclosure. Electronic disclosure should be the presumed method of 
disclosure to plan fiduciaries and participants and paper copies should 
be available on request.
Section 111(d)--Application to insurance and bank products
     The bill needs to be modified to ensure that there is a 
sufficient level of fee disclosure for traditional fixed interest 
insurance and bank products. The bill simply requires that the 
Secretary of Labor issue rules to identify products that provide a 
guaranteed rate of return. The bill should direct the Secretary to 
require disclosure that alerts participants to the risks and economics 
of these products, for example 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.
            D. Effective date
     Allowing only one year for service providers and plan 
administrators to come into compliance with the provisions is 
unrealistic. DOL will not have issued final rules implementing the 
statutory provisions with enough time for service providers to adjust 
during that period.
    The mutual fund industry is committed to meaningful 401(k) 
disclosure, which is critical to providing 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.
                                 ______
                                 
    [Questions for the record requested from Mr. McKeon 
follow:]

                                   [Via Facsimile],
                                             U.S. Congress,
                                       Washington, DC, May 6, 2009.
Mr. Julian Oronato, CEO,
ExpertPlan, Inc., Building 400, Suite 300, East Windsor, NJ
    Dear Mr. Oronato: Thank you for testifying at the Wednesday, April 
22, 2009, Subcommittee on Health, Education, Labor, and Pensions 
hearing on ``H.R.1984, the 401(k) Fair Disclosure for Retirement 
Security Act of 2009.''
    The Senior Republican Member on the Committee, Congressman Howard 
P. ``Buck'' McKeon had additional questions for which he would like 
written responses from you for the hearing record.
    Senior Republican Member McKeon asks the following questions:
    During your oral testimony before the Committee, you stated that 
your firm provides startup 401(k) plans for an annual charge of $600, 
plus $36 per participant annually, and that these firms typically had 
15 employees. To assist the Committee in our research on fee 
disclosure, please answer the following questions and provide a copy of 
a standard contract and a fee schedule or other fee disclosure 
material. Unless otherwise indicated, the questions below are with 
reference to the hypothetical startup plan and costs noted above.
    1. Do you have a different fee schedule when dealing with a third 
party administrator (TPA) and a single employer? If so, why, and what 
are the differences in these schedules?
    2. Does the above-quoted cost include all the services required to 
administer a plan and meet regulatory compliance requirements? If not, 
which additional services would a plan sponsor need to secure? What 
cost do you charge for these additional services?
    3. Does your firm charge any one-time (or recurring) set-up or 
conversion fee to plan sponsors?
    4. Are plans offered at the above-referenced charge restricted in 
the investments that its sponsor may select? If yes, what are the 
criteria for any such restriction?
    5. Which funds are on your platform? Is revenue sharing a criterion 
for the platform? Do you assess an additional charge for non-platform 
investments?
    6. Do you receive any other sources of revenue, such as 12b-1 or 
sub-transfer agency fees? If so, are these revenues disclosed to the 
plan sponsor?
    7. Does the above-referenced fee include nondiscrimination testing 
for all types of plans?
    8. Does your firm assess additional fees for restating prototype 
plans? If so, how much?
    9. Does your fee include a quarterly benefit statement?
    10. Does the above-referenced fee include the processing of loans, 
distributions, and rollovers? If it does not, what fees are associated 
with these services?
    Please send your written response to the Committee on Education and 
Labor staff by COB on Wednesday, May 20, 2009--the date on which the 
hearing record will close. If you have any questions, please contact 
the Committee. Once again, we greatly appreciate your testimony at this 
hearing.
            Sincerely,
                               Robert E. Andrews, Chairman,
            Subcommittee on Health, Education, Labor, and Pensions.
                                 ______
                                 
    [Whereupon, at 12:11 p.m., the subcommittee was adjourned.]

                                 
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